As some of you know I am a member of Lehigh University’s premier student Investment Portfolio, the Dreyfus Portfolio. One of our responsibilities is to write a year-end report in May to the CIO of our school’s endowment. It is my second year being a part of this process and it’s a bittersweet one. We get to talk about the wins we have had and the knowledge that we have gained, but it is also one of the last times we work with the members who are seniors. This year I got to write the US Macro Outlook and Strategy. In honesty, it was me listing out my thoughts and my friend, who is now at Credit Suisse, introducing grammar into my writing.
To offer some trade recommendations from the writings below:
Trump mean reversion trade: Pair trade of Long KSU and short CAT
Shifting of weights by sector: Long XLE, XLU, IYZ
Raising of interest rates: JQC
Large caps beating small caps: pair trade of Long SPY and short IWM
US Macro
The US Macro Outlook has experienced large swings over our portfolio calendar year, from August 2016 through May 2017. Political and economic factors, overall uncertainty as well as have all impacted the investment strategy we have followed. 
Cross Asset returns, Goldman Sachs Equity Research
Politics
In terms of politics, November 2016 had one of the most debated and unexpected American presidential elections. Donald Trump’s victory and the lack of future guidance regarding policies to come in his administration were reflected in market volatility. Trump made many ambitious campaign statements such as bringing back jobs to America, ending the USA’s involvement in NAFTA and NATO, building a wall on the Mexico border, and getting rid of Obamacare. However, his ability and willingness to act on his words remain to be fully proven.
The first 100 days of Trump in office are indicative a mean reversal trend across many sectors. Many swings that have occurred in the market regarding healthcare and tax reform have shown that the market is overly pessimistic and optimistic. The Board expects a mean reversion across other sectors that have been excessively lauded or, on the other hand, avoided.
Economics
The economic outlook has been tied heavily to the Federal Reserve’s activities. The Board agrees with a market consensus of one or two more interest rate hikes in 2017. The US dollar is expected to stay strong regardless of the political agenda of decreasing trade deficits. While the administration is enticing American companies to bring home their operations, it is unclear whether they will adhere, and if so, to what extent. Numerous CEOs of international companies, for example, Nike, have commented that it is economically disadvantageous for them to relocate their operations. The long-term trends and implications are currently not clear, due in part also to market noise.
Employment remains a strong indicator for the economy and the Fed’s plan of action. While the market is focused predominantly on the U3 unemployment calculation method, the data from the U6 shows that there is still a lot of slack presents and the economy is not at full employment. 
U6-U3 with fixed standard deviations and Recessions marked.
The Federal Reserve also plans to start selling off the assets is has acquired during quantitative easing. The Fed is expected to start selling its mortgage-backed securities in September, followed by treasuries later down the road, proceeding from the least liquid of its assets.
Strategy
The Board believes that several sectors are due to outperform in the upcoming year. We expect a shift in currently underweight sectors, such as Energy, Telecom, and Utilities, to overweight. On the other hand, Technology which has had a very strong rally, is anticipated to become underweight. The Retail sector remains problematic with more large-scale bankruptcies on the horizon. The discussed upcoming reduction in FCC regulation is indicative of many M&A transactions within the media and telecom sector. The industrial and energy companies, specifically, large cap companies with big offshore cash piles, are expected to repatriate assets.
Manager Exposure, Bank of America Merrill Lynch Quantitative Equity Research
Small cap companies are historically more directly affected by GDP growth, which remains moderate in the US. They have underperformed large cap firms which have a stronger global presence and have benefited from the strong dollar. The first two-quarters of 2017 have shows strong corporate profits and low guidance revision ratios, forecasting a good second half of the year.
Cross Asset returns, Goldman Sachs Equity Research
I decided to share with you guys and anyone else interested what exactly my short thesis in Chipotle (CMG) is. I am doing this because I often get people asking how I develop my thesis and such. This particular position has gotten a lot of questions about the thesis so I decided to do a blog post on it. I wold like everyone to know that this is a personal position as well as a position for the Lehigh Dreyfus Portfolio which I am on. I presented the idea and the other members voted that we should commit capital.
My thesis can be summed up in these three points from my pitch to the Dreyfus Portfolio in Early December 2016:
Chipotle still has not fundamentally recovered from the food safety issue last year despite a stock that has pretty much been cut in half. Along the way many customers have not come back and recent consumer surveys by BellWether food group, 38% of people 18-34 worry about getting sick due to chipotle’s food while 29% from ages 35+ feel the same. This lack of confidence fueled most recently by the misguided calorie counts for the new chorizo burrito, have led to Chipotle to do whatever it takes to get people back in stores. This has led to mass discounts and couponing at the expense of margins. My thesis is that this discount ting will continue as chipotle will try to regain positive same-store sales on both a quarter over quarter and year over year basis.
Another part of this story is the activist investor Bill Ackman investing over one billion dollars into the company, Ackman hasn’t had the best track record recently, but has a very good track record with resultants. Ackman plans on getting board seats and eliminating board members and splitting up the current Co-CEO structure. There has even been talk that the CEO and founder Steve Ellis may be asked to take a more passive role, this would be like asking Starbuck’s Howard Schultz to take a lap. I think this management shake-up and the potential for Ackman’s clashes with management will have a negative impact on the stock in the near future.
Chipotle also faces several operations headwinds. They have guided that Labor cost will on average rise by 5-6% in the next three years due to a combination of state and federal minimum wage increases and company wage increases. Chipotle has also forecasted that Q4 2016 will have COGs of 35% with this coming down in early 2016 with the change in avocado prices, this is, of course, all weather based and in the past Chipotle has suffered do to swings in commodity prices such as avocado and pork.
I made this pitch the evening before the investor conference where Chipotle declined 7% in trading. At that conference, management did say that they will be facing higher labor cost and that they should probably raise prices, but they are not going to in order to regain sales. This to me was the same as management was essentially saying that they don’t really care about margins anymore. This lack f concern is at the core of my short thesis because a company can have all the sales in the word, but if they cant convert that into free cash flow then you have a big problem. This comes at a time when Chipotle is trying to increase the customer usage of their mobile order system that they have had in their app since 2009 and trying to possibly have stores with drive-thrus which will need to have changes in kitchen layout and potentially more staff. All of those things will require a good deal of capital, which if they cant get through cash flow will have to come through the issuance of either stock or debt. To chipotle’s credit, they have no debt outstanding.
The last big part thesis that was reinforced by management’s appearance at a recent conference was that management is really going to suffer from the loss of the Co-CEO Monty Moran. The company has been run with the dual CEO structure of founder Steve Ellis and Moran. This partnership was what built the company up to the powerhouse it once was. Moran was the operations guy and Ellis was the brand man and visionary, a similar structure to Apple in the 2000s if Jobs and Cook. With Moran’s execution a problem arises, you have a visionary leading the company alone. Going back to the Apple comparison, remember when Jobs was the sole leader? He was kicked off by the board and had to go Microsoft for a bailout. Ellis, unlike Howard Schultz of Starbucks Ellis, hasn’t really had to manage the company. Which makes him being the sole leader of the company scary for the longs. Now Ackman has brought operations people who were at McDonalds on the board, but I think this will have limited success in the near future as it is still Ellis who is running the ship.
Overall I think Chipotle will eventually stabilize, but I think it will take a couple of years and more management changes to do so. Currently, though the company has too many operations headwinds and rising cost of both labor and food. For thus reasons I think it is a good short opportunity for the next year or so. I have a price target of $272 or about 15x my modeled 2018 earnings.
The number everyone is probably waiting to hear is -11.48%. That’s my performance for this last year with all fees included and dividends received. I haven’t done a sharpe ratio or quarter by quarter performance because I didn’t track that this year. This year was my first down year against the S&P 500 since 2011 where I blew out my much smaller account with a lot of trading racking up commissions.
So why did I perform so poorly? I think a lot of it was massive holes in my process and learning big lessons from the world of options. When it comes to options, about ¾ of my loses this year was through options. I started to use options after trying them out for a while on the paper account that is provided through my broker. I thought I had learned it all, but this was of course a mistake. I mainly used options to be able to hedge fast like in the sharp decline last January. Or making lots of little bets. I never risked more than 3% of my account in anyone options play, but the small losses I took with my stops in place added up along the way. On the process side, I had so many holes that looking back are kind of crazy. A good deal of these holes were uncovered during my internship with Avory & Co this last July.
I was lucky to spend a month with their CIO Sean Emory (@_SeanDavid). He helped me reveal the holes in my process and help me realize how to close those holes. We went through everything like my faults as an investor, my major one is getting too emotional, and not having valuation targets. Looking back, it seems crazy that I never had defiant targets for when to get out of my investments, something that has hurt me in the past. This was mainly due to not ever modeling, but after a month with Sean I could whip out a model with my eyes closed. He also helped me develop a firm process with finding various Ideas as well such as using various screeners.
A lot of the plagues that affected me this year was not having a definitive process in place for a lot of things, like those mentioned above, I struggles this year with a lot of my equity positions not preforming and I just didn’t know when to reduce to keep those gains that I had. A great example this year was Under Armor. I held it all the way until the election and watched a great deal of my money disappear. I have since then introduced ways to stop this from happening.
Another big thing that I have also introduced is economics into my process. Throughout my investing career I have always said I was a equities guy and I could only pay attention to some economic factors, I always thought that was the realm of the global macro guys. This year taught me that Where we are in terms of the economic data greatly effects what equities perform well and when. Over this holiday period I have created a couple of economic models that tell me when the data is accelerating and where we are in terms of a sine curve. If you want to learn more about this feel free to email me or DM me on twitter.
This year has become a great, but hurtful learning period. Like every year, I look back at where I was and am amazed at how far I have come as a investor. I had some of my best trades of the year whether it be short Volatility ETFs into the election or being long Deutsche Bank puts into Brexit, but this also came with me having one of my worst returns for my core portfolio that I have ever had. I have also come to realize just how long it takes to get a firm process that works for a investor can take. I for one am glad I am learning this with my own money and not having to figure this out while I am investing the money of others. For right now I am happy with having higher knowledge gains than monetary gains. I don’t think a hedge fund is going to come calling me because of my track record over these past eight years. I would rather take the knowledge I gave gained or these years then what I have earned and with this I hope to continue this journey and hopefully some of you can take something away from my journey and apply to your own.
Morning Market Thoughts:
This morning I was reading a piece from Jefferies global equity team. I tend to like their pieces because they are typically two pages long, having some very good facts and stats, and have charts that make you go “Hm”. Earnings now wrapping up to the final few companies reporting, Jefferies had a rather good chart on the S&P 500’s sales revision ratio both on a 4 week moving average and a 6 month moving average. Here it is: 
We see that the 4 week moving average has defiantly picked up from the 20015 lows and the 6 month moving average is improving nicely. The question that arises from this chart is Why? Why is this improving? The answer is comes from another chart featured in the Jefferies note: 
Ah yes! The almighty dollar. Whats so important is that this chart of the dollar is that it focuses of the Year over Year rate of change. We see that there was a sharp move higher from 2014-2015 and that we are starting to get back to that 0% Year over Year change. With this change in the dollar appreciation we have also heard less of the Dollar in earnings calls. I remember over the last two years that the play was to switch into more pure domestic companies so you didn’t have to worry about the dollar affecting earning as much. But now we have a significantly less move in the Dollar on a Year over Year basis and the result……. Not a lot of mentions about the dollar on conference calls and you would have to really search to hear about another fact. That fact is that Multinationals absolutely kicked Pure domestic company’s butt when it came to earnings this quarter, take a look: 
It is in my opinion that this lack of move in the dollar is defiantly one of the reasons why earnings were so good this quarter and that we have seemed to emerge from the earnings recession we were in.
Questions and comments are always welcome
WillHassellws@mail.com
Some things to read this Morning:
Mohamed El-Erian’s expectations for the Fed Minutes (Bloomberg)
Here is a cool Chart from BAML:
Market Thoughts:
Lately I have a lot of people ask me what equity plays I like in the market. I keep coming back to one play and that is the Russell 2000 ETF the IWM. The IWM is one of the few major indexes that hasn’t hit its All Time High from last June. I like the IWM here has 1-3 month play. Using $122 as a stop and targeting a break out over $13 and then to the all time highs seen last June. 
Here we have a chart of the IWM with the yellow line being $123. This level seems pretty key as it has been a level of buying back ion both March 2015 and July 2015. If you remain hesitate of this trade then wait for IWM to close above $123 for a couple days to confirm that the break out is for real.
Hey everybody! Its been awhile since I have had the time to actually right anything. I keep trying to get back into the swing of writing small, daily, post in the mornings, but I keep putting it off. So here I am writing about the most recent trade I have put on and its kind of a shocker.
I must admit I did not come up with this trade on my own. I had some help from my good friend Alex who is a awesome trader, he know options better than most professionals and you can follow him on twitter @InvestmentKId. I came to him asking about VIX trades (VIX is the CBOE S&P500 volatility index). With the VIX in the 11s O figured it would probably be time to put a trade on because the VIX almost always ends up rising when it is below $12. With this in hand I began a long conversation with Alex about trade ideas for VIX; explaining that I wanted to only risk $400 on this so if it didn’t work out it didn’t hurt me too bad. Alex quickly educated me on why a trade on the VIX was not the best play. He suggested a trade he was in if I wanted to put on a hedge, like buying the VIX, but would have a better payoff if it worked.
The trade was a Broken wing butterfly in the SPX or the S&P500 index. Here is what the trade looked like on the order form:
You can see here that I would be buying and selling some in the money puts for the SPX. I did end up getting the trade for my limit price. For those, like myself, who better understand options based on the graphical representation here you go:
Here we see that if the SPX ends up being at $2,000 on September 16th expiration I can make a max of $9,625 with risking only $375. That is a pretty low probability. On this chart you see that it actually doesn’t even give it a probability. On the max loss side we see its the $375 I paid for this spread; with a probability max loss of 97.96%. This does have a risk reward of 1 to 25.67 which is nice if it actually happens. The goal of this trade is to have a decent hedge for my portfolio. So I am fine with having $375 hedge that must likely will go to zero, but can protect thousands in long exposure if something goes on.
Now what is nice about this trade is that if the SPX does go down 1% on a day you will make about 50% of what you paid for the trade. you can see that here on the Optionhouse “What if Calculator” : 
To wrap it this up the reason I got into this trade is that we are at all time highs for the S&P 500 and I wanted to buy some protection at a price where if I could lose it all and not really mind too much. Im not suggesting everyone rush into this trade, but it is a decent alternative to buying calls on the VIX.
Some Reads:
Americans (and I) are jacked up on coffee Bloomberg
Yields reach record lows WSJ
Ritholtz on the dialogue of Finnacial pundits Ritholtz
Meb Faber does podcast (LISTEN TO THEM!!!!!!!!!!!!!!!!) Meb Faber Show
Charts:
Southern Energy vs SPX (S&P 500)
Southern Energy vs TLT (20+ year bond ETF)
Thoughts: The charts above are very interesting because it shows the amazing performance of Southern Energy (SO) which is a Utility that services the southeast United States. SO has had a stunning 23% return over the past year and the XLU (Utilities Sector ETf, which I own) has had about the same return. The S&P has returned about 2% and the TLT has returned 17%. Utilities are now at a stretched valuation, trading at a 20 P/E when they normally trade at 7-8, So I’m not recommending a long in Utilities here, but just shedding some light on the best performing sector i the S&P.
If you take the time to listen to Meb Faber’s podcast, and you should, you will hear him talk about a study he did in his book about the 60-40 asset allocation (6o% of the portfolio in stocks, 40% in bonds) and the various returns that it got over time. As I was watching Bloomberg Surveillance this morning, while sipping my espresso, the conversation was focused around the almost record low yield that US bonds have right now. I immediately thought back to the 60-40 allocation. For years now we have heard pundits talk about how easy stocks were and how you can invest in almost anything. We are now getting to the point that it is getting to be that way for bonds, or at least over the past three years. So I began to wonder how these years will be shown in the performance of that allocation, many people like Mike Batnick ( head of research at Rithotz wealth management @michaelbatnick) often do blog post about this. I am looking forward to these studies and post coming out and in the mean time take a look of the performance of the SPX and TLT.
SPX is up 56.19% vs TLT up 45.64%
Hedge funds battle for Pension money (WSJ)
The Algos win again! (WSJ)
Molson Coors cracks open Euro bond market (Bloomberg)
Chart:
People wake up shocked that $NKE’s growth is actually good and that sometimes you have to read beyond the headline number that comes out. Shares were down over 5% in after hours last night, now up over 1% in per-market.
We are now almost four months into the year and boy what a year it has been. We have seen the major US equity indexes decline by 10, 15, and 20% for the Russell 2000. We have had multiple investment banks and pundits calling for recessions. Yields in Japan and Europe are negative. Not to mention that both the S&P 500 and Dow Jones are now positive or flat year to date. All this in just the first fourth of the Year!
S&P500 compared to the Dow Jones (Pink), 3 month
Lets first take a look at consumer staples:
Here we see the Consumer Staples ETF (XLP) in white and the S&P 500 ETF (SPY) in orange, 1 year
Here is a even better view of XLP vs SPY, roughly 3 month
Time for Utilities:
Here we have the Utilities ETF (XLU) in white and the S&P 500 ETF (SPY) in orange, roughly 3 month
Here we have the XLU in candle stick and the SPY in pink, 3 month
Now we are going to look at two different baskets that hold “Quality” stocks. The first is the iShares MSCI USA Quality Factor ETF (QUAL). The second is a index by Goldman Sachs High Quality index (Bloomberg ticker is (GSTHQUAL). I would like to note that the GSTHQUAL is a portfolio that you can invest in with Goldman Sachs. I must alos say I have received no form of payment from Goldman, I just knew this index was out there from their Weekly Kickstarter note.
QUAL:
S&P500 compared to the Dow Jones (Pink), 3 month
Here we have QUAL as the candle stick and SPY in pink, 3 month
And last but not least, the GSTHQUAL:
Here we have the GSTHQUAL (orange) and SPY (white), roughly 3 month
GTSHQUAL (white) and SPY(green), roughly 3 month
What I found interesting by these findings is that it payed to end up buying quality in terms of sectors rather than buying baskets of quality. I personally think that Quality can continue to outperform this year. I believe this because I expect it to be a rocky year for the markets. In January and early February we had a good portion of the S&P had been down 10% before the index did. We have also, now that earnings season is over, had two back to back quarters of negative earnings growth so we are technically in a earnings recession. With all this I believe quality will be the rock you want in your portfolio for the rest of this year.
*******Disclosure: I am long XLU, see my Positions page for exact dates
Feel free to chat about the post or markets via Twitter or Email!
Hello everyone! Yes! I’m back writing again! Many of you who follow me on twitter might have noticed that I wasn’t Tweeting nearly as often as I normally due. This mainly do to the fact that the other side of my life got really busy. The other side isn’t referring to my family or personal life. I’m talking about my life in the theatre. For those of you who don’t know I have been heavily involved in theatre since my sophomore year in high school. I now focus on lighting, but I have run sound and even a assistant stage manager. A lot of people ask me why I do it, especially at the business school here at Lehigh. My response is normally “To give my mind a break from Finance”. I say this because it is completely unrelated in that I am an artist instead of a investor. I’m dressed in all black instead of a suit, and I focus on a story instead of the last breaking news.
I had always thought of theatre and finance to be very different from each other, but it wasn’t until I worked on my current production, which is a show called “Boom”, that I realized how similar they were. First let me give you a quick breakdown of all the roles on the lighting side for a production. First there is the Lighting Designer, much like the hedge fund manager, he or she has the vision of what the show should be. The LD comes up with the various fixtures they want to use and transfer that into a lighting plot: which is a drawn representation of each light and its position along with channel and dimmer number. If the LD has a assistant lighting designer (ALD) then they will do the plot and help manage focus points during focus. The next important role is the Master Electrician (ME). The ME is like the head trader: they get the plot and decided what dimmer and which dimmer to use (you don’t want to use a dimmer that is 50 feet away from the light when you can use one 5 feet away!). They are also present during hang, when you hang all the fixtures according to the plot, and focus, when you focus the fixtures. ME is in charge of the Electricians, who are like traders; they are your workforce that gets things done like hanging, focusing, and circuiting.
Once I realized some of the similarities just in the workforce of lighting; they started to flood to me. Both jobs require long hours. I have several +10 hour days in a space in order to get things done. The hours are pretty muched flipped from finance unless you are a trader in the US who trades Asia. I am mainly in the space from 2pm to 12pm when I would be at my desk from 7am to 4pm on a trading day. There is a constant stream of information that is thrown at you that you have to keep straight in your head “What type of power are we using? Does this take DMX or Artnet or Net3? Why are receiving power? Why don’t we have data being sent to the fixtures?”. There is also a good deal of money at stake too. We have to move and hang very expensive fixtures all the time. An example would be for Lehigh’s production of Boom we have four Highend systems DL.3 moving head projectors that retail for about 30k a apiece so you get a little nervous when you have to rope them up 20 feet in the air and hang them on a balcony rail.
The biggest connection fiance has to be when you are a programmer. A programmer is someone who takes what the LD is saying and programs it into a lighting console. This happens during tech so you are constantly changing lights. A programmer is on headset with all the Technical staff so it gets very difficult determining what information is important. You often have conflicting information too. You have the LD asking you to do something while the Stage manager is ordering you to go to the next cue. My experiance during Boom was almost like being on a trading floor. The stage is infront of me, but I was glued to my console, for me it was a ETC Gio.
ETC GIO
The two monitors built into it are touch screen so you can better mix color for LED fixtures or select multiple channels without using the Keypad. I had a flood of commands going in my ear “I need channels 211 thru 215 at 50. Channels 5othru 75 minus 63, 64, 64, 67 all at 40. Pan the stage right Icue beam down to more center stage left. Record this as a cue with a up time of 5 seconds and down time of 10”. I had to execute these in real time or I would hold up the productions. I got commands like this about every two minutes with various smaller commands like “bring channel 1thru 20 at 40 and update the cue” in between. Its a exciting and stressful experience because if you mess up everyone else on the intercom can hear that you messed up because your LD is correcting you. Its almost like day trading in a way.
Looking back to it seems strange that I didn’t realize the connection before because it seems so obvious now. Its the fast paced, quick thinking that both share that has attracted me. I think I never really tried to think about it because I always wanted theatre to be a escape. I still think it is a escape because it takes my mind off a lot of the ridiculousness of finance like the constant need to be informed and the constant deluge of opinions. So when I go from the world of finance from time to time its because I’m trying to convince an audience that they are in the fairy tale world of OZ, The streets of London(Sweeney Tod), or possibly the colonial America (yes that was a Hamilton reference).
WillHassellws 