“They died hard, those savage men - like wounded wolves at bay. They were filthy, and they were lousy, and they stunk. And I loved them.”
-Douglas MacArthur
We all have some wolves in our lives. In fact, some of my married and more, shall we say, settled down friends, would say I am that wolf. But this morning note is not about my night time activities, but rather thinking about how to channel your baser instincts and apply it to trading.
In the past, Keith has referenced a great book called The Hour Between Dog and Wolf: How Risk Transforms Us authored by John Coates, who at one point ran a large derivates trading desk. I finally had the opportunity to grind through it when the Governor of Connecticut had me sheltering at home in March (shut down all the bars and hockey rinks among other things!) and it was a great read.
You know all those times you’ve taken too much risk? You know all those times you’ve sold at the bottom? You know all those times you’ve had FOMO (fear of missing out) and bought at the top?
Well it turns out, and no surprise, a lot of it can be explained chemically (and side note these dang chemicals by and large make men worse traders than woman!).
Per Coates, many traders have a moment of Jekyll-and-Hyde transformation. This moment of transformation, which the French have called “the hour between dog and wolf” since the middle ages, results from spiking testosterone. The end result of this spiking testosterone is an increase in a combination of both confidence and appetite for risk. Sound familiar?
Further, as Coates writes, traders often become cocky and irrationally seek risk when on a winning streak. Conversely, they become tentative and risk averse when recovering from losses.
This is called the “winners” effect and is a concept borrowed from the study of animal behavior. According to many of these studies, winners emerge from battles with heightened levels of testosterone and losers with diminished levels. As a result, when winners go on to the next round of competition they do so with a chemical edge. While losers go into the next round of competition somewhat passives and risk averse. Eventually of course too much testosterone leads to overconfidence and reckless behavior.
Ultimately though we can hijack these natural instincts and become better traders. As Coates writes:
“Good judgement may require the ability to listen carefully to feedback from the body.”
Indeed.
Back to the Global Macro Grind…
So in terms of the macro set up today, I’m going to borrow from my colleague Darius Dale morning macro grind. It is Jobs Report Friday, so the preview, as Darius writes, is maybe for one of the most bizarre job reports in modern economic history. But for starters, lets recap the economic data we’ve received this week:
- ISM Manufacturing Employment PMI +2.2pts to 44.3 in JUL
- ADP Total Nonfarm Payrolls: +167k MoM to 117.548mil in JUL, down from +4.313mil MoM in JUN
- ADP Total Nonfarm Payrolls: +2bps to -8.42% YoY in JUL
- ISM Non-Manufacturing Employment PMI -1pt to 42.1 in JUL
- Challenger Job Cut Announcements: +27,060bps to 576.1% YoY in JUL
- Continuing Jobless Claims: -2.382mil MoM to a monthly mean of 16.628mil in JUL
- Total Unemployment Insurance Claimants (across all 8 programs): -696k MoM to 30.816mil in the two weeks most closely corresponding to the BLS survey period (weeks-ending 6/12 and 7/11)
Needless to say, that is a lot of data. As Darius concluded:
|
“Holy cow that’s a lot of noise. We have a team of ~12 software engineers and data scientists @Hedgeye and it took them less than a week to confirm how nonsensical it is to forecast a single month’s Nonfarm Payrolls figure given the standard error across every model they designed and massive revisions to the underlying data. We failed at various efforts across our research team to achieve an acceptable standard error roughly a decade ago too. And all of this was BEFORE the YTD explosion in the standard deviation of the Nonfarm Payrolls time series. Ipso facto, I feel keen to reiterate our belief that guessing the flavor of the Jobs Report the day/week of isn’t an effective risk management framework. The real alpha likes in having a prospective view on The Cycle and we continue to think that, in the absence of additional rounds of PPP-like funding, the balance of risks is skewed to the downside with respect to the US labor market over the intermediate term.” |
So, ultimately, whatever happens this morning, the cycles is still cycle. #Quad3 stagflation, baby!
I’m going to take a step back from macro for a second though and give you a, quote / unquote, stock pick. Earlier this morning my colleague Andrew Freedman initiated a long call on Twitter ($TWTR). According to Andrew (or as we call him Freebird):
|
“Twitter has been a perennial disappointment among investors since going public in 2013. Poor capital allocation, a lack of innovation, and privacy/security concerns have been a headwind to growth and monetization. However, we believe we are near a turning point in the Twitter saga following activist involvement and a renewed commitment to monetization. Investments Twitter is making in ad-tech and alternative forms of monetization today can create significant value over the next 12-24 months. Meanwhile, COVID has accelerated user growth and engagement, further adding to the information network's value. We see a path to 30-50% upside over the next 12-24 months as strategic initiatives bear fruit while ad-spend recovers and events return (e.g., sports, the Olympics, etc.). If management fails to deliver, we believe activist involvement limits downside.” |
In the Chart of the Day, we’ve included a proprietary chart of mobile app downloads of twitter and while they are off their COVID peak, remain elevated. If you’d like to listen to the call (institutional fees apply), please email .
Twitter has indeed become a critical source of real-time information, which will only accelerate into the election. Speaking of which, you can follow me at @hedgeyedj.
Immediate-term @Hedgeye Risk Range with TREND signal in brackets:
UST 10yr Yield 0.50-0.60% (bearish)
SPX 3 (bullish)
RUT 1 (bearish)
NASDAQ 10,533-11,218 (bullish)
Tech (XLK) 108.07-117.42 (bullish)
REITS (XLRE) 34.90-37.07 (bullish)
Utilities (XLU) 59.45-61.43 (bullish)
Financials (XLF) 23.38-24.58 (bearish)
Shanghai Comp 3197-3442 (bullish)
Nikkei 211 (bearish)
DAX 129 (neutral)
VIX 22.37-29.75 (bearish)
USD 92.49-93.99 (bearish)
Oil (WTI) 39.75-42.65 (bullish)
Nat Gas 1.84-2.33 (bullish)
Gold 1 (bullish)
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
