Tuesday, September 28, 2010

Macro themes dominate the investing world

The rise of global macro investing and the increased importance of weighing macro themes in everyday investing were the subject of this recent Wall Street Journal piece entitled, "Macro Forces in Market Confound Stock Pickers" (Hat tip: Abnormal Returns).

An excerpt from that piece:

"
The market turmoil has battered many investors over the past few years. But for stock pickers like Neuberger Berman LLC's David Pedowitz, it has made their entire investing approach feel like an exercise in futility.

Mr. Pedowitz buys and sells stocks based on research and analysis of individual companies. His investment strategy, he says, has been upended by a tidal wave of "macro" forces—big-picture market movers like the economy, politics and regulation.

More and more investors aren't bothering to pore through corporate reports searching for gems and duds, but are trading big buckets of stocks, bonds and commodities based mainly on macro concerns. As a result, all kinds of stocks—good as well as bad—are moving more in lock step.

"It's unbelievably frustrating," says Mr. Pedowitz, who helps manage $4.5 billion for wealthy clients and has 25 years of investing experience. "It's enough to make you crazy."

That kind of talk has become widespread on Wall Street as stock pickers discover that long-held investment strategies are no longer working very well..."

Note that Gregory Zuckerman, author of The Greatest Trade Ever, is a co-writer of this article. Which makes sense, given that the main subject of his book, John Paulson, was a convertible arbitrage trader turned macro-focused hedge fund manager who scored big with his now-famous subprime short trade.

Paulson's not the only one to embrace the macro approach; exhaustive researchers and value oriented stock pickers, David Einhorn and Michael Burry have also delved into macro investing in recent years with their subprime-related short trades and forays into gold, farmland, and commodities.

The authors of the WSJ piece note that in the aftermath of the 2008 financial crisis, many investors woke up to the fact that a big picture theme or an "unexpected" storm can wreak havok on their investment returns. Now, they are starting to look more at big picture trends in the economic and geopolitical spheres, as they realize these events can greatly influence their performance.

Witness this quote from David Einhorn:

"For years I had believed that I didn't need to take a view on the market or the economy because I considered myself a 'bottom-up investor,'" said hedge-fund manager David Einhorn of Greenlight Capital last year. "The lesson that I have learned is that it isn't reasonable to be agnostic about the big picture."

There you have it. The big picture outlook has permeated the investment world. Is this a temporary vogue in favor of macro investing, or are we all, to some extent, global macro investors now?

Related articles and posts:

1. Michael Burry: an up & coming macro star? - Finance Trends.

2. Must hear interview with John Burbank of Passport Capital - Finance Trends.

Thursday, September 23, 2010

Recession Is Over! (if you want it)


Rejoice: the recession is over, at least according to the NBER's Business Cycle Dating Committee, which recently declared that our latest recession ended in June 2009.

This is awesome news for those of us living in September 2010 and in a little sphere of existence I like to call, "the real world". We can now celebrate the official end of what's been dubbed, "The Great Recession", a six quarter period of negative growth that now stands as a post-war record.

I'm sure Americans will be pleased to know that the GDP numbers and government unemployment statistics, which purposely gloss over the problems of longer-term, structural unemployment by omitting discouraged workers from the tally, are now signalling a light at the end of the economic tunnel.

We discussed the silliness (and uselessness) of the NBER committee's recession pronouncement rituals back in December 2008, when the same committee officially blessed the start of our "now-ended" slowdown.

However, if you go back 11 months to January of 2008, we were already discussing the likelihood that we had entered a recession in real terms if statistics were properly adjusted for inflation.

Our matter of fact view on the economy was repeated in May of 2008 when Bloomberg TV was running a special called, "Surviving the Slowdown". It seems anyone not immersed in academia or connected to the government was able to see these things clearly for themselves at the time.

Which brings me to Robert Murphy's article at Mises.org entitled, "Hooray, the Recession Is Over!". Aside from parsing the NBER announcement and mocking the economic establishment, Murphy makes a much needed point about the officially sanctioned history of recession and recovery that will likely emerge from the NBER's data and viewpoint. Everyone who studies economic history or is just reading about the current economic cycle should take 5 minutes to read it for that insight.

Related articles and posts

1.
Now can we call it a recession? - Finance Trends.

2. Buffett: We're still in recession (CNBC) - PragCap.

3. For many of us, the recession lives on - Washington Post.

Tuesday, September 21, 2010

Wisdom of Burton Pugh, 1930s stock trader

Found an interesting post from the Crosshairs Trader on the, "Wisdom of a Depression Era Stock Trader", Burton Pugh.

Since I'm always interested to learn more about traders and investors of the past, I thought I'd pass this along. Not only do we get to learn about a market student and trader of the past, we can also get an insight into his trading methods and market philosophy.

Here's an excerpt from Crosshairs Trader's post on Pugh:

"Burton Pugh, a well known trader, market commentator, and writer in the 1930s wrote numerous books, one of which discussed his trading methodology and the psychology behind it. Even after 80 years some things never change and most likely never will. Here is a list of some of the great nuggets of wisdom found in his book
A Better Way to Make Money.

1. The secret to losing money in the market is to know why. “The losers “were ‘playing the market’, not using it intelligently. The fellow at the other end of the deal, who was using it intelligently, not ‘playing the market’, is the one who got the money.”

2. “It is an undeniable fact that indiscriminate trading in a hectic market will send one to financial oblivion quicker than any other known process.”

3. “The most careful preparation-a systematic plan-is one of the essentials of success.”..."

Good study material for traders and investors. Do you see any rules or observations that you find particularly helpful? Any that you disagree with?

Thursday, September 16, 2010

Must hear interview with John Burbank of Passport Capital


Earlier in the week, we posed this question: who are the top global macro investors of today?

We started on the road to answering that question first by posing it to you (we're always interested to hear about up & coming investors from our many industry-savvy readers), then followed up by spotlighting Michael Burry's emergence as a global macro investor.

Today we shift gears by sharing an excellent Benzinga interview with an established star of the macro hedge fund world, John Burbank of Passport Capital.

You may already know that Burbank and Passport were thrust into the limelight when, like Michael Burry, their 2007 returns were boosted by short positions in the subprime housing market.

What you'll hear in this interview (transcripts: part 1, part 2) is how Burbank got his start in trading and investing and how he arrived at his global macro approach. There are too many interesting points to outline here, but be sure to listen to the full interview to hear his insights on medium-to-longer term thinking on big picture trends and the market's response to these type of events.

Enjoy the discussion, as this is the type of interview you will certainly not hear on most of the "leading" cable business channels. There is definitely a lot of food for thought here, not only on macro investing but also regarding some of the issues currently affecting America and the world.


Tuesday, September 14, 2010

Michael Burry: an up and coming macro star?


Michael Burry is best known for his successful subprime CDS short trade during the great housing bubble of the mid-2000s (recently detailed by Greg Zuckerman in The Greatest Trade Ever, and in Michael Lewis' The Big Short).

What you may not know about Burry (if you haven't perused the ex post facto celebratory literature) is that he began his career as a value investing med student sharing ideas & research with fellow stock pickers on popular message boards like Silicon Investor, as well as on his blog, the now defunct valuestocks.net.

He then founded Scion Capital, a hedge fund devoted to his own unique brand of value investing and short speculating. As a witness to the relentless rise in real estate prices and the simultaneous plunge in borrowing standards for home mortgages, Burry decided to become a self-taught expert in subprime mortgage lending and the market for asset-backed securities based on these loans. His fund soon shifted its focus to shorting subprime bonds via the CDS market, and the rest, as they say, is history.

Now beyond these facts that anyone can find through an article search, I think there is another aspect of Burry's investing career that is coming to the fore: Michael Burry as global macro investor.

Last week we highlighted Bloomberg TV's interview with Burry, in which the California investor said he was investing in agricultural land, gold, smaller tech companies, and small cap companies in Asia.

While Burry is no longer managing funds for clients, he is definitely looking farther afield in his own investment portfolio. As he noted to Bloomberg, increased correlation in the price movements of asset classes has made it more difficult to find unique trades and investment opportunities.

So Michael Burry has moved well beyond his original focus of value investing and value-focused short selling of US shares, to an approach that embraces a variety of asset classes (land, gold, stocks) at home and abroad. In this sense, he is building on the global macro approach of his earlier subprime trade: combining a top down view of economic trends with intensive research in an effort to find the proper investment vehicle to express (and hopefully profit from) his view.

In this, he is joined by other successful investors, like John Paulson, whose own subprime short trade helped Paulson & Co. expand from its original mandate as a merger arbitrage & event-driven fund, into one of the largest hedge funds in the world with sub-funds devoted to gold, real estate, and macro bets on a US economic recovery.

While media attention surrounding Michael Lewis' book, The Big Short, tended to cast a disparaging light on Burry and his fellow subprime shorts (CBS' "60 Minutes" patronisingly dubbed him a "Wall Street Misfit"), it's nice to see him getting a chance to share his views on investing and the
US economy through recent editorials in the NY Times and on Bloomberg TV.

Burry's most recent appearance on Bloomberg TV was edited down to a series of 3 minute clips for the web, but you can read the full transcript of his interview here (thanks to Bloomberg TV and Heidi Tan). If you're interested to find out more about his macro view, including his take on the post-housing bubble stimuli and the US and global economy, be sure to check this out.

BurryTranscript

Even though Michael Burry is now a private investor, we'll be keeping an eye out for more of his macro views and investing ideas. I hope he'll continue to share his thoughts in the future, because he seems like a very sharp guy, motivated to self-learning and investing on the basis of his own findings & views.

Monday, September 13, 2010

Who are the top macro investors of today?

During last week's MacroTwits discussion on StockTwits TV, Eric Jackson of Ironfire Capital posed a very worthwhile question to the group: who are the top global macro traders & investors of the day and what can we learn from them?

For those who may not know, global macro is a term used to describe a largely "top-down" approach to speculating and investing across multiple asset classes and locales. Macro traders and hedge funds often take a big picture view of emerging trends and geopolitical events and express their positions accordingly by speculating in any number of markets, be they debt, futures, currencies, or international shares.

The names of some now-legendary macro traders are probably familiar to most investors: George Soros, Jim Rogers, Stanley Druckenmiller, Louis Bacon, Paul Tudor Jones. But who are the rising stars and top practitioners of this investing style today?

That's a question we're going to examine a bit further in the weeks ahead. We'll start tomorrow with a look at one (seemingly) unlikely candidate and follow up later in the week with a rare interview from one of the recently established stars of the global macro universe.

In the meantime, check out the items in our related posts section for more on the movers & shakers in global macro trading. Know a great macro trader or hedge fund we should follow up on? Chime in at any time via the comments section.

Related articles and posts:

1. The Invisible Hands: Hedge Funds... (Stephen Drobny) - Marketfolly.

2. Paul Tudor Jones: Trader (documentary) - Finance Trends.

Friday, September 10, 2010

Features of the Week

Some worthwhile items of interest gathered for you in our Features linkfest:

1. Why saving is right and economists are wrong - Minyanville.

2. "My honest word": a translated interview with Vladimir Putin - Russia Watchers.

3. 7 things to do to improve your trading performance - The Kirk Report.

4. Our ongoing recession: stimulus-fueled recovery - Sense on Cents.

5. Castro: "Cuban model doesn't work for us anymore" - Credit Writedowns.

6. Media: How Fred Wilson killed Inc. Magazine - Zerobeta.

7. Reflections on the Sovereign Debt Crisis - Edward Chancellor at GMO.

8. To embrace death is to embrace life - The Financial Philosopher.

9. Fearless fall predictions & the illusion of knowledge - Derek Hernquist.

Enjoy the links & reading material, and thanks for stopping by. You can follow us on Twitter for timely financial updates and via our blog RSS to catch all our posts. Have a good weekend!

Tuesday, September 07, 2010

Michael Burry bullish on farmland, gold

Michael Burry, the California investor who profited by foreseeing the subprime mortgage collapse, is investing in farmland, small tech companies and Asian stocks, and gold.

Bloomberg has the details:

" “...I believe that agriculture land -- productive agricultural land with water on site -- will be very valuable in the future,” Burry, 39, said in a Bloomberg Television interview scheduled for broadcast this morning in New York. “I’ve put a good amount of money into that.”

Burry, as head of Scion Capital LLC, prodded Wall Street banks in early 2005 to create credit-default swaps to bet against bonds backed by the riskiest home loans. The strategy paid off as borrowers defaulted, letting his investors more than quintuple their money from 2000 to 2008, according to Michael Lewis’s book “The Big Short” (Norton/Allen Lane).

Burry, who now manages his own money after shuttering the fund in 2008, said finding original investments is difficult because many trades are crowded and asset classes often move together.

“I’m interested in finding investments that aren’t just simply going to float up and down with the market,” he said. “The incredible correlation that we’re experiencing -- we’ve been experiencing for a number of years -- is problematic.”..."

With so many hedge funds and investment firms following the same research and stalking the same ideas, it seems the larger companies and sectors are crowded trades. Burry is going further afield with his entry into farmland and smaller Asian stocks; it will be interesting to see if rising inflation from global money printing leads cash-averse investors to pile into some of these areas in the next few years.

More on the issue of gold and paper money inflation, currency devaluation in Bloomberg's article. You'll also find video interviews with Burry on Bloomberg TV, so be sure to check out the video tabs.

For more on Michael Burry and his successful subprime trade, see, "Michael Burry explains subprime CDS trade", as well as Michael Lewis' discussion of Burry and The Big Short with Charlie Rose. You can also click the "Michael Burry" label in our post footer to find more.

Friday, September 03, 2010

Niall Ferguson on entrepreneurial freedom and innovation



I am presently watching Niall Ferguson speak on entrepreneurial freedom in the global financial system, a presentation given at the St. Gallen Symposium 2010.

According to Professor Ferguson, the innovations brought about during the industrial revolution not only increased the efficiencies of goods manufacturing, it also made it easier for the very people who made those goods to buy more. These advances in economic ingenuity and processes are at the heart of rising living standards and economic growth.

Ferguson begins this lecture with some frank talk about Americans' delusions over their rapidly rising wealth twice over a ten year period (first in the dot com bubble, followed by the real estate boom); he then moves on to address the realities of economic decoupling, as seen in the recession in the developed world vs. slowing growth in developing economies.

He then offers a quick rundown of the factors which brought on the recent financial crisis, leading up to a historical overview of the industrial revolution and the efficiencies created by the "entrepreneur-driven process". Where industrial technologies and industrial processes were successfully spread, they came about mainly as a result of risk taking by entrepreneurs.

Relentless innovation and competition from entrepreneurs have driven down the costs of manufactured goods ever since. Schumpeter's description of the process of "creative destruction" speaks to the realities of economic survival; according to the evolutionary mode of thought, there are businesses and business models that, not unlike a species doomed to extinction, are not supposed to survive.

Unfortunately, we seem to face some very real threats to the workings of this spontaneous cycle of innovation and renewal. The long-term economic prosperity that has come about as a result is also in danger, says Ferguson.

What are the principal threats to entrepreneurial freedom and innovation? Let's tune in and find out.