HOW ARE WE DOING?
It’s been almost two months since we updated our past calls. As I often say, accountability is rare on Wall Street and performance is the end game. But too often, we find that fund managers underperform on a risk adjusted basis and tout themselves as geniuses. Most investors are quick to point out their good calls and quick to sweep their poor calls under the rug. It’s amazing how many stories are in the news this year about fund managers who have 20%+ returns. What the articles always fail to mention is that the fund manager was almost always down 40%+ last year. Two steps backwards, one step forward, charge you a mountain of fees and avoid all discussion of risk adjusted returns at all cost. That’s the M.O. of most fund managers and pundits.
Back in May we detailed our macro calls. Some good, some bad, but overall they were generally good. As regular readers know, I use a multi-strategy approach of which the macro strategy is the only one discussed at The Pragmatic Capitalist. Because of this it is difficult to track specific returns, but my macro calls are fairly broad and easy to follow. With that said, let’s take a look at some of our recent calls:
As the reflation trade picked up steam in late May we became less bearish on long-term bonds. I hadn’t quite turned bullish yet, but a full reversal in the “bond trade of the year” was in effect. A little over a week later bonds had been beaten undeservedly as little to no signs of inflation were evident and investors piled into risky assets. We officially turned bullish on long-term treasuries with interest rates at 4% based on the idea that inflation was running far more benign than investors believed. It turned out to be the bottom to the day. Bonds promptly ripped 6% higher in a matter of days and we moved to a neutral position as the risk/reward changed drastically. The reflation trade was beginning to show signs of weakness.
Although cautious since the April 29th we maintained that the stock market was not shortable. That changed in early June as the reflation trade began to run its course. Oil had spiked and every investor under the sun was convinced that the high beta reflation trade was the only way to play the market. We believed oil would roll over heading into the 4th of July holiday and the peak of the summer driving season. The fundamentals of the oil market simply didn’t justify the continued price surge. Although the market remained flat off our June 1st short call, it promptly rolled over 8% after the July 4th holiday as oil fell 18%. It turned out to be a near top-tick, almost to the penny at S&P 945. We moved to neutral just over a month after our short call due to the fast approaching earnings season. Our analysis of the upcoming earnings season led us to believe that the analyst’s estimates were too low and the companies were cutting their costs faster than analysts were raising their estimates. Last Friday we officially called for a rally this week as earnings were expected to come in much better than expected. The market has promptly surged 6% since then. I fully expect the rally to contine – perhaps as high as S&P 1,000.
As I’ve said before:
*I should note that this site is a roadmap rather than someplace where you should expect to receive stock “tips” and investment advice. This is not Cramer’s lightning round – in fact I hope it is the opposite – someplace for people to get ideas, bounce them around and come to their own practical conclusions. This also isn’t your financial advisor’s office. I’m here to help by all means possible, but not to hold hands. With that said, I hope everyone is enjoying the site thus far. The readers and comments so far have been incredibly generous and I have attracted the best audience around. I am by no means perfect, and it’s nice to know that the readers understand that EVERYONE in the stock market is constantly learning – especially yours truly. I have a lot of good ideas for the site going forward that I hope everyone will benefit from.
I’m sure I’ve missed some bad calls and maybe even some good ones. If you can think of anything feel free to use the comment section. If there is anything you like, dislike or would like to see on the site please feel free to let us know.
Your yen call was a good one. Impressive stuff TPC. You’d probably be in the top 1% of hedge fund managers if you ran one.
It would be awesome if you could provide more micro details. I love the broad macro outlooks, buthow do we apply trades to it and with what instruments?
Impressive calls but you are presenting your call of last weeks move to neutral with rose tinted spectacles – should have been a short term bullish call not neutral/ no positions going into the earnings season given the potential for positive earnings suprises particularly form the banks. Excellent reading tho.
Do you think the March 9 was the FINAL bottom? It seemed to me that it was an intermediate bottom because everyone was bearish and it felt like a bidding war for how low the S&P 500 can go.
I do not think it is the final bottom. I still like the long term bearish case on equity prices though. This is not the start of a bull market. The bull market of the 1980s started when inflation went down (as equities were heavily discounted by inflation) and relatively low debt levels. Dollar hegemony granted a temporary boon to the US economy as it allowed it access to low cost imports allowing the US to consume without excess inflation or wage hikes. Furthermore, debt boosted the economy.
In the 1930s, values were extremely depressed and were still a good buy despite the fundamentals.
Ken,
Good point. I wasn’t as clear as I should have been. Last Friday I said we were “likely” to see a rally. Then on Monday morning reader BGray asked: “TPC,
So what’s the plan? Are you going long early in the earnings then neutral for later? If memory serves me correctly, I believe you said last week after you closed out the shorts that you’re looking for some upside earnings surprises.”
I responded in the comments with:
Gray,
I wouldn’t consider getting short again until after the banks finish reporting. We might just see a repeat of last quarter albeit on a smaller scale in terms of percentage upside move.
Definite long bias heading into the next two weeks.
Link: http://pragcap.com/earnings-update-what-to-expect-for-q2-and-beyond
Thanks for keeping me honest. I’m definitely not trying to misconstrue things.
Aki,
I don’t think we’ll see 666 this year. Of course, I still think we’re in a secular stock bear market so that doesn’t mean we won’t revisit in the years ahead. I often say that I don’t think the market discounts more than a quarter ahead so I’d be lying if I tried to tell you that I think I know what is going to happen 3 months+ ahead of us. I have an opinion, but you know the old saying about those.
My gut tells me we’ll revisit at some point in the next few years, but who knows. It’s hard to imagine reaching that level of pain again in the banking sector.
TPC,
Thanks for the hard work.. Please continue to give us a running scorecard of the SPX companies who hit, miss, and exceed. And then do your math and let us know when you think the SPX is priced right or not based on P/E and your thoughts going forward.
Your new website rocks.
I have recently regularly read your articles and they are great. I think if you could update and publish at the same time this SPX chart of calls when you make a call, it would be very obvious and helpful. I knew you were discussing the expectation ratio and leaning toward surprises in Q2 but it was not simple for me that a call was clearly made.
Paul,
I am going to begin issuing a strategy update that is a one page concise overview. When I get some time I’ll finish it up and begin posting it (most likely on a weekly basis).
You’re not the first person that was confused by my posturing before earnings. I certainly wasn’t very clear about it and didn’t clarify my position until BGray asked specifically on Monday morning.
Sorry for the confusion. I shouldn’t have assumed that “better than expected earnings” = buy.
If anyone has suggestions for the site going forward I am all ears. Being accountable by having an audience has actually taught me more than I thought it could so I am all ears. It’s really nice to help others and learn a little at the same time. So far, the readers have been nothing but a pleasure.
TCP,
Good call last week. How about next week? You indicate SPX higher to perhaps 1000+……here is some skepticism:
Investor sentiment short term is very bullish (therefore contrarian):
http://www.sentimentrader.com/
Of course the H&S pattern which failed last week, might still be in play with an extended R shoulder forming.
Of course I don’t know for sure but it looks to me that the market had its best shot this week and didn’t make to much of it.
Rebuttal?
In my opinion, the sellers are always more powerful than the buyers in a market. On the buy side it’s the short sellers and on the sell side it’s the actual sellers. I just don’t see a catalyst in the next few weeks where a selling stampede ensues. What news is going to cause this? Rather, the recent buyers will hold onto shares in anticipation of better earnings and short sellers will continue to be forced buyers. This will drive the market higher. Once we bust through S&P 950 we’re going to 1,000 in my opinion.
With a tech heavy earnings schedule on deck next week I would not want to be short. I’ll be out with a full slate of ideas later this afternoon, but preliminary results are leaning towards the bullish side for sure.
As powerful as the H&S pattern is, it is nothing compared to the fundamental strength of better than expected earnings. Unless we get misses by some really important names it is a total non-factor. Of course, I wouldn’t be shocked to see investors digest the large gains from this week, but I fully expect to see higher stock prices in the coming 2-3 weeks. Of course, this could set up a beautiful short trade heading into August as investor sentiment could really boil over and stocks could get extended very quickly if the momentum continues. Stay tuned.
You may have superior knowledge in this matter. Certainly the majority view is bullish.
IMHO better earnings have already been discounted (look at the banks today) because the bar was set way too low to begin with. There may be some other reasons for the markets to continue higher but technicals point to short term overbought conditions and a rising VIX.
Reader Dean.
TPC,
Just my 2 cents – it could be a portfolio with simple – buy, sell, hold calls and the date the call was entered. Put some money into the portfolio maybe 100K so we can do a sample allocation across the calls. Then track the portfolio in real-time, maybe by hosting it on Yahoo Finance or any other stock tracking website as a public portfolio.
TPC–
I was also right on the direction of the market in the last week. But, and this is a big “but,” when I tried to convert that into a series of wins in the market, I came up short and actually lost a few bucks (not much). But my week was definitely not a “win.” Short of any specifics in your call, I don’t think you get to claim a win. That’s a little too easy.
Don’t get me wrong though. I always read your blog and usually come away better for it.
Understandable Edward. Personally, I was short into the end of last week and got long Monday. My total portfolio was only up 1.5% on the week, but it was certainly a win by my standards. Had you covered last week when I said to and bought on Monday when I clarified my position to BGray you still would have made 3%+ on the week.
All in all, just avoiding the short position was a big win in my book. Being short into a 7%+ week is a huge loss….
Edward,
TPC has been talking about a rally into earnings for weeks. Anyone who is a regular reader knows that. Are you new?
Stanley,
I think I definitely could have been more clear about it. I didn’t really clarify the position until someone asked me specifically on Monday.
I don’t think Edward is wrong to question it….
Edward,
Just ran across this while doing a write-up on something else. This earnings rally has been on my radar for well over a month:
http://pragcap.com/will-further-cost-cuts-leader-to-q2-outperformance
“The implications here are that we are likely to see another quarter of “better than expected” bottom line earnings as analysts have adjusted their EPS estimates very little over the prior quarter. This could further juice the stock market.”
TPC,
I want to thank you for your hard work and excellent insights. For the couple of months I’ve been reading your blog I have enjoyed it very much. You’ve been making quite a few accurate calls. Makes me wish that I’ve known about this blog all along to guide me through these tumultuous waters. Please continue to keep the readers updated on the market and your sentiments. Your blog is quickly becoming one that I frequent multiple times a day. Since I don’t have time to read all the blogs out there, yours is usually the one I go to. I like that you translate everything into plain English so that it’s easy to understand.
TCP:
This is an idea. Is it possible for you to consider a format where your weekly or monthly views re:market performance are the dominant topic, yet allow for others to display alternatives views?
For example, the great majority of financial forecasters, including yourself, expect a final summer rally that will produce an SPX value anywhere between the high 900s to 1200 range. Yet how we get there or the degree of the move are equally important.
Re: next week I think we will see a retreat of all indeces, for example. It would be interesting to your readers to allow some form of civil debate as to movement prediction supported by credible, yet perhaps conventional, sources. I can provide my own forecast compared to yours and others. This is not meant to steal the thunder away from you, rather, provide for a forum where our positions here are further refined.
An obvious thread in your typical reader commentary is the bias we all have towards a particular outcome. The truth is that bias should stand aside to a more disciplined approach towards outcome discovery.
One of your readers the other day accused the bears as incapable of making money in this market. The truth is that one can make money whether the markets go up or down; directional correctness is the key.
Dean,
That’s a great idea actually. One of my favorite things about writing here is that the comments are fantastic and often the writers know more about a segment of the market than myself so I love to feed off other people’s ideas. I am 100% for intelligent debate.
How about this: I use the current Research and Investment Ideas section to post a discussion on monthly market direction where everyone can express their opinions?
Another idea I have had is creating a virtual stock exchange link where everyone can create users, use VSE on marketwatch and track trades and ideas in real-time (or close to it). I think both would generate helpful ways for everyone to bounce ideas off one another and get some good discussions going that generate money making possibilities.
What do you think?
Great, either or both would work.