WHITE MOUNTAIN WEEKLY BY PINECONE MACRO JUNE 29TH, 2018

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Arnold Hamilton
5 years ago
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1 Joshua Trees and Yucca Moths Going to change things up a bit this week and focus on a local plant that is not a pine tree. I live in the Mojave Desert and about the only trees around here are Joshua trees. Some folks find these beautiful and enjoy living in the desert. I am not among these people, but they are certainly interesting plants. I say plant because they are really more of a cactus than a tree. They were named after the Biblical Joshua by Mormon settlers who crossed the Mojave in the mid-1800s. The settlers thought they looked like Joshua reaching his hands up to the sky in prayer. Joshua trees can live to be up to 1,000 years old impressive for any creature in this harsh environment. What I find most interesting, is that they depend on a moth for survival. That moth, known as the Yucca Moth, depends on Joshua trees for its survival. They have coevolved. Not exactly an antifragile plant, but a resilient and robust one none the less. As I learned this, I asked myself what is my yucca moth? What can I not live without? I answered this question about my personal life, professional life, and my trading. I will spare you all but the pineconemacro@gmail.com 1

2 reflections I made on my trading Yucca Moth. I have a few trading moths but the most important is charts. If you took charts from me and only gave me balance sheets and news etc. I would fail as a trader. I will likely always have charts to help me trade, but I know I should sharpen my micro skills fundamental analysis, accounting, quant skills, and other tools. This exercise also made me realize how much I depend on the research of others. I do plenty of my own research, but for now I know that many of my ideas are at least partly sourced from the minds of others. This is all natural and a good practice, but it does illustrate weaknesses I can address. I know that some of the research I subscribe to will always have my business because it is so intellectually rewarding and enjoyable to read. Other research however, should only be a stepping stone to learn processes and mindsets and filters. Once these lessons have been learned from the researchers and on-boarded into my own methods, I should move on. There will always be specialists who do things you will not have the skills, time, resources, or interest in doing - and you should pay those people well for their work. At other times you will find yourself paying people for doing work you should learn to do for yourself. What are the Yucca Moths in your trading and in your life? It is important to ask this question because there is a species of these moths - the Tegeticula intermedia that actually only takes from the Joshua tree. It betrays the mutual obligations coevolution delivered and does not pollinate the tree, but still lays its eggs which feed on the tree. Mutualism is what makes much of life beautiful, but building in some antifragile properties that do not allow a metaphorical moth to take you down is probably prudent. pineconemacro@gmail.com 2

Fishwrap of the Week Salt Lake Telegram 10 July 1931 Because of the trade war issues today, I decided to take a look at the Smoot Hawley era for some insights.

3 Fishwrap of the Week Salt Lake Telegram 10 July 1931 Because of the trade war issues today, I decided to take a look at the Smoot Hawley era for some insights. It is interesting that this early in the depression, some politicians were asserting that the tariffs were contributing to the depression. My favorite part of this article is Senator Watson suggesting that passing Smoot- Hawley would return prosperity to the US within 30 days. Oops. Give this a full read for some insights into the last great trade pineconemacro@gmail.com 3

Will the US consumer be squeezed again or will Trump get what he wants in a way that benefits US

4 While researching the Smoot-Hawley era, I ran into this great cartoon in the Baltimore Sun that ran on 16 June Will the US consumer be squeezed again or will Trump get what he wants in a way that benefits US businesses? Time will tell, but for now perhaps small caps will give us a place to hide from the trade war. More on that next. pineconemacro@gmail.com 4

5 A Thesis on a Small Cap Mega-Boom I have a working idea about a monumental small cap blow off top that would be historic. This thesis depends on multiple independent variables, so it could be slain at any time by any of the drivers ending. The main variable is a stronger dollar. If we stay in the environment of the past couple of months where the dollar is strengthening and the US is attracting capital from the rest of the world, I think a disproportionate amount of capital will make its way into small caps in general but a certain class of small caps in particular. The dollar started to really take off on about April 17 th since then the DXY is up about 7%, Russell 2000 about 8%, and the S&P 500 only about 2.5%. I suspect the Russell outperformance may be because smaller companies do not have exposure to the trade war and are outperforming as a result. They don t depend on overseas sales or cheap imports the way large multinational companies do. Now, that is what has happened over the past couple of months, but what if the capital inflows into the US accelerate and dollar strength keeps building? If money floods into the US looking for a home as inflation stays high and the Fed is raising rates, the money is likely to find its way into equities (amazingly the huge treasury supply has been soaked up by US investors lately). Much of this money will be indiscriminate and will plow into everything. Any money that is thoughtful however, *if* the trade war is still going or perhaps even intensifying, will likely look for US companies that are benefiting from strong growth without the painful trade headwinds. Many of those companies are small cap firms focused on domestic services, production, and sales. Small caps have been exploding lately leaving a lot of market participants and commentators pineconemacro@gmail.com 5

6 scratching their heads and screaming bubble - but to me it all makes perfect sense. Most of these companies are already overvalued, but if my thesis plays out they could enter a true blow off that makes Japan and Bitcoin proud. The next logical step is to screen out the small cap world for companies that are largely immune to trade wars, are not over levered, and are capitalizing on the current late cycle growth spurt. Thanks to my day job I cannot do this quickly or efficiently. I have a friend of a friend looking at this, but if anyone else wants to try and see what sticks after this screening, let me know what you find. The need for the stronger dollar and trade war fears to stay alive are inputs that are not guaranteed. If one were to find a good basket of stocks to get long it would be a game of constant monitoring. Regardless, I really think this could be a great trade as I personally expect dollar strength and trade war fears to buy a few months of great returns. If I get time I will start to scrub the Russell for names I think qualify for my thesis and I will try and share a couple names and charts. If one is fearful of equities in general, a pairs trade of long small caps and short large caps may even work (if not short a basket of multinationals that depend on free-ish trade) Let me know what you think. Here are the charts that examine this thesis and how it has been working out lately. pineconemacro@gmail.com 6

This week small caps have come back into an area of support. I expect equities to struggle Monday, but that may be a good time to buy small caps.

7 On this chart the blue line is the dollar index and the candles are the IWM/SPY. Small caps are clearly outperforming the S&P in lockstep with the big dollar rally since the dollar bottomed early this year. This perfectly illustrates my thesis on the chart. This week small caps have come back into an area of support. I expect equities to struggle Monday, but that may be a good time to buy small caps. Brent Johnson tweeted about this and I think his initial thought makes perfect sense without a trade war. I would expect foreign capital to just buy large caps with this macro environment, but I believe the trade war has necessitated more buying of trade war resilient stocks, which are largely smaller companies with a US focus. pineconemacro@gmail.com 7

Speaking of Brent, I discussed this thesis with him because his Dollar Milkshake Theory is what really got me to thinking about where capital inflows would make their way in the coming weeks and

8 Speaking of Brent, I discussed this thesis with him because his Dollar Milkshake Theory is what really got me to thinking about where capital inflows would make their way in the coming weeks and perhaps months. He provided this chart below again we have clear outperformance for small caps (Russell 3000 in this case) compared to the SPX since the dollar bull really sarted. If the dollar and trade war keep trending, I expect small caps to really surprise to the upside. That is all I had for you this week. I got this issue out a bit later than I had hoped as I was travelling. I spent time in Seattle and Vancouver and my next issue will hit on what I observed in Cascadia and what it could mean for investors. Have a great weekend. pineconemacro@gmail.com 8

9 If a man knows not to which port he sails, no wind is favorable. Seneca This quote from Seneca is one that a macro trader should really take to heart. Your macro view is meaningless if the charts disagree, and your charts are meaningless if your macro view is not aligned. If you know where you are sailing (your macro framework) and you have favorable winds (technicals) you can find your port. Thank you so much for your readership and if you are enjoying the letter please send it to your friends. Disclosure: There is risk in trading markets. Pinecone Macro is not an investment advisor. My letters are based upon information gathered from various sources and believed to be reliable, but are not guaranteed as to accuracy and completeness. The information in this letter is not intended to be, and shall not constitute, an offer to sell or a solicitation of an offer to buy any security or investment product or service. The ideas and trades I share are my own and are for informational and educational purposes only and should not be construed as investment advice. Accordingly, you should not rely solely on the information in making any investment. You should always check with your licensed financial advisor to determine the suitability of any investments. pineconemacro@gmail.com 9

Has Diversification Stopped Working?

Has Diversification Stopped Working? Questions from the Field: During the course of teaching seminars, writing articles and newsletters, and meeting with clients we hear lots of questions. We will try to address some of the more timely and