Macro Trading has several advantages to regular trading or investing.  Most people either are long only or they trade one asset class.  Instead of focusing on one area of the financial markets, Global Macro Traders focus on the best risk to reward opportunities they can find regardless of asset class or whether it is long or short.  By not tying ourselves to one source of returns we can better balance our risk profile with our return objectives.  Global Macro allows one the flexibility to not be dependent on any one thing or be held hostage by the downside of a particular asset.

Here we are comparing the returns of the Barclays Global Macro Index against the SP500.  As you can see the Macro Index has performed significantly better than the SP500 from 1997 through the end of October 2008.

While the Global Macro Index is currently in a drawdown it is far smaller than that of the SP500. The SP500 is down -37.47% while the Global Macro Index is only down -7.14%.

Anyone that is still tied to the notion that all you need to do is buy and hold has lost money over the last 10 years. While we hope that investors are finally coming around to the idea of absolute returns and risk management, we also realize that investors by nature are irrational and that they will continue to repeat the same mistakes.

We here at The Macro Trader try to generate absolute returns because a relative loss is still a loss. If you are interested in learning more please send us an e-mail.

Happy Trading,
The Macro Trader

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Our stock market risk index did not change this week and remains at 25%. In simple terms the lower the reading the more bearish we are and the higher the reading the more bullish we are. As you can see in the chart we have been fairly bearish for most of the year.

If you have read our previous posts you know our active beta approach to managing some of the model portfolio.  The risk index is one of the primary inputs as to how much to invest.  Our complete model is a bit different but essentially you would invest X% of your account depending upon how bullish or bearish the model is.  Using this risk index you would only have 25% of your money at risk right now.  Since it dynamically changes depending upon what it expects out of the market it is not only a useful timing gauge but also helps measure the proper position size and asset allocation.

Hopefully this short explanation helps some of the answers that we have received lately regarding the risk index.  If you have more questions feel free to e-mail us.

Happy Trading,

The Macro Trader

P.S. If you want to ensure that you receive every update make sure and subscribe by RSS or E-mail by clicking on the RSS button on the right hand side of the page.

P.S.S. This is usually posted by Monday of each week but due to travel delays it was late this week.

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Our stock market risk index improved a bit this week.  The bulk of the improvements came from some of our sentiment indicators.  So now we have valuation improving and sentiment at an extreme.  In the newsletter we are positioned for a short term bounce but longer term we are still bearish.

macrotrader.com/wp-content/uploads/2008/11/riskindex1.jpg” title=”Macro Trading stock market risk index”>

Happy Trading,

The Macro Trader

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Nothing really changed this week in our Equity Risk Index.  We are still only 12.50% bullish which of course means that we are very bearish.  When the index is this bearish we basically step aside or go short.  Right now there are some relative yield and sentiment indicators that are slightly bullish but not one model that we follow is actually on a buy signal.

We will continue to update our Equity Risk Index each week on the site.  Among our many proprietary tools that we use at The Macro Trader  we also have risk indexes for fixed income, precious metals, and currency markets.  If you have any questions feel free to e-mail us.  If you want to get the risk index as well as our other posts in your RSS reader just click on the RSS button on the right hand side of the page.  And of course if you have any questions regarding the newsletter simply shoot us an e-mail.

Happy Trading,

The Macro Trader

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Our Equity Risk Meter essentially measures how bullish or bearish we are towards the US Markets.   The higher the reading the less risk there is in the market and the lower it goes the more risk there is.

Right now for instance the meter is reading 12.5%, which is very bearish.  As you can see we have been bearish for some time now and very bearish since mid June, enabling us to avoid almost all of the downturn in the stock market.  When the meter starts to climb we become more and more bullish and look towards the longside.  For now we are essentially on the sidelines sitting in cash.

We will be posting our risk meter for US equities each week.  If you would like to follow it you can either come to the site each week or simply subscribe to our RSS feed.  Using RSS you will be able to either receive our posts as an e-mail or in your RSS reader.

Happy Trading,

The Macro Trader

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Active Beta? What’s that? It is our term for a systematic and relatively passive way to enhance returns by capturing risk premia but at the same time manage risk and provide a real long term edge over standard buy and hold.

Having read countless books and papers preaching the long term upward drift in stock and bond prices we realize that risk premia is a good thing. Of course after having come through the 2000-2003 bear market we also know that if risk premia is good then risk management is even better. After reading Jim Leitners’ interview in the book Inside the House of Money we started to look at different ways we could gain more exposure and safely earn risk premia by using systematic strategies that have us involved in different asset classes.

Currently we have models built to capture risk premia in equities and fixed income. We are still working on ways to capture it in currencies and precious metals/commodities. We have built, bought, and researched several timing models over the years that are based off of technicals, valuations, sentiment, monetary inputs, and any mix of the above. Over time several of these timing models have proven to have a substantial edge over buy and hold especially when it comes to risk control. We have experimented with several different ways to use these models but so far have found that simpler is better and for each bullish model we enter X%. Currently for both fixed income and equities we enter 10% of our position for each model that is bullish using up to 50% of the model portfolio.

Right now we are working on a currency model that takes advantage of the carry trade, but with a risk management filter. We had been struggling to do it in a systematic risk controlled manner but thanks to a post by Macro Man we may have found a solution. If the testing works out we will post an update. As for the Precious Metals/Commodities model portfolio we are working on a CTA technical trend following model. We questioned calling this an Active Beta strategy but after re-reading some research by Bridgewater we decided that with the relative ease (No, it’s not actually easy. But once you have it up and running you shouldn’t have to tweak it much to keep it running.) to maintain it we would include it as Active Beta. Expect more posts on these models in the future as we get further in our research.

Happy Trading,

The Macro Trader

P.S. If you liked this post please add us to your RSS reader. if you have any questions, comments, praises, or criticisms feel free to e-mail us at Editor@TheMacroTrader.com

For further reading on Active Beta and systematic capturing of risk premia, here are some links to go to.
Inside the House of Money Excellent book filled with interviews with leading Global Macro Traders.
Pioneering Portfolio Management Must read book by David Swensen, portfolio manager of the Yale Endowment Fund.
Formula Research Nelson Freeburg builds some of the best systems out there.
World Beta blog Mebane Faber has done a lot of work on systematic methods of reducing risk.
Macro Man blog Macro Man has lots of witty takes on the markets and does quite a bit of solid research.

If you would like to receive our new FREE course “Macro Trading 101″ put your e-mail in the box below.

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Here at The Macro Trader we run five different model portfolios: US equities, fixed income, precious metals, foreign equities, and currencies. We use ETF’s and the occasional Closed End Fund as our trading vehicles.

The starting value of each portfolio was $100,000.00. We typically risk from .5% to 2% (usually 1%) on each position, with each position taking up no more than 25% of the model portfolio’s equity. So for example, with a $100,000.00 portfolio, we would risk no more than $1000.00 from entry to stop on one position, and that one position initially could not take up more than $25,000.00 in equity.

We track each model portfolio against two different benchmarks: The 0-line and the standard benchmarks in their asset class. We use two benchmarks for two reasons: First we believe in absolute returns. Our newsletter is patterned after a Global Macro Hedge Fund, so we pay strict heed to risk controls and positive returns. Who cares if you beat the SP500 because it lost 25% that year, and you “only” lost 20%? Sure, you may have won in Morningstar’s eyes, but you and your investors lost real money. In addition as long as you have positive returns, you could potentially lever up your portfolio to juice up your returns if your trading is sufficiently risk-adverse.

That said, we also track our relative benchmarks because people are used to them and doing so helps us gauge the effectiveness of some of our risk-taking. For instance, if we are taking on a lot of risk and are lagging our relative benchmark, then we need to scale back. If on the other hand we are beating the benchmark while taking far less risk, it may be appropriate to take on a bit more risk. As we will discuss later in this post, the latter situation has been our problem as of late.

US Equities

When we started the letter we had been bearish on US equities for some time. That said, we remained in cash until our 2/1/08 issue when we went short the XLF-Financials ETF. So far we have had three closed out trades. Of the three trades, two were profitable and one was closed at a loss. Our return has thus far been 1.57%. In the same time the SP500 has returned -3.28%. So on an absolute basis we are positive with a 1.57% return and on a relative basis we are beating the SP500 by 4.85%.

Fixed Income

In fixed income our first trade came in the 12/28/07 issue and was a buy of the TIP-TIP’s ETF. Since then we have had six closed out trades and currently have one open position. Of the seven trades all but one has been profitable. Our total return has been 1.9%. In the same time our primary benchmark the TLT-20 Year Treasuries has returned -4.1%. So on an absolute basis we are positive with a 1.9% return, and we are beating our benchmark by 6%. (By the way, as the universe of fixed income ETF’s expands we may change our benchmark to the Lehman Aggregate Index AGG-ETF)

Precious Metals

The first trade we had in precious metals came in the 12/7/07 issue. We went long GLD-Gold ETF. Since that time we have had three total trades in the metals portfolio and all of them have been profitable. Our performance has been good with a 5.23% return which beats the XAU Philly Gold/Silver index by 5.24% and the price of gold by .89%. We were able to achieve this while never being more than 54% invested.

Global Equities

Our first trade was a short in the EWW-Mexico ETF in the 12/1/07 issue. Since then we have had a total of six positions. Four of them have been closed out, and we currently have two open positions. Of our closed trades, three were losses and one was profitable. Currently our two open positions are profitable. Our P/L for this portfolio is -1.33%. That of course comes out to a -$1,326.48 loss. On an absolute basis we are obviously down. Depending on the benchmark used, we are either a bit ahead of a bit behind. Using the EFA-ETF which returned -6.64% we are ahead by 5.31%. Using the EEM-ETF which returned -.09% we are behind by 1.24%.

Currencies

We didn’t have our first currency trade until the 2/22/08 issue. Since then we have had four trades: Three winners and one loser. We are up 3.12%. As of now we are using the DBV-Currency Harvest ETF as our benchmark. Since there is no real benchmark for currencies, we decided to use the carry trading DBV-ETF as a benchmark. The DBV is down -3.71%, so we have beat our benchmark by 6.83%.

Overall the model portfolios are up 2.1% as of today’s close (5/7/08). Of our 20 closed out trades 14 have been winners and six have been losers. Our winners have made $13,894.01 and our losers have lost $3,675.88 for a total gain of $10,218.13. We currently have three open positions, all three are profitable, adding an additional $278.70.

While evaluating our performance, we have realized that we need to take on more risk. With a 70% accuracy rate and a 3.78 profit factor we should probably either be bigger in our positions, have more open positions, or a combination of both. Going forward this will definitely be an area that we will be working on.

Happy Trading,

The Macro Trader

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As you probably know Macro-Traders typically take a top-down approach when looking for potential investment ideas. Specifically we look for the best risk to reward opportunities we can across all asset classes, countries, and trading strategies. So we basically trade anything anywhere that we can find an edge.

Our investment approach takes a multi-step process to generate investments for our portfolios.

This is a flowchart showing our basic process.

What follows is an explanation of each step.

We have two ways to come up with investment ideas. We have our quantitative methods and our traditional research. Our quantitative methods vary from all out trading models that give actual buy and sell signals to scanners that look for favorable conditions in different asset classes, to a few tools we have that just look for unusual activity. One of the best things about using quantitative tools is that we miss fewer opportunities due to a computer being able to scan more asset classes in more markets than we could ever do.

As much as technology helps us to catch things we wouldn’t otherwise find. We also rely heavily on traditional research. We are always reading magazines, newspapers, books, trade publications, research reports, etc. We read anything that might help us find new investment opportunities or more information for our current positions and themes. We also try to listen to smart people and watch news and other television that might help us find anything helpful. Basically we are information junkies.

Our next step after getting some investment ideas is to research them further to validate them. Most of the time we hit dead ends, but occasionally we come across something good. If we decide that it makes sense we start looking to see if there is a past model that goes with it. For instance as of this writing we are bullish emerging market telecom and have been for some time. When we first came across this theme we liked the idea because it was logical. So looking for a model we found VIP and MBT both Russian telecoms. They both had outstanding growth rates and the stocks were definitely outperforming the market. Well since then we have traded them and have found several other good telecoms riding that theme like TKC, TMX, TEF, and ETF.

After deciding that what we have found is a solid theme that works out fundamentally, we look at the risks and rewards. Risk management is the most important part of what we do. We look at risk on several levels. At the individual security level we look to see what the best instrument to trade is. For instance if we are bullish on a country do we play it using equities, debt, or currency? We then look to see if we can cut off risk by using options. We like options for their flexibility. Many times we will find an idea that we like but due to the risk profile we can’t get in using the typical security, but we are able to manage the risk by using options. Another risk we really look at is portfolio risk. How does it correlate to our other positions, how does it correlate to the overall portfolio, are we actually just playing another version of a theme we already have on? We look at geographic, political, and any other type of risk we can. The final thing we look at is at what point do we admit that we are wrong? Or in other words where do we place our stop. Our stops are based off of the chart, volatility, potential reward, and size of our position. With risk there are not too many absolute rules. But one that we do always abide by is to never risk more than 2% of the portfolio on any position. Many times we will risk less but we will never risk more. So we size our positions accordingly.

Once all of this has been done we can finally add it to our portfolio. In future posts we will go into more depth on each part of this process. But this should give you an idea as to what we do and how we go about doing it.

Happy Trading,
The Macro Trader

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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

If you would like to receive our new FREE course “Macro Trading 101″ put your e-mail in the box below.

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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

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