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.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
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