Rewind: Who Was Bearish At End Of 2015?
That’s right. Just me. Happy to be corrected but I sifted through all the research that comes across my desk and found almost nobody warning about the impending implosion in equities at the start of 2016. Not only that nobody had the foresight to tell readers what risks would be present for any potential sell off let alone tell you there would be a sell off. A major one. Worst start to the year for equities in history. C’mon fellas you can do better than that.
Every time I see an opportunity in the market I release strategy and presentation documents that entails the reasons behind the trade, how the trade will be structured and what the trade plan for profit and managing risk will be. I published one in December 2015 that I entitled “Death of the Bull” which encapsulated some of the points I spelled out in my last article here on Share Café in December - “Beware of 2016” where I highlighted the risks and areas of global markets that point to a serious downturn. I even went as far as to say that almost every commentary and research I read is complacent about positive returns in 2016.
The result is our prop desk returned near 20% profits on our entire portfolio in the first week.
Now this is not an exercise in self-praise. After all my bear trade is not yet complete. Rather it’s to open the eyes of readers in assessing the authors of articles and the timing of the material they send. You see, when RBS said “Sell Everything” last week it evoked a reaction from the media, even a response from commentators on this website. Sorry RBS but where was the sell recommendation BEFORE the collapse. AFTER is no use. That’s REACTIVE not PROACTIVE. You can’t make profits reacting.
So why the big deal then about the RBS recommendation? Because it was made after headline grabbing declines by equity markets. It’s funny how nobody reacts when you warn of an impending “fire”, but everyone panics in a herd when there is an actual “fire”. As the line goes in the movie, Margin Call – it’s not called panicking if you are the first to sell.
For six months I have been educating readers to think like a seasoned trader, how to assess global risks and importantly understanding where the “herd” is positioned and how markets begin to unravel in a slow but orderly process if you know where to look. Let’s recap. I highlighted first that High Yield Corporate Debt, known as junk bonds – would be the first area to implode and this would be a major headwind for equities. Small oil producers have issued $200-300 billion in paper that they can’t buy back given their cashflows have been crunched on the back of oil’s collapse. I started highlighting this mid-2015 and the correlations the HYG ETF (US listed junk bond ETF) had with the S&P 500. After turning uber bullish at the end of September and calling for the Xmas rally to come early – I turned bearish from November and I urged readers to watch junk bonds and emerging markets for warning signs of impending drops in equity markets. I explained how and why the Federal were on a path to sending markets lower with a complete stuff up of their first interest rate increase. Here is what has happened since my warnings.
I warned how together with the junk bond market, emerging markets would be the centre of the next GFC style collapse. And emerging markets (which includes China) has been a major source of distress for markets in 2016.
And there is more to come in 2016. I also showed the similarities in markets today as they were to 1937. Both 8 years respectively after their major depressive market corrections of 2008 and 1929. I showed which sectors were leading markets lower and why if markets were going to have a positive year and the Fed could really raise rates four times suggesting a healthy economy then why are banks and housing stocks on the verge of a major decline? It can all be reviewed in my last column for 2015. Nothing has changed since then except that the resulting move by global markets and assets only cements my views, strategy, outlook and most importantly trade positions are correct.
Now onto some other house-keeping issues – Structural Monitoring Systems. I highlighted this stock in my 4th September article and informed readers that despite running a proprietary trading desk where we turnover a significant amount of trades, this was one position we had held since 2014 from under 30c. It was the only trade I have held for over 12 months and was a core part of our portfolio. By highlighting it in September I was timing the right entry opportunity for readers. The company was fast approaching approval of their metal fatigue sensors to be adopted in the aviation industry by the FAA.
It’s pleasing to say that approval was granted late last year and within three months of my article SMN share price gained by more than 300%. The stock has retreated on profit taking but I believe it’s on its way towards $5.00 as the company has a monopoly on its technology and because of the savings it provides the industry every airline will be faced to adopt it.
So as my first column for 2016 I implore readers to not be complacent. This is going to be a very difficult and bearish year from a macro, top-down perspective. Macro trends are bearish and only a handful of companies from a bottom-up perspective – like SMN – will do well.
All I heard for the first two weeks of this year is people make “excuses” for why the market fell. More like excuses why they – the herd - are wrong. Yes it harsh and yes I am sticking the boot in. But you investors deserve better results, advice and forecast than what’s currently being fed to you. And yes when I get it wrong I will put my hand up and say so. It will also coincide with me writing a personal cheque for my share of the loss on the proprietary trading desk.
Greg is the Head of Proprietary Trading at Global Prime and has over 20 years of experience as proprietary trader and high level strategist for the major investment banks including Citigroup, Bankers Trust and Macquarie Bank. He has been involved across all asset classes including commodities, bonds, currencies and equities right across the globe.
After a 10-year career within the comforts of the large investment banks and research firms he branched out on his own to form his own proprietary trading firm successfully building the business into a multi-million dollar trading operation that turned over a billion dollars a year. This same team now runs the proprietary trading desk at Global Prime, risking their own money in line with the firm's and client's capital.
Greg has appeared on CNBC, Channel 9 - Business Sunday programme, a guest columnist for the Australian Financial Review, a regular author for Personal Investor, Wealth Creator and Shares magazine and is the former Treasurer of the Australian Technical Analysts Association.