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Where We Are

While we will probably get a short term pullback in interest rates we remain bearish on bonds.  Basically every indicator and model that we follow show bonds as a sell.  It is probably safe to say that the inflation numbers are a joke and while 2.7% may sound good it is wrong.  Just like calling a fat man skinny doesn’t make it true, the same goes for “low” inflation.  Guess what it is at least 1% higher and probably closer to double the reported numbers.  There will be more posts in the future on this.

For Bonds



-Junk/High Yield-Sell

The signals for Government and Corporates have been on sells for weeks now but the high yield only came in as a sell three weeks ago.

As for stocks as much as it pains us to say it we see the SP500 staying in bull mode for the immediate future.  Virtually all of our models remain in a buy mode.  So although we wouldn’t be initiating or adding to our positions right now we remain on a Hold.


US Domestic-Buy/Hold

Favored Area-Large Cap Value

Top Two Sectors-Energy and Materials (XLE and XLB)

As for precious metals we are bullish on them right now.  Not wildly so but we have had a few buys on for several weeks now.  So for metals we are 40% invested with the rest in cash right now.

Gold-Long 40% of metals allocation.

As for the economy as a whole we remain short term neutral and long term bearish.  In the next few months we should be alright but by  mid fall we wouldn’t be surprised if we see the fabled recession.  That is a ways off but we would not be surprised if it came about.

In the currency world we are short term short the Euro, Pound, Swiss Franc, and the Swedish Krona.  In the coming weeks or months we will revert back to the short dollar position that long term has done so well.  In addition to that we are long term bullish the Australian Dollar.  If we actually go into hyper inflation mode the AUD will benefit significantly and if inflation stays where its at the AUD will still be OK.  Overall a good risk reward trade.

That is it for now.  Come back often because we are ramping up the posting.

Happy Trading and as always Manage Your Risk,

The Macro Trader

Disclaimer-None of this is investment advice.  It is the opinion of the authors.  If you choose to trade off of this you do so at your own risk and none of the gains (unfortunately) or losses (fortunately) are the fault of  Be safe, do your own due diligence on anything you see, and keep a level head.

One Way To Enter And Exit Asset Classes With Models

Many people have the misguided impression that anyone that market times is either 100% in or 100% out of a market. Anyone that has successfully used multiple models knows that’s simply not the case. A long time ago we read an article interviewing Marty Zweig where he discussed that while he used timing extensively he was rarely 100% in or out. Since reading that we have found that it was excellent advice and have incorporated it into our trading.

As stated previously The Macro Trader uses multiple models for virtually every asset class. For instance in precious metals we currently run five models. Three are virtually 100% mechanical one is 75% mechanical and one is discretionary in order to build up a core position. So how do we position size this? Actually it’s pretty simple. We take our allocation to precious metals and divide it by the number of trading models, in this case five. So if for instance we have allocated $100K to metals each strategy gets $20K.

Why do we do this? Primarily for two reasons. We don’t know everything and we want to earn at least some of the risk premia built into each asset class. So unless we are extremely bearish one asset class and net short we will almost always have at least some money in play there. What about leverage you ask? Well we have rules built for that as well. Our use of leverage deserves a few of it’s own posts but basically if we are extremely bullish we will usually use options in order to lever up. Depending on the situation we might use futures for an asset class or margin in stocks but usually we like options to add leverage because we can usually control our risk better.

There are several other ways to use models such as ranking each strategy and putting X% in the top one, less % in the next, etc. We will cover more ways to position size each model in future posts but for the most part we have found that while you can make this as complicated (not to be confused with sophisticated) or as simple as you want many times simple works best.

Happy Trading,
The Macro Trader

Some of the Advantages of Multiple Strategies

Many individual traders whether they are institutional or retail focus and specialize in one strategy in one market. While that is fine for part of your money if done right there are many advantages to running multiple strategies inside of your portfolio. Among them are a more consistent steady stream of returns, lower drawdowns, and the ability to perform in all market environments.

How do you achieve all of this? Well you have to go out and find successful strategies. You then have to check their correlation to each other. Depending upon the size of your portfolio you can definitely have overlap but the overall goal is to have several uncorrelated strategies. You want managers in different areas trading different ways. One manger that is involved with growth stocks, one in value stocks, another that is a trend following CTA (commodity trading advisor), another that does statistical arbitrage, a bond manager, an emerging markets manager, etc. You get the idea. As I said earlier some overlap is fine. In fact if you have large portfolio it is good to have a bit of overlap. If you can get multiple growth stock managers that trade slightly differently you will have added a bit more diversification to your returns albeit usually only a small amount. It also makes it so if one starts to under-perform you aren’t as dependent on them to extract the strategies alpha.

This obviously isn’t everything there is to generating good returns in good and bad times but is an often overlooked part of the puzzle. I can’t begin to count the times that I have talked to someone who was diversified into 10 different mutual funds by a financial advisor only to find they were barely diversified at all. Look to different strategies in different markets or to managers that trade in different markets and strategies and you will see that your returns become steadier and usually go up over time.

-The Macro Trader

P.S. In case you didn’t know most managers that trade in multiple strategies across multiple markets are Global Macro Funds or Multi Strategy Funds.

Real Diversification Part-1

It is said that diversification is the only free lunch in regards to investments.  While that may very well be the case, done the traditional way it is one of many ways to not be able to pay for your next lunch.

 If you go to most financial planners or stockbrokers they will tell you things like be 60% in stocks and 40% in bonds.  Or maybe X% in Large Caps, X% in Small Caps, X% in Treasuries, and X% in Corporate.  Sounds great right?  Along with this “diversified portfolio” you get the whole pitch that some of these will zig while the others zag so being in these separate asset classes smoothes out your returns so that you never have a drastic loss.

 Do you see a problem with any of this so far?  The problem is not that diversification can be a wonderful tool.  The problem is that just because you are in a bunch of different funds you aren’t necessarily diversified.  Take the above example: two classes of stocks and two classes of bonds.  If you actually look at what drives those asset classes you will find that over time you don’t really have four positions you have two.  Interest rates drive bond returns for the most part regardless of if they are corporates or treasuries.  What drives stocks?  Interest rates and corporate earnings.   

 I already hear some of you saying “well in the last crash Large Caps went down while Small Caps went up.”  Yes, this time that is what happened but over the long haul this doesn’t hold up.  In fact since 1995 the returns between the SP500 and SP600 had an 80% correlation.  And while the SP600 has definitely outperformed guess when it got hardest hit……..yep 1998, 2002, and summer of 2006 the same times as the SP500.  So when you needed it most the diversification fell apart.

 So how do you properly diversify?  Invest in multiple strategies in multiple asset classes.  For instance instead of just domestic stocks and bonds you could add commodities (energy, metals, agriculture, etc.), global stocks (both developed and emerging markets), global bonds (again developed and emerging markets), and real estate (same thing developed and emerging markets), hedge funds, private equity, venture capital, currency trading, and possibly even collectibles like art.  Obviously some of these have minimum net-worth requirements but the point is to invest in as many disparate and risky asset classes that you can. 

 Why diversify so much?  Because that is the only way to achieve true diversification in a portfolio.  Stocks zig a little differently from bonds which zag differently from commodities which zig differently from global stocks etc. 

 Obviously this is not all there is to it but it is a lot better then the traditional 60/40 stock bond mix.  In Part Two we will discuss how to decide what types of strategies to look for.  And in Part Three we will discuss different ways to decide how to weight your investments in each asset class.

 Happy Trading,

The Macro Trader

Who Profits When Bubbles Pop?

Many fund managers have been saying that we are in another bubble, but this time it is different. Not in the sense that “It won’t happen this time,” but in the sense that it is a global bubble and that almost every asset class is taking part in the bubble.

Jeremy Grantham recently popularized this concept with his paper
It’s Everywhere, In Everything: The First Truly Global Bubble

There are several articles worth of information and opinions here but my question today is: If there really is an all asset class bubble, who will be able to profit from it? Probably not your mutual fund manager since he is most likely long only and 98% invested, probably not your bond fund manager since he is also most likely held to the same long only and mostly invested constraints, probably not your private equity fund since money would dry up and we would be in a slow if not retracting economy, etc. Basically the majority of fund managers out there not only won’t profit from it but because of their investment constraints they will most likely lose a lot of money from it.

So who is left to profit from popping bubbles?  Funds that have a flexible mandate.  Obviously we feel that Global Macro Funds should benefit the most from this type of scenario.  Other types of trading that should benefit would be CTA’s, good Short Sellers, and funds that for the most part are long volatility.

Happy Trading,

The Macro Trader

P.S. download and read the Grantham paper. Even if you disagree with what he says it will make you think.

What Makes a Potential Investment Good?

What makes a potential investment good is a question that doesn’t get asked enough by most investors. If you asked your average investor that question you would get one of two answers 1-One that goes up and 2-One with good management and blah, blah, blah. If you ask an excellent trader what makes an investment a good one they would say that it is a good investment in regards to risk versus reward.

Most investors don’t focus near enough time on risk versus reward and instead only see the reward side of things. For example back in March of 2000 if you had asked most people what should I get into they would have said internet stocks. Why? Because they are all growing at a bazillion% a day and in a few years every man, women, dog, cat, etc. will be doing everything online. Only a few times did I ever here someone describe XYZ or maybe more appropriately WXYZ a good investment because it has a 200% growth rate and it is trading at a good multiple and it has something else going for it so even if the internet ends up being a fad you end up doing alright in the stock. Nope I don’t think any of us heard that nearly enough.

All most people see is the upside. In order to be successful long term it is imperative that you look at and for the negative as well as the positives when choosing where to put your money. If you are looking at a stock not only do you want a good story but you should also search for the bad story. What could go wrong? What will we do if it does go wrong? What else could go wrong? These are the right questions. If it is a bond then you have to worry about the issuing country, the countries interest rates, that countries business prospects, the world interest rates, etc. For every good thing you see in an investment you should be searching for that many bad or potentially bad things. Doing this vastly increases the likelihood of coming out on top. But just as importantly it insures that even when you lose you lose small. There are no shortcuts in this business. Nothing goes up in a straight line forever but you can make your line have less big dips by focusing on the risk just as much as on the reward.

Happy Trading,

The Macro Trader

Trading Quote

“I think the secret is cutting down the number of trades you make. The best trades are the ones in which you have all three things going for you: Fundamentals, Technicals, and Market Tone. If you can restrict your activity to only those types of trades, you have to make money, in any market, under any circumstances.” -Michael Marcus

Happy Trading,

The Macro Trader

What is Global Macro Trading?

Global Macro Trading is different from other trading strategies such as long equities, fixed income arbitrage, or other strategies. Instead of being put in a style box Global Macro Trading is characterized as being able to go anywhere in the world, trading any instrument, using any strategy. Basically the objective of a Global Macro Trader is to find the absolute best risk/reward situations on the planet earth.

Many of the best traders of our time are Global Macro Traders. Probably the most well-known Global Macro Trader is George Soros. In 1970 he started the Quantum Fund with Jim Rogers and since then he has averaged around 30% a year building up his net worth to the tune of about eight billion dollars. Other well known Global Macro Traders are Paul Tudor Jones, Bruce Kovner, Michael Steinhardt, Julian Robertson, Stanley Druckenmiller, Nick Roditi, and Louis Bacon. What do all of these traders have in common apart from their basic trading styles? They have all done exceptionally well running multi-billion dollar funds. Everyone that I have named have averaged over 20% a year for fifteen plus years. It’s safe to say that they are some of the best traders ever.

Why do so many great traders gravitate to this style of trading? As noted above Global Macro Traders go anywhere and everywhere looking for great risk-adjusted rewards. Look at the chart below. It is a chart of $10,000 invested in the Barclay Group’s Global Macro Index with the SP500 returns overlaid from 1997 to now.

Global Macro Index 2

What stands out the most from this chart isn’t just that the Macro Trading Index beat the SP500 by over 50%. What stands out the most is that the SP500 had a 47% drawdown and the Macro Trading Index only had a 2.81% drawdown during the same time.

What does this say to me? It says that being tied to one asset class, in one country, to one strategy is very limiting and can be very painful to your portfolio as well. With Global Macro you are able to go anywhere for the best risk/reward situations available.

Happy Trading,

The Macro Trader