Three months into the new year, it’s a good time for me to put on the big boy pants of accountability and take responsibility for my asset management calls thus far: the good, the bad and the ugly, writes Landon Whaley of Whaley Global Research Wednesday.
The week’s headline is a quote from Sir Michael Edwards, a South African businessman who had a reputation during his career for publicly holding to account people who were not accustomed to accountability.
My old man always stressed the importance of being accountable and, more importantly, being proactively accountable before someone else demands it of you.
This idea of accountability is so ingrained in me that it drives me nuts when people avoid it, which is a prevalent behavior in financial markets and associated industries.
The Bad
I’ve got more calls right than wrong this year, but there is one call I’ve been making for five months that hasn’t played out the way I thought it would.
It’s said that in investing, being early means being wrong. I would amend that statement to say that being early, without a proper risk management process, means being wrong.
My question to those who believe this statement is this: how can you possibly earn extraordinary risk-adjusted returns if you aren’t early?
The very best breaks come when my Gravitational Framework reveals investment opportunities that diverge from the public perception of a market. By that very definition, for a period of time I’m almost always “wrong” about what I perceive as opportunities. I must wait for other market participants to figure out what I already know.
I initially laid out the Gravitational case for being short Chinese equities via the iShares FTSE/Xinhua China 25 ETF (FXI) on November 21, 2017. I’ve reiterated this short Macro Theme on several occasions since, once in December and again on March 14, 2018.
While the theme has certainly gone my way since January 26, and I believe there is more downside to come, I was definitely early.
Interestingly enough, this theme started out really well. FXI hit its 2017 high the day after my initial call and proceeded to lose 7.9% over the next three weeks. Some might say a trade that instantly goes in your favor to the tune of 8% over a three-week period should be considered a win.
Well, if I judged myself and my research team the way everyone else does, we’d generate the same mediocre returns as most other investors. Three-week moves are nice, but we grind every day to find the multi-month moves that will generate double-digit returns with acceptable risk parameters.
After bottoming on December 7, FXI ripped higher, gaining 24% over the next seven weeks. Since peaking on January 26, FXI has declined 10.6%, while experiencing a maximum drawdown of 18.5% (the technical definition of a crash is a 20% drawdown).
The net result of my Macro Theme call over the last 18 weeks is that I’ve been right for 11 weeks and wrong for seven. Obviously, we also attach risk parameters to our asset management calls, so we didn’t have our research clients blindly shorting and holding FXI during the huge rally to start the year.
Rather than trotting out my winners and catching amnesia to my losers like so many involved with financial markets are prone to do, I believe in publicly acknowledging the market calls that don’t go exactly the way I planned.
The short Chinese equity theme continues to be confirmed by both the economic data and FXI’s Quantitative Gravity. As long as my Gravitational Framework backs this Macro Theme, I’m sticking with my short Chinese equity playbook.
The Good
Now that I’ve embraced my inner Brené Brown and been vulnerable to my mistakes, it’s time to take a brief victory lap on the calls I’ve got right.
My last call of 2017 was to be long crude oil to enter 2018, and indeed black gold has gained 11.8% in the year to date.
Our first call of the year was to be short U.S. dollars, and that has played out nicely. I’m no longer bullish on crude but remain bearish on the greenback.
My first Macro Theme call of the year came on January 18, when I broke down the Gravitational case for being long U.S. technology, via the Technology Select Sector SPDR ETF (XLK), and short U.S. energy stocks: Energy Select Sector SPDR ETF (XLE).
Since making that call, the pair trade (long XLK and short XLE) has gained 9.97% and been profitable for 66% of the 50 trading days. Not only that, but while the S&P 500 (SPY) declined 11% from January 27 to February 9, this trade gained 6.5%.
Winner winner, chicken dinner!
We’ve also been guiding research clients to be long technology (+2.2%) and consumer discretionary (+2.9%). It’s turned out that these are the only two U.S. equity sectors still boasting positive year-to-date returns.
At the same time, we’ve been telling clients to avoid, or opportunistically short, utilities (?3.3%), REITs (?9.0%) and long-dated U.S. Treasuries (?3.5%).
More recently, I’ve laid out cases for being short German equities and industrial metals. It’s still far too early to know if these calls are good, bad or ugly. While both themes are already in the black, we need to wait and see how they unfold in the weeks and months ahead.
Bottom line
I made it through Q1 without any “ugly” calls, which are calls that go horribly against your thesis. For a guy focused on risk first and profit second, not making ugly management calls is as much a win as making good calls.
Capturing economic and financial market data and contextualizing it is something Wall Street finds very difficult to do. Nevertheless, this is what we do to generate our Macro Themes.
It takes a disciplined approach to measure the slopes and extremes in economic and financial market data across all four major asset classes in 27 economies globally.
We turn the insights we gain from this disciplined approach into our Macro Themes, which in turn drive our asset management calls. Each call I make is to help you position yourself for opportunities, or sidestep dangers, that most investors will miss.
While not every Macro Theme plays out, our research process, which is anchored to our Gravitational Framework, is right more often than not.
Next week, I’m going to unveil a U.S.-based Macro Theme, which has just been activated. I’ve been trading the U.S.-based markets using the same playbook for almost two years. This new Macro Theme represents the first departure from that playbook since September 2016. It will also run contrary to the U.S.-based calls that I’ve nailed so far this year.
Remember, the best opportunities come when a market’s Fundamental Gravity diverges from the public’s perception of that market. Right now, there are several U.S.-based markets experiencing this very divergence.
As always, stay data dependent, process driven and risk conscious, my friends.
Landon Whaley is editor of Gravitational Edge and CEO of Whaley Capital Group.
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About MoneyShow.com: Founded in 1981, MoneyShow is a privately held financial media company headquartered in Sarasota, Florida. As a global network of investing and trading education, MoneyShow presents an extensive agenda of live and online events that attract over 75,000 investors, traders and financial advisors around the world.
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