Here is a breakdown—good and bad—of Fundamental Gravity based market calls from Landon Whaley.
Theodore Roosevelt gave a speech in Paris on April 23, 1910, and said in part, "It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, who comes short again and again, because there is no effort without error and shortcoming; but who does actually strive to do the deeds; who knows great enthusiasms, the great devotions; who spends himself in a worthy cause; who at the best knows in the end the triumph of high achievement, and who at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who neither know victory nor defeat."
This speech is known as “The Man in the Arena,” and as someone accountable to his market calls week after week, Roosevelt’s speech resonates deeply.
“There is no effort without error and shortcoming…”
We are far from perfect, but we get more right than wrong, and more importantly, our winning trades far outperform the losses we risk manage on the trades that go against us.
On Oct. 21, 2019, we made the call for U.S. inflation to begin accelerating after 15 months of slowing. We nailed that inflationary impulse as U.S. CPI has now accelerated for four consecutive months. More importantly, our Focus Markets were the best performing U.S. based markets for the final two months of 2019. Energy stocks, crude oil, and broad-based commodities put up big boy two-month returns of +14.9%, +14.2%, and +6.4%, respectively.
Unfortunately, those markets began sniffing out the coming Winter Fundamental Gravity and delivered horrible January performance, which led us to cut those markets loose at the beginning of February. I hate taking losses on a Focus Market, but man am I glad the process got me out when it did! Since closing those three inflation-sensitive markets on Feb. 4, energy stocks have declined an additional 22.7%, commodities (broad-based index) have lost another 7.0%, and crude oil is down 10.0%.
U.S. inflation assets weren’t the only call that looked right initially, but where we overstayed our welcome a bit. We started the New Year with a bullish bias for the equity markets in South Korea and South Africa. We looked like heroes on the South Korea call because the iShares MSCI South Korea ETF (EWY) rallied 6.4% in the first eight trading days. Similarly, South African equities traded well for the first week. However, we clipped both bullish Focus Markets on Feb. 4 for a small loss due to a bearish shift in the Quantitative Gravity and confirmation from The Mongoose. Here again, the process saved us from further damages as South Korean equities are down an additional 11.0% as of Friday’s close, and South African equities have lost 15.8%.
Risk managing the losses on losing trades enables us to minimize the time we spend in a drawdown. I’ve been professionally managing money for 20 years, and my experience tells me if you stick to your risk management game plan and cut losses when the process indicates, the profits will inevitably flow your way.
“The credit belongs to the man who is actually in the arena…”
To say that our U.S.-based macro themes have gotten us paid so far this year is like saying that sports talk radio guys work in hyperbole the way Michelangelo worked in oil and stone.
Our long book has crushed it this year, led by long-dated Treasuries (+14.2%) and gold (+5.8%). Our call to be long utilities (-5.6%) and REITs (-7.6%) looked fantastic until the final three trading days of last week. However, have no fear, these two markets will be back outperforming on an absolute basis before Q1 is over.
On the flip side, our short book is back to stacking Benjamins: basic materials (-16.1%), small-cap value companies (-15.4%), and retailers (-13.3%).
Folks, that kind of alpha generation over eight weeks is massive!
Keep in mind, 100% of the U.S. equity sectors we track are negative for 2020, 100% of the country-specific equity markets are also in the red, 47% of fixed income markets and 76% of the global currencies we monitor are posting losses, and 90% of the 21 commodity markets in our universe are also losers through two-months.
Given that financial market backdrop, I’d say we’ve more than done our job because an equal-weighted, dollar-neutral portfolio of our longs versus short Focus Markets has gained 16.6% so far this year!
Alpha generators mount up!
The Bottom Line
As I’m fond of saying, we done good, but we gotta keep doin’ good. The investing game, as always, is played in front of us and never behind. With an impending Winter Fundamental Gravity in the world’s largest economies, the Coronavirus sweeping the globe, the Fed squarely behind the rate cut eight-ball, and a U.S. Presidential election just months away, 2020 is setting up to be one heck of a year in terms of both risks and opportunities.
I’ll never find myself with “those cold and timid souls who neither know victory nor defeat” because I wake up every day eager to traverse the uncertain economic and financial market terrain on your behalf in an attempt to side-step danger and position you for opportunities. In short, every day, I wake up and embrace being the Man in the Arena.
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