Thursday, June 19, 2008

Hits, Runs, and Errors

Macro Man's going to have to figure out how to assign a macro to the shift-F9 keystroke that will automatically type out "it isn't getting any easier, is it?" Because it isn't getting any easier, is it? Just when you thought that sanity had returned to short-end interest rate markets, out comes the UK with a piece of data so far off the charts that it literally beggars belief.

Yes, despite rock-bottom consumer confidence, a plunging housing market, a rise in unemployment, and dire warnings from retailers, apparently retail sales in the UK rose by 3.5% in volume terms last month. On a value basis, sales rose even more- 4% m/m. To put this figure into context, the last time monthly sales rose this much, Margaret Thatcher had only been prime minister for two months.
According to the ONS, sales were powered primarily by food and apparel prices, the latter of which evidently rose more than 9% on the month. Riiggggghhhhhtttt. If something looks like a duck, walks like a duck, and quacks like a duck, but someone tells you it's a race horse, would you really expect to see it at Royal Ascot today? Probably not. This number is literally unbelievable, but the gap lower in short sterling is all too real. Once again, this market appears to be pretty much unplayable.

In that vein, Macro Man decided to do a bit of portfolio introspection this morning to see where he's had some hits, scored a few runs, and (perhaps most importantly of all) made his errors. Now usually, Macro Man enjoys a pretty good hit ratio on his trades, both at his old shop and in the old blog portfolio. Traditionally, roughly 55%-60% of his trades are winners.

It's instructive, therefore, to see that since he started the new gig, his hit ratio has been substandard- only 40%. As much as anything, this tells him what a difficult three months it has been for his style of trading. Fortunately, his position sizing has been relatively conservative, as he at least had the sense to recognize how difficult the market has been and has just tried to "chip away."

What's clear is that there have been a couple of classic "macro trades" that have worked over the last few months, and a host of others (as well as shorter term punts) that have not. The large cap/small cap RV trade in particular stands out as a high conviction trade that's not worked; fortunately, Macro Man had the sense to cut most of the position before it really fell off a cliff. The lack of success in that strategy would seem, it appears, to illustrate the difficulties of RV trading over the past couple of months.
What seems clear is that straying from his core competency has not been rewarded; in particular, forays into commodity and fixed income markets have been relatively luckless. Fortunately, some moderate success in his bread-and-butter skillset have given him a tiny positive result since inception. But he would be curious if other risk-taking readers have had the same experience: lower-than-normal hit ratios, RV trades gone wrong, a high correlation between core skillset and performance, and, ultimately, an unwillingness to swing the bat aggressively when hits and runs are so hard to come by and it's easy to make an error.


Anonymous said...

wholly agree with nature of these markets. my advice is to stay out of short-end fixed income right now, very dislocated and fickle. It's a jobber's market, I'm trying to hit singles with smaller positions, range-trading, and only high conviction RV/curve trades.

Anonymous said...

Isn't the increase in UK sales volume consistent with anticipated inflation. Most folks are possibly buying & stocking up in anticipation of higher prices further down the road.

spagetti said...

lower hit ratios, changes in correlations (is that part of the hit ratio?) ..

May-Jun a nightmare for me. seems like a different world to Jan-April which - to me - seemed to 'make more sense'

Steve Place said...

Now you're really showing your age... you haven't been able to put macros in a keyboard for 15 years ;)

Macro Man said...

Anon @ 11.54

yeah, I've pitched all my fixed income trades with the exception of a low delta punt in short sterling call butterflies, which can only go to zero.

Anon @ 12.01

If that were the case, it should show up in the surveys and anecdotals....but it hasn't. Colour me skeptical.

Steve...hmmm...15 years ago....that's just about the last time I understood how all the electronic gear in my home entertainment system worked....

Fullcarry said...

Best opportunities in the market right now are scalping trades.

We are avoiding macro trades until for now. Too choppy!

Anonymous said...

I'm sorry to be such an idiot.

What's an "RV" trade?

Macro Man said...

Under normal circumstances, it means "relative value", but for the last three months, it's tended to mean "really vicious."

golden alcuzini said...

the trouble is, from a macro perspective, the world is currently drifting. We all think things are bad and will get worse. We are all positioned as such....and yet, no big shoes have yet dropped for months. And while no footwear is descending, we are going to suffer from noise and a lot of flapping.

Yes, we have to earn the returns but in reality the markets are not set up to go one way or another until some seismic events occur. In the meantime, some of the trades will work, others will fail and one will wonder why there is no profit, unless the singles and doubles were not accompanied by the loss of too many wickets.

Either be happy to chop wood or improve the timing of the trades, that is all I can advise...

From a frustrated (commodities) flapper.

Macro Man said...

Well, if you believe the Office of National Statistics, the reason the shoe hasn't dropped is because the bloody UK consumer paid the offer for it last month!

Will M said...

Retail sales: less inflation expectations, and more inflation? Is the deflator moving up fast enough?

golden alcuzini said...

with China increasing costs of petrol and diesel by about 13-16% now, they will start exporting their inflation to us (just as they exported their deflation to us during the NICE times!

The shoe willl eventually drop, it's just going to take some time.

Anonymous said...

my investments (pure alpha fx) have had a ruff year down about 3% ytd with 7 year average of 12% annualized (net) however our rolling 12 and 36 month still close to our average so current draw down is only worring for the trashcans which i keep kicking my foot through--hit ratio in really good times is about 40% in ok times 30% current is around 20%--good news is our position size is way down (1/3) normal...whats not working for us is our risk management--as you can tell by our hit ratio our risk reward tends to be very high ratio--the challenge is we tend to be getting stopped out at the extreems ends of the range (over and over again)--interday vol within a range is so high right now that our risk management results in lots of little losses--which is fine because this looks like a warm up to one of the best macro markets ever--chuck the RV keep the powder dry and get ready for end of q3-q1 09 of rock and roll---picking the right chinese stock ain't going to matter question is gonig to be long or short china in general --and that will be true for all markets--good luck and be glad you arn't one of my trash bins cause for the next couple of monnths i suspect they will continue to get kicked to hell

daytrader said...

the last two weeks have been my best trading period. ever. does that mean i'm a noise trader? Must be if intelligent, sophisticated traders such as yourself are feeling pain, but me, the dumb day trader is doing quite well. I was doing really silly things, like buying US10yr's on the bounces. really dangerous trades, when all the smart money is positioned for a steepening...

Richy Rich said...

The other function is that leverage has been clawed back from the fund community by prime broker and counterparts. Huge haircuts now preventing the type of leverage needed to take meaningful advantage of the "obvious" arbs. So as fewer folks able to play the mean reversion game on spreads, there is less to keep the spreads together. So more likely to blow - Which they have. Macro is back to Macro -look at big, big picture and trade the purest view. Eg if you think oil is going up then buy oil. Don't get clever trying to buy eur/usd, nok/jpy, selling spx, or putting some sort of rates curve trade on.

And re my Garden center theory - The most efficient form of topiary is to cut the tree down.

Anonymous said...

Richy rich: agree with your sentiments but there is pocket depth to consider also. Yes if oil goes up, one can buy it but in the meantime it can retrace savagely blowing people out of hte water. I believe macro-man made a reference to this with Euribor longs.

Well done to daytrader and no-one is knocking his method of trading. Perhaps that is the ploy for now until the trends are established.

spagetti said...

hope i wont jinx it

but usdjpy, bunds, treasuries..etc making a reversal
and stock futures looking weakish
curves steepening

we could be in for some fun in risky assets this pm or from monday

any thoughts ?

Macro Man said...

Daytrader, per Anon's comments, there is no right or wrong way to make money; our job is to make money, period.

That said, an environment where day trading is highly successful and an optimal strategy is figuring out where the market is and going the other way can be a pretty difficult one for those of us who try and figure out what the world will look like in 3-6 months and what the implications are for asset prices.

Anonymous said...

it seems to me that a good part of the large-small cap spread trade is "long financials" short small cap. so maybe way to play it is with hedge on financials -- probably right as fin'ls recover (ha).

Steve said...

I'm a macro prop trader at a bank in New York. My style is similar to Macro Man's, namely scalp here and there where possible to pay the bills, and rely on some good solid longer-term strategic positions to generate real returns.

Historically the returns have been coming in a ratio of about 2:1 in terms of strategies vs scalps, but since this spring this has been turned on its head.

My short-term trading has been better than ever, with a very high hit ratio. I couldn't pin an exact number on it but is has to be north of 60%, perhaps a good deal higher.

The strategies on the other hand have been miserable. The losers have been more numerous and bigger than the winners.

So: I'm flat since March.

It's tempting to chuck in the strategies and just day trade, but as the inbalances increase (particularly in the short end) I am actually increasing my risk. And like Macro Man, I am a small short in stocks, in my case the Dax.

My thoughts on why the short term trades are working is mean reversion, at the end of the day. I wait for one market (T bonds for example) to get stretched in one direction or the other relative to its related markets (stocks etc) and then enter the position.

And for all that, no money. I should have been an electrician.