As mentioned in previous posts we run a variety of automatic as well as discretionary trading systems. Running them alongside each other helps us to spot market trends that we might not otherwise see. Well here are a few macro themes that we have found and currently are tracking for good entry points with relatively low risk.

Energy and Raw Materials-Yes, we know that this isn’t exactly a novel idea. But the fact remains that if the world is to continue expanding we are going to need more energy. If more people in third and second world countries are buying cars guess what they need? Yeah you guessed right. They need gasoline and the car companies need steel. If the BRIC’s and friends are to continue growing at their current pace or even half of the current rate then they need raw materials and energy to build. So we are for the most part energy and hard asset (commodity) bulls. While an index probably isn’t a bad way to go we feel that we can get better risk adjusted returns by looking for our own trades and scaling in and out of different securities. So we track a lot of different individual stocks, ETF’s, and commodities.

Housing-We are housing bears. While we don’t see this trend continuing forever or even for ten years we do see it going for at least another year. Does that mean we are shorting everything in housing? No, in fact we currently only have one short position in housing (HOV). But it is a theme we will continue to monitor.

Healthcare-Ultimately the outcome of the health-care industry is probably going to end up with politicians deciding if it is allowed to win or not. For the next 40 years we see several reasons to be long healthcare. Unfortunately we see a reason to be very hesitant. Because of the aging populations in the western world the bulk of the voting population will probably favor government controls on the health system. That being said we still see many potential opportunities in healthcare and bio-tech.

Global Telecom-This is a theme that has been good to us off and on for some time now. We have found that in a lot areas of the world some of the best stocks have been in the telecom industry. Off and on we have been long VIP, MBT, AMX, CHL, SKM, and TKC. In fact last week we re entered TKC. Basically telecom is one of our favorite emerging market industries and whenever a country meets our other criteria it is usually one of the first areas we look at.

These are some of our major trading themes right now. We have other themes we monitor but these should give you an idea as to where we are looking and what we look for. Basically we look for areas that should have long lasting trends and real fundamentals. We then look for entries that present a good risk to reward scenario. We aren’t in the business of risking a dollar to try and make a dollar. We are looking to risk a dollar to make three or four and sometimes even ten.

If you have any questions feel free to contact us here. And if you like what you have read you will want to add us to your RSS reader and consider subscribing to our newsletter.

Happy Trading,
The Macro Trader

As we have previously mentioned we run a Global Stock Model that essentially tries to be in the best countries. While we often trade ADR’s and have traded open ended mutual funds for the most part we trade the ETF’s. Occasionally that is not possible so if we can find a Closed End Fund that is correlated to the country index we will use that instead.

We keep a watch list of countries meeting our Stock and Interest Rate criteria and if they reach our entry prices we will buy them. We typically will only enter the top 5 on our list but depending on the geographic location of the countries, the macro-environment, valuation, and several other criteria we will buy other ones instead of or as well as the top 5. For a better idea of what goes into individual country criteria read this post on Singapore EWS.

We will go over our actual entries in greater depth in later posts. But essentially we look to buy in solid up-trends using breakouts and pullbacks. We are also addicted to risk management. If we can’t find a low risk entry we will wait. In our Newsletter we provide specific entries, exits, and stops for all of our positions. We don’t adhere to any profit target method but instead move our stops up as a position moves in our favor. We find this allows us to ride trends past where we “think” they should end while still using good risk management. As noted earlier we will cover a lot of this in later posts and cover it all in our Newsletter.

Back to the subject title here in order of geographic regions is our Long Global ETF/Closed End Fund watch list.

EWU-Great Britain ETF

EWQ- France ETF

EWG-Germany ETF

EWP-Spain ETF

EWL-Switzerland ETF

EWN-Netherlands ETF

VGK-Europe ETF

EWC-Canada ETF

EWH-Hong Kong ETF

EWS-Singapore ETF

INP-India ETF

RSX-Russia ETF

TKF-Turkey Closed End Fund

EWZ-Brazil ETF

If you have any questions, comments, ideas, etc. Feel free to contact us here.

Happy Trading,
The Macro Trader

Our last post discussed the advantages to using systematic investing processes along side discretionary trading. Here is a great example of this in practice.

In our Junk Bond Model we track several Junk Bond Funds and indexes. We do this so that we aren’t burdened with mutual fund trading restrictions and so that we have a fuller view of the High Yield Bond market. In this example we are using PRHYX the T Rowe Price High Yield Bond Fund. It is actually one of our favorite Junk Bond Funds because among other reasons it tracks the index very well and has a long history.

Looking at the results of the PRHYX its year to date (YTD) performance has been OK. On a total return basis it is up +3.9% this year with a maximum drawdown of -5.69% and a current drawdown of -1.56%. Looking at the results of our Junk Bond Model we have a YTD return of +5.6% with a max drawdown of -.71% and a current drawdown of -.71%.

If you look at the chart below you can see the results of investing $100 in the Junk Model versus $100 in he PRHYX Bond Fund.

Obviously the Junk Bond Model was able to sidestep the huge drop this summer and has avoided most of the current downturn. If you had invested in the Fund you would have taken on almost six times the risk for less return than trading the Junk Model. By the way the main inputs for this model are price action and interest rates.

This is an example of a model we use in our trading. As stated before we do this so that we can have uncorrelated, consistent, outperforming returns over time. We look at several asset classes, across as many countries as we can, using varied trading strategies. We do this because we are looking for the best risk to reward trades on the planet.

Happy Trading,

The Macro Trader

P.S.-If you liked this you will love TheMacroTrader.com Newsletter and will want to add us to your RSS Reader.

UPDATE-So far for the year 2007 our Junk Bond Model is ahead of the SP500 in both absolute and risk adjusted returns.  The SP500 is up 2.87% and the Junk Bond Model has returned 5.86%.  And what about drawdowns?  Well the SP500 has had two drawdowns slightly larger than -8% and few in the -5% range.  The Junk Bond Model’s worst drawdown is still only -.71%.  So yes, long term (and short term as well) adding different asset classes and trading strategies to your overall portfolio does help returns, diversification, and your risk profile.