3rd Quarter 2017 Review: Time for Kaizen!

The Japanese have a term to describe the effort of continuous improvement for the better: 改善 (pronounced ‘Kai-zen’)

That’s what exactly what I need to do.

Ever since I decided that I wanted to be a successful macro investor, I’ve embarked on my never-ending journey, climbed mountains and went through valleys, sought out the sages, and forced myself into a lifestyle that will make me that mean machine that I’m molding myself into.

While there were disastrous failures and terrible mistakes, I’ve also made progress along as I look back and reflect upon them. But, it isn’t enough.

Kaizen doesn’t just mean ‘improving to be better’. You can’t just do it once and leave it. There’s a presupposed meaning of ‘continuous work’ that is not unlike an ongoing, systematic process in order to constantly progress and improve.

And reflecting upon the past quarter and year-to-date, I’m utterly disappointed with myself.

I lightened my book and lowered overall risk over the past 3 months as work and personal commitments got heavy, but in the process itself I’ve also neglected some parts of my active process. I took shortcuts, did less homework, and I realised that I have been unconsciously missing out on my ideas and on following up on my thoughts about the markets. That’s not a healthy development! Moving forward, I will need to find a way to be more disciplined and to be in a proper mental state when executing my plan and process.

I got completely whipsawed by Baidu (BIDU) , a Chinese firm which I’ve developed a bullish conviction for after following it for some time since last year. I got cut out of the stock just about the time before price broke through a long wedge on 17 July, rallying more than 26% since then!

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I’ve also completely missed the rally in Lithium-related equities. I developed a bullish conviction in the first quarter, but did not act upon it at all. Here’s the chart of the Global X Lithium & Battery Tech ETF (LIT), which tracks an index of Lithium-related equities:

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A particular lithium-related stock which I was tracking and considering to take a position was Sociedad Quimica Minera de Chile (SQM), which produces Lithium other than its other products such as industrial chemicals and iodine. Here’s the weekly price chart:

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If only one could make money by hindsight…

One area which I’ve been monitoring for a year now has been the casino industry, which is in the midst of an ongoing recovery. Year-on-year revenues have been increasing over the past 2 quarters and I missed an entry into Wynn Resorts (WYNN); its share price has steadily climbed since bottoming in 2016.

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Macau-related casinos on the Hong Kong Exchange (HKEX) have seen positive earnings revisions for some time now as sell-side analysts turned more optimistic on it:

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One good trade over the quarter was a long in the Chinese onshore equity market via the Deutsche X CSI 300 China A ETF (ASHR). Price hit my target just before it dipped in mid-September.

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As of this juncture, I have 3 equity ETFs on the book: PGAL, GREK, NGE, which gives me exposure to the Portugese, Greek and Nigerian equity indexes respectively, and 2 stocks (GAIA, IPI). Both GAIA and IPI are ideas from the Macro Ops community, which I have the great privilege in being a part of.

All the positions are in the money except for GREK, which was supposed to be a pyramid trade to the European recovery theme that was expressed by a long in PGAL (which is on a roll since Portugal got a credit rating upgrade). However, price action isn’t cooperating, and in hindsight, I could have just doubled my exposure to PGAL, which would have been a better move. I will exit this position for a small -35 bps loss should it continue to do nothing.

GREK

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With that being said, my concerns moving forward are quite similar to what many institutions are facing at this juncture. Aggregate valuations of both fixed income and equity markets worldwide are not exactly cheap, but the overall improvement in global growth momentum (certainly the hard data across developed and emerging markets supports this) is supporting public asset markets. I’ve noticed that the MSCI Emerging Markets and MSCI Asia ex Japan Indexes are close to their cyclical-highs (in USD terms), something which hasn’t gotten much attention:

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Risk-appetite is still very much alive, as evident in the rush into emerging markets’ assets this year. Take a look at this article from Bloomberg. As quoted:

“Eurobond issuance from African governments is already at a full-year record of $14.6 billion, despite a slew of ratings downgrades, including for South Africa and Namibia, that has left the continent without a single nation that is fully investment grade. Moreover, Mozambique — which defaulted in January and hasn’t even started restructuring talks with investors — has the best-performing bonds in emerging markets this year after Belize, clocking up a 31% gain.”

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The carry trade is alive and kicking as well:

“All 21 global emerging currencies have had positive carry-trade returns this year amid low volatility. Fundamentals remain solid, such as real yields, external balances and growth dynamics, and volatility compression reinforces the carry trade, Jason Daw, the Singapore-based head of emerging-markets strategy at Societe Generale SA, wrote in note dated Sept. 21. Any developed market-policy induced weakness are buying opportunities, he wrote, adding that he was maintaining “short-dollar characteristics” in his foreign-exchange portfolio.”

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The broad-based weakness in the US Dollar year-to-date has given emerging markets a booster and eased financial conditions in many countries. Positioning in the ‘short-USD’ theme is also quite lopsided. This needs to be monitored, as a weaker USD could breathe some inflationary pressures into the US, which could force policy-makers’ hands. Due to the market’s current positioning, if the USD starts to strengthen again, it could be a whammy to the carry-trade (there are selective opportunities for shrewd and nimble currency traders).

Liquidity is still very flush in the system, and as such, we should still have a long bias, but keep a wary eye on any potential developments and catalysts that could upset the situation. Risk aversion levels is still quite subdued at this juncture:

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Other than the Fed’s commencement on ‘quantitative tightening’ – aka its balance sheet normalisation programme, the European Central Bank’s (ECB) potential scaling back of stimulus as well as China’s upcoming political congress event are crucial in determining the macro trends into the following year.

One good paper to understand the broad picture at this moment is an interesting transcript of the Bank of International Settlements‘s Claudio Borio’s most recent speech in London.

From today till the end of the year, other than managing the current positions (won’t take new positions), I’ll be taking time off to work on my entire process and framework. I will be monitoring the markets solely to keep abreast of developments. I hope to systematise whatever that could be systematised, and I’m tweaking with my checklists to see what could be improved to make it efficient and seamless.

I’m planning to hit the following books as well in this transition period:

They are mostly process-focused, and as such I’m looking forward to applying what I can hopefully distill.

Aside from investing-related reads, I’m planning to dive into Japanese literature for inspiration for this process. In particular, I’m planning to read well-known warrior classics such as Musashi’s ‘Book of Five Rings’ and ‘The Unfettered Mind‘.

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We all know that the Samurais were famous for their professionalism in battle, rising to prominence during the Sengoku period and the days of the Shogunate in Japan from the 14th to the last days of the 19th century. Their lifestyle, discipline, and courage in war is fascinating. I also have ‘The Swordless Samurai‘ on my reading list, which is a personal development book drawing lessons from the famous warlord Toyotomi Hideyoshi:

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I see a lot of similarities between a lean-mean, vicious samurai warrior and a well-oiled and skilled macro investor extracting returns from financial markets. Both professions require arduous training and preparation, both require a ton of self awareness and discipline, and both deal in risky ventures (a samurai his life (honour) at war and an investor, his capital). Perhaps I could learn a thing or two from these legendary warriors, and apply the takeaways into my process to tone me up for battle.

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Hence, it’s time for Kaizen!

 

*image credits to amazon.com, https://i.pinimg.com/*


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