WEBVTT - Interview With Jeff deGraaf: Masters in Business (Audio) 0:00:00.440 --> 0:00:04.440 Look ahead, imagine more. Gain insight for your industry with 0:00:04.480 --> 0:00:08.480 forward thinking advice from the professionals at Cone Resnick. Is 0:00:08.480 --> 0:00:11.559 your business ready to break through? Find out more at 0:00:11.640 --> 0:00:19.319 Cone Resnick dot com Slash Breakthrough. This is Master's in 0:00:19.400 --> 0:00:23.840 Business with Barry Ridholts on Bloomberg Radio. This week on 0:00:24.040 --> 0:00:26.960 Masters in Business, we have a very special guest. His 0:00:27.080 --> 0:00:30.480 name is Jeff de Graff and he is known as 0:00:30.520 --> 0:00:37.360 a technicians technician. He has a storied career, most notably 0:00:37.560 --> 0:00:42.680 his time as the chief technician at Lehman Brothers, where 0:00:42.720 --> 0:00:46.840 he famously resigned pretty much the day of Lehman's all 0:00:46.880 --> 0:00:50.800 time high. Jeff is now the founder and presidents and 0:00:50.920 --> 0:00:56.200 chief technical strategist of Renaissance Macro, better known as ren Mack, 0:00:57.280 --> 0:01:01.200 which is really an interesting shop that come binds both 0:01:02.000 --> 0:01:06.399 macro analysis and technical analysis. In fact, one of the 0:01:06.440 --> 0:01:09.880 things that makes Jeff so unique is the fact that 0:01:09.920 --> 0:01:14.640 he has both a c f A and a CMT, 0:01:15.520 --> 0:01:20.800 which means that he is very schooled in both fundamental 0:01:21.080 --> 0:01:24.960 and technical analysis of of equities, and I think you'll 0:01:25.000 --> 0:01:29.160 find his approach to be somewhat unique. The way ren 0:01:29.280 --> 0:01:33.400 Mack was built to create its own unique database is 0:01:33.480 --> 0:01:36.600 something that not a lot of companies can can lay 0:01:36.640 --> 0:01:39.200 claim to UH, and it's part of the reason that 0:01:39.319 --> 0:01:43.360 for the past decade or so he's been named one 0:01:43.400 --> 0:01:45.319 of the top and and in fact has been ranked 0:01:45.400 --> 0:01:49.600 number one by Institutional Investor for the space he covers. So, 0:01:50.320 --> 0:01:55.520 without any further ado, here is my conversation with Jeff 0:01:55.560 --> 0:02:02.720 de Graff this Masters in Business with Barry Ridholts on 0:02:02.840 --> 0:02:07.160 Bloomberg Radio. My special guest this week is Jeff Degraff. 0:02:07.520 --> 0:02:11.960 He is the chairman and head technical analyst at Renaissance Macro. 0:02:12.480 --> 0:02:16.480 He has quite the storied background. Started out at Merrill Lynch, 0:02:16.800 --> 0:02:19.080 was at Lehman Brothers for a number of years, where 0:02:19.080 --> 0:02:22.440 he was not only chief technician but also on the 0:02:22.440 --> 0:02:27.040 firm's investment policy committee as a managing director. Moved to 0:02:27.120 --> 0:02:29.880 I s I in two thousand and seven before launching 0:02:29.960 --> 0:02:34.080 his own firm in two thousand and eleven. UH. He 0:02:34.240 --> 0:02:37.480 is both a c f A and a CMT charterholder, 0:02:37.520 --> 0:02:41.000 a member of the New York Society of Securities Analysts 0:02:41.280 --> 0:02:44.239 and the m T A UH. He has been number 0:02:44.280 --> 0:02:48.680 one ranked in Institutional Investor magazine for the last twelve years. 0:02:49.040 --> 0:02:52.640 Ranked his number one technol analysts for the last eleven years. 0:02:52.639 --> 0:02:55.320 And we know he's a great technician because he resigned 0:02:55.400 --> 0:02:59.120 Lehman Brothers literally the day of the stocks all time high. 0:02:59.520 --> 0:03:02.200 Jeff de Ra, Welcome to Bloomberg. Thank you for having me. 0:03:02.520 --> 0:03:05.440 So I've been following your work for a number of years. 0:03:05.520 --> 0:03:08.760 I have a lot of friends who are technicians, who 0:03:08.800 --> 0:03:12.840 who have nothing but good things to say about you. 0:03:12.960 --> 0:03:16.919 So let's jump right in to your background and talk 0:03:16.960 --> 0:03:19.960 a little bit about what makes what you do a 0:03:19.960 --> 0:03:24.560 little different than the average technicians. You describe yourself as 0:03:24.600 --> 0:03:29.840 a macro analyst. What does that mean? Well, we um, 0:03:29.880 --> 0:03:32.160 you know, we we really pride ourselves on looking at 0:03:32.240 --> 0:03:34.920 the big picture and within that what I mean is 0:03:35.000 --> 0:03:39.360 currencies and and bond markets and commodity markets and then 0:03:39.600 --> 0:03:41.440 trying to put all the pieces together. I mean, I 0:03:41.480 --> 0:03:44.400 think the world's always appolosible. That's why I love this business. 0:03:44.400 --> 0:03:46.600 It's a it's a chess match, you know, and it's 0:03:46.600 --> 0:03:49.000 never different. It's never the same thing the same right, 0:03:49.040 --> 0:03:52.440 and so it's really it's it's you know, it's it's 0:03:52.480 --> 0:03:56.520 upon us. Um. You know. This weekend, great example, I 0:03:56.560 --> 0:03:58.800 go through about a thousand charts on the weekend, right, 0:03:58.880 --> 0:04:01.880 and I put a pile of charts, UM in the 0:04:02.320 --> 0:04:04.440 I need to figure this out pile, right, And there's 0:04:04.520 --> 0:04:08.200 usually you know, five to ten Why do Chinese steel 0:04:08.240 --> 0:04:11.200 stocks look good while the rest of the world doesn't, right, 0:04:11.280 --> 0:04:13.760 And so you know, and then we we then start 0:04:13.800 --> 0:04:16.760 to backtrack and figure out what's going on. So I think, 0:04:17.120 --> 0:04:19.640 you know what what we do that's different is we 0:04:19.680 --> 0:04:22.240 believe in fundamentals, but we start with the charts, and 0:04:22.279 --> 0:04:24.640 I think that's the that's the difference. So that raises 0:04:24.680 --> 0:04:28.039 an interesting question. You're both a c f A, which 0:04:28.040 --> 0:04:32.760 stands for Chartered Financial Analysts, essentially the key to looking 0:04:32.760 --> 0:04:35.360 at stocks on a fundamental basis, officially a c f 0:04:35.480 --> 0:04:38.760 A charter holder which means you've gone per distance right 0:04:38.839 --> 0:04:44.239 three tests, and a CMT Chartered Market technician. So that's 0:04:44.560 --> 0:04:50.320 relatively unusual, having both fundamental abilities and technicals. What what 0:04:50.360 --> 0:04:55.000 motivated you to go for both accreditation? Well, my my 0:04:55.000 --> 0:04:59.760 my background is formal education is in finance, so obviously 0:04:59.760 --> 0:05:02.920 that's more fundamental than technical. And and like everybody who 0:05:02.960 --> 0:05:07.880 comes through any business school, it was you know, relatively 0:05:08.240 --> 0:05:11.880 pooh pooed, uh, the art of technical analysis, UM, and 0:05:11.920 --> 0:05:13.960 so I bought into that as I you know, was 0:05:14.240 --> 0:05:17.520 searching for grades more than anything else. And UM, you know, 0:05:17.640 --> 0:05:21.520 once I um got into the business, uh, it just 0:05:21.720 --> 0:05:26.599 found um that the technicians who I appreciated, Bob Farrell, 0:05:26.640 --> 0:05:29.039 who I grew up under, Steve Schaubin, who was my 0:05:29.120 --> 0:05:32.039 mentor at at Lehman Brothers, and just a fantastic individual 0:05:32.080 --> 0:05:36.360 and great technician. Um, I just I found that there 0:05:36.440 --> 0:05:38.520 was something to what they were saying. In fact, it 0:05:38.600 --> 0:05:41.839 was usually more prescient than what you're seeing out of 0:05:41.880 --> 0:05:44.760 the out of the fundamental side. So I picked up 0:05:44.839 --> 0:05:48.040 the Edwards and McGee book. I read it. Um, it 0:05:48.080 --> 0:05:50.440 was interesting. I didn't you know, I didn't buy into 0:05:50.480 --> 0:05:53.080 it wholeheartedly, but certainly there were you know, parts of 0:05:53.080 --> 0:05:56.640 it that I appreciated and could see the light with. UM. 0:05:56.680 --> 0:06:01.520 I thought the the books, the Wiser books UM or 0:06:01.560 --> 0:06:05.799 the I think Schweizer, Swigger, UM, the Right Market Wizard books. 0:06:05.800 --> 0:06:08.240 So I thought those were fantastic. And what that did 0:06:08.279 --> 0:06:11.920 for me really solidified it was UM and I've always 0:06:11.920 --> 0:06:16.360 been this type of person. It was about probability, right, 0:06:16.480 --> 0:06:19.960 and the best way for me to manage risk and 0:06:20.080 --> 0:06:22.080 thinking about it, whether it's at the poker table, the 0:06:22.120 --> 0:06:25.480 blackjack table, or in the markets was through technical analysis, 0:06:25.520 --> 0:06:27.720 and that just really hit me over the head. As 0:06:27.880 --> 0:06:32.000 as to the type of discipline essentially counting cards in 0:06:32.040 --> 0:06:34.880 the market, um is the last You start with the 0:06:34.920 --> 0:06:37.400 evidence in the data, you lay out what's most likely, 0:06:37.520 --> 0:06:40.320 least likely in everything in between, and that colors how 0:06:40.400 --> 0:06:43.040 you see the markets. Yeah. Look, I I described a 0:06:43.080 --> 0:06:46.200 little differently the difference between the pot odds and the 0:06:46.200 --> 0:06:48.880 odds in my hand. Right, there's a certain probability of 0:06:49.360 --> 0:06:52.600 pulling a card to complete an inside flush or an 0:06:52.600 --> 0:06:56.920 inside straight. Pardon me, Um, if the opportunity to stay 0:06:57.040 --> 0:07:01.560 in the pot is low enough and the the reward 0:07:01.600 --> 0:07:04.320 is high enough. Absolutely those even though it might be 0:07:04.360 --> 0:07:07.440 a very slim chance of pulling that straight, the chance 0:07:07.480 --> 0:07:09.480 to stay in makes an awful lot of sense. And 0:07:09.560 --> 0:07:11.480 that's how we think about You know, I took the 0:07:11.960 --> 0:07:14.800 m T A course with Ralph Acampora, and one of 0:07:14.800 --> 0:07:18.080 the lines that have stayed with me all these years 0:07:18.080 --> 0:07:22.360 has been fundamentals tell you what to buy, Technicals tell 0:07:22.400 --> 0:07:25.800 you when to buy. There's there's some truth to that. 0:07:25.920 --> 0:07:28.840 I would I would add to that though, too. Um. 0:07:28.880 --> 0:07:31.120 In fact, you know, it's just talking to somebody about this. 0:07:31.160 --> 0:07:35.480 With gold, UM, oftentimes the technicals will tell you, um 0:07:35.600 --> 0:07:39.280 what to buy, and maybe you don't know the fundamental story, right. 0:07:39.320 --> 0:07:41.480 I mean, if you think about when Apple first broke 0:07:41.520 --> 0:07:44.600 out of this huge base formation, nobody had a clue 0:07:44.600 --> 0:07:47.240 about the iPhone, and I mean it just was unbelievable, 0:07:47.400 --> 0:07:50.920 you know, sort of the the the the the ramp 0:07:50.960 --> 0:07:53.240 and the product and changing the world. Same thing with 0:07:53.280 --> 0:07:56.760 gold today. You know, the gold trends have changed, UM, 0:07:56.920 --> 0:07:59.160 and they changed in the first quarter for US. But 0:07:59.600 --> 0:08:02.320 you know, some me asked me, well, is it uh? Currencies? 0:08:02.440 --> 0:08:05.080 Is it uh? You know, negative interest rates. I don't 0:08:05.080 --> 0:08:07.880 know officially what the answer is, but the charts are 0:08:07.920 --> 0:08:11.240 telling you that something is out there that has a 0:08:11.320 --> 0:08:14.640 high probability of continuing. Let me ask you a simple question. 0:08:14.920 --> 0:08:19.680 What do most people misunderstand about technical analysis? I think, 0:08:19.680 --> 0:08:22.880 and this will you know, This will uh send shivers 0:08:22.920 --> 0:08:25.960 down to some people's spines. I think people believe that 0:08:26.040 --> 0:08:29.680 technical analysis can predict the future, and I really don't 0:08:29.680 --> 0:08:33.360 see it as that. I see technical analysis as identifying trends, 0:08:33.920 --> 0:08:38.079 identifying opportunities within those trends, and taking advantage of them. 0:08:38.280 --> 0:08:40.400 So to say it's predicting the future. I think is 0:08:40.400 --> 0:08:43.720 is a little a little misguided. I'm very Rihults. You're 0:08:43.760 --> 0:08:47.360 listening to Masters in Business on Bloomberg Radio. My special 0:08:47.360 --> 0:08:51.480 guest today is Jeff Degraff. He is the chairman and 0:08:51.800 --> 0:08:55.680 head technical analyst. Is that your your property title? CEO 0:08:55.840 --> 0:09:01.760 and chairman? And yeah. Renaissance macro a uh, pretty much 0:09:01.760 --> 0:09:07.400 a global research shop that supports institutions, edge funds, commutual funds, 0:09:07.440 --> 0:09:11.360 et cetera. Let's jump right in. Let's jump right in 0:09:11.440 --> 0:09:15.320 why technicals work. And I think it's it's pretty interesting 0:09:15.559 --> 0:09:17.960 for the lay person, for the average investor who might 0:09:18.000 --> 0:09:20.720 be listening to this or some student in an NBA 0:09:20.840 --> 0:09:24.120 course where they tell you this stuff doesn't work, Explain 0:09:24.440 --> 0:09:27.880 what is technical analysis and why does it work? Well? 0:09:27.920 --> 0:09:31.880 That there are definitely elements within technical analysis that I 0:09:31.920 --> 0:09:34.040 would even say probably don't work, and I want to 0:09:34.040 --> 0:09:36.439 be careful with some of those, and and and Elliott 0:09:36.440 --> 0:09:39.440 wave Fibonacci, some of the more fringe stuff, or just 0:09:39.760 --> 0:09:44.200 generally the patterns that some people there there are oscillations 0:09:44.240 --> 0:09:46.960 that people sort of believe must mean revert. And that's 0:09:47.000 --> 0:09:48.880 really you know, we've done a lot of work on that, 0:09:48.960 --> 0:09:50.760 and that doesn't prove to be true. There there are 0:09:50.840 --> 0:09:55.000 certain conditions that you can overlay to help create better 0:09:55.280 --> 0:09:58.320 probabilities or opportunities. But really when it comes down to 0:09:58.480 --> 0:10:02.000 for us is is technical analysis works because it's about 0:10:02.040 --> 0:10:05.640 trend analysis. And if you think about just the world 0:10:05.720 --> 0:10:08.959 in which we live, um, you know there are trends 0:10:08.960 --> 0:10:12.400 in place everywhere, right, I mean earnings are generally trending, 0:10:12.720 --> 0:10:15.160 um Uh, And so you know to expect that there's 0:10:15.160 --> 0:10:18.040 sort of this randomness and earnings there there isn't right, 0:10:18.040 --> 0:10:20.040 there generally is a trend. Now, there might be missed 0:10:20.040 --> 0:10:23.000 opportunities in those earnings trends here and there, but for 0:10:23.040 --> 0:10:26.240 the most part, uh, you know, a company's fundamental trajectory 0:10:26.280 --> 0:10:28.800 will be a trend, and we're capturing that through price. 0:10:28.840 --> 0:10:31.560 And the idea is that the markets are efficient and 0:10:31.600 --> 0:10:33.880 so what you know, what I know from a fundamental 0:10:33.960 --> 0:10:36.679 sense is probably already embedded in that price. And what 0:10:36.720 --> 0:10:39.880 we're doing is we're just simply measuring that price, taking 0:10:39.920 --> 0:10:43.439 that temperature and understanding or trying to understand whether or 0:10:43.480 --> 0:10:46.360 not the probabilities are for good continuation in that price 0:10:46.720 --> 0:10:48.800 or for a reversal in that price. So so the 0:10:48.840 --> 0:10:52.400 baseline assumption is that a trend in place, that momentum 0:10:52.440 --> 0:10:55.920 is going to continue until such time as something acts 0:10:55.960 --> 0:10:59.959 to stop it. The probabilities, overwhelmingly, whether it's academic research 0:11:00.080 --> 0:11:02.760 our own research, are that there's a persistence and trends 0:11:02.760 --> 0:11:05.000 in the market. It's called momentum in a lot of 0:11:05.320 --> 0:11:08.240 in a lot of academic studies. Um. And it drives 0:11:08.280 --> 0:11:11.760 people nuts because quote unquote shouldn't work, right, But the 0:11:11.800 --> 0:11:14.559 reality is is that it does and um, and that's 0:11:14.559 --> 0:11:17.040 what we exploit. Well, why shouldn't it work. Let's let's 0:11:17.080 --> 0:11:19.440 step back, because you're a big macro guy and you 0:11:19.440 --> 0:11:22.680 look at things from both the fundamental technical quant an 0:11:22.679 --> 0:11:26.880 economic perspective. Hey, every day people are earning money. That 0:11:26.960 --> 0:11:31.760 money gets shoveled into their four oh one case and elsewhere. Ultimately, 0:11:31.880 --> 0:11:34.600 there's only so many stocks in the universe that a 0:11:34.640 --> 0:11:40.079 fund manager with a given uh sector or topic or 0:11:40.960 --> 0:11:43.560 charge is going to buy. And so he's gonna go 0:11:43.640 --> 0:11:46.160 back and keep buying his favorite names over and over. 0:11:46.520 --> 0:11:48.920 I mean, that's it's a great point that the academics 0:11:48.920 --> 0:11:52.559 would say. Um, there's the efficient market hypothesis, which says 0:11:52.679 --> 0:11:55.760 that the um. You know, the the weak form, the 0:11:55.800 --> 0:11:59.000 strong form, that that information should already be discounted in 0:11:59.040 --> 0:12:01.280 the market price. The reality is, is it just it 0:12:01.360 --> 0:12:05.120 just isn't right. It's sort of kind of eventually more 0:12:05.200 --> 0:12:08.240 or less efficient, but it's not instantly efficient. You have 0:12:08.679 --> 0:12:11.480 there are too many people who have been consistently beating 0:12:11.520 --> 0:12:14.280 the markets. I know the academics like to just shrug 0:12:14.320 --> 0:12:17.000 it off and say outlawyers run off, but there are 0:12:17.040 --> 0:12:20.200 just too many Howard marks and too many Warren buffets, 0:12:20.240 --> 0:12:23.800 even though we're talking, you know, a few dozen, but 0:12:23.920 --> 0:12:26.680 they shouldn't exist, and they do, and and that that 0:12:27.400 --> 0:12:31.760 sort of begets that perfectly efficient thing. So what do 0:12:31.800 --> 0:12:35.320 you think is more important? Trends or mean reversion without 0:12:35.360 --> 0:12:38.480 question trend um If you look at mean reversion without 0:12:38.520 --> 0:12:41.160 the presence of trend in other words, trying to identify 0:12:41.240 --> 0:12:43.839 mean reversion without looking at first what the underlying trend 0:12:43.920 --> 0:12:49.000 is um, it is quickly a recipe and a system 0:12:49.120 --> 0:12:53.959 for losses um. The trends are historically um and this 0:12:54.000 --> 0:12:56.680 is a crossed assets it's not just equities, but the 0:12:56.679 --> 0:13:01.840 trends are historically prescient in giving you some foresight into 0:13:02.000 --> 0:13:05.120 the next move higher and that's that can be anything 0:13:05.160 --> 0:13:08.120 from intra day to to you know, long term, multi 0:13:08.200 --> 0:13:11.880 multi year. You know what we find the sweet spot um, 0:13:11.960 --> 0:13:14.120 And this isn't you know, I'm not I'm not breaking 0:13:14.120 --> 0:13:16.960 any rules here or breaking any new ground. But we 0:13:17.040 --> 0:13:21.120 find that from three months, uh, three months in other words, 0:13:21.160 --> 0:13:24.760 one month, two months, three months, uh, the returns of 0:13:24.760 --> 0:13:28.160 of equities over that period um tend to me mean reverting. 0:13:28.160 --> 0:13:30.760 In other words, if I have strong one month performance, 0:13:30.800 --> 0:13:34.160 the probability of me having another outperformance the next month 0:13:34.240 --> 0:13:36.920 is actually pretty low. UM. If I start getting into 0:13:36.960 --> 0:13:39.719 six month twelve month time frames and look out for 0:13:39.760 --> 0:13:42.480 the next six to twelve months, that probability actually shifts 0:13:42.520 --> 0:13:45.640 to being more momentum oriented. Right, So you want to 0:13:45.640 --> 0:13:47.559 be careful when people talk about, well, I'm not a 0:13:47.559 --> 0:13:49.680 trend foller, I'm not a momentum player. You know, you 0:13:49.760 --> 0:13:52.960 really have to define what your time frame is because 0:13:53.000 --> 0:13:55.520 if you're a swing trader, if you're a short term player, 0:13:55.600 --> 0:13:58.640 then you can be anti momentum. But I wouldn't suggest that, 0:13:58.880 --> 0:14:01.559 you know, you use twelve month or nine month momentum 0:14:02.000 --> 0:14:04.200 and try to fade that. Historically that doesn't work out 0:14:04.200 --> 0:14:08.679 for so long. How does valuation fit into into your analysis? Well, 0:14:08.720 --> 0:14:13.280 let's let's take valuation and lump it with fundamental analysis. 0:14:13.400 --> 0:14:17.640 And and we would look at UM fundamental analysis as 0:14:18.160 --> 0:14:22.280 UM one silo in what we call conditional factors. These 0:14:22.280 --> 0:14:25.160 are things that tend to support a bull phase or 0:14:25.200 --> 0:14:27.480 tend to support a bear phase. So you have these conditions, 0:14:27.560 --> 0:14:30.960 valuation being one, UM that certainly would be more supportive 0:14:31.040 --> 0:14:34.280 of a bull phase, presuming there's uh, there's good valuation. 0:14:34.520 --> 0:14:38.360 I would put things like credit, sentiment, seasonality. All these 0:14:38.400 --> 0:14:42.040 would be conditions that that support a bull or bear phase. UM. 0:14:42.120 --> 0:14:44.360 Think about it. If you will like the amount of 0:14:44.400 --> 0:14:47.600 gas in the tank, it sort of tells you how 0:14:47.640 --> 0:14:50.760 far you can go. UM. The other side of that 0:14:51.040 --> 0:14:54.000 is momentum and trend, and we think about that is 0:14:54.040 --> 0:14:56.640 how hot the spark is in the engine. Each one 0:14:56.640 --> 0:15:00.640 of these independently is useless, right, But it's the combination 0:15:00.760 --> 0:15:03.640 of both that's important. So if I've got strong conditions, 0:15:03.640 --> 0:15:05.880 if I've got a lot of barishness, I've got good valuation, 0:15:06.200 --> 0:15:09.560 I've got seasonality, credit conditions are good, and I've got 0:15:09.560 --> 0:15:12.640 that hot spark, I've got momentum, I've got trend. That's 0:15:12.640 --> 0:15:16.120 a great combination. So for us, that's about position sizing, right, 0:15:16.160 --> 0:15:18.560 that's a bigger call. That's something that we're more comfortable in, 0:15:18.640 --> 0:15:21.320 will make a bigger bet with. If I've got the 0:15:21.680 --> 0:15:24.320 market today, if I've got a hot spark, in other words, 0:15:24.320 --> 0:15:26.960 we've got good trend, we've got good momentum, but the 0:15:27.440 --> 0:15:29.200 way that we see the fuel in the tank is 0:15:29.200 --> 0:15:32.040 being maybe a quarter full. I'll still play, but I 0:15:32.080 --> 0:15:35.000 have to understand that the probabilities of this being an 0:15:35.000 --> 0:15:37.680 O nine type of trend change or an OH three 0:15:37.680 --> 0:15:41.080 type of trend change really are are are low. How 0:15:41.080 --> 0:15:44.600 does sector work figure into your macro approach? Do you 0:15:44.640 --> 0:15:49.320 look at specific market sectors technology, healthcare, energy? Absolutely? We 0:15:49.360 --> 0:15:51.840 think you know, we're known for market calls. I mean, 0:15:51.840 --> 0:15:53.800 that's sort of what people want to hear. But the 0:15:53.840 --> 0:15:55.840 reality is the way that we really make money air 0:15:55.920 --> 0:15:59.720 through sectors. And uh. We we look at sector relative performance, 0:15:59.720 --> 0:16:02.640 we global relative performance. So we bring it all together 0:16:02.680 --> 0:16:07.240 and find that there's a huge uh correlation between between 0:16:07.360 --> 0:16:10.880 regional markets and the sectors um and so we'll we'll 0:16:11.000 --> 0:16:13.600 use all that to identify where the best and where 0:16:13.640 --> 0:16:16.040 the worst sectors are, and we quantify the process. We 0:16:16.080 --> 0:16:18.720 have ways in which we've quantified, so it's not Jeff 0:16:18.760 --> 0:16:20.400 de graph We can got, you know, in a bad 0:16:20.440 --> 0:16:23.600 mood someday and saying everything looks terrible. Um, we haven't quantified, 0:16:23.640 --> 0:16:25.320 so we can back test it, and we can give 0:16:25.360 --> 0:16:28.440 people the confidence and assuredness that hey, if you follow 0:16:28.480 --> 0:16:31.720 this system, here's what you're looking at in terms of probabilities. 0:16:31.880 --> 0:16:34.920 I'm Barry Rihults. You're listening to Masters in Business on 0:16:35.000 --> 0:16:39.080 Bloomberg Radio. My special guests this week is Jeff DeGraf. 0:16:39.600 --> 0:16:44.360 He is a technician extraordinaire and and I jokingly started 0:16:44.400 --> 0:16:47.960 the show by saying he resigned Lehman Brothers pretty much 0:16:48.000 --> 0:16:50.760 to the day of it's all time high. That's how 0:16:50.760 --> 0:16:53.800 we know he's a really good technician. But that actually 0:16:53.880 --> 0:16:57.120 is a true anecdote. You did move to I s 0:16:57.120 --> 0:17:00.800 I pretty much early two oh seven thousand seven, when 0:17:01.120 --> 0:17:03.960 February oh seven was my resignation, and that's pretty much 0:17:04.000 --> 0:17:06.000 the top sick and it was the it was my 0:17:06.040 --> 0:17:08.439 origination letter was the day after the high in the 0:17:08.440 --> 0:17:11.280 stock price. So that's lucky, not good, But that is 0:17:11.280 --> 0:17:14.000 a true story. I love that story that I've said 0:17:14.000 --> 0:17:15.960 that to people and They're like, no, that can't be him, 0:17:15.960 --> 0:17:18.480 Like no, no, he's a really good technician. He saw 0:17:18.560 --> 0:17:20.440 that that trend break and he said that sad, I'm 0:17:20.440 --> 0:17:24.359 out of here. Um. But it's kind of interesting because 0:17:24.400 --> 0:17:26.560 you left for I s A. You were there for 0:17:26.600 --> 0:17:29.200 a couple of years. Ed him and another guy who 0:17:29.320 --> 0:17:32.399 thirty plush years number one ranked. We found him on 0:17:32.440 --> 0:17:35.720 the show. He's great. But at a time when when 0:17:36.000 --> 0:17:40.959 commission dollars are plumbering, when research budgets are really being constrained, 0:17:41.400 --> 0:17:44.840 you decide to launch a new research farm, right, what 0:17:44.880 --> 0:17:49.080 was the thinking like making that leap? Well, you know, look, 0:17:49.160 --> 0:17:53.720 the research budgets are contracting, but when you're when you're 0:17:53.760 --> 0:17:57.439 bloated and have you know, too much capacity, that's a 0:17:57.440 --> 0:18:00.119 bigger problem. When you're starting with eight people, which we 0:18:00.200 --> 0:18:03.199 did uh and are now up to um. You know, 0:18:03.280 --> 0:18:05.879 that's a that's a different that's a different game. And 0:18:05.960 --> 0:18:09.760 so you know, focusing on one of the keys to 0:18:09.880 --> 0:18:13.000 starting ren MAC was, uh, we wanted to build a 0:18:13.000 --> 0:18:15.879 world class database and you know, you just have to 0:18:15.880 --> 0:18:18.760 do that yourself. You can't do it under another another 0:18:18.880 --> 0:18:21.280 entity or you're basically building it for somebody else. And 0:18:21.320 --> 0:18:25.160 so the idea was build a world class database, quantify 0:18:25.280 --> 0:18:28.800 approach this in a much different way to work into 0:18:28.840 --> 0:18:32.920 people's process so that they have another overlay look of 0:18:33.000 --> 0:18:35.960 the street, spend its time and I don't falls them 0:18:35.960 --> 0:18:38.800 for this on fundamental research and the nitty gritty the 0:18:38.840 --> 0:18:41.480 quote unquote knowing the company is better than anybody else. 0:18:41.960 --> 0:18:43.960 But the reality is is not enough time is spent 0:18:44.560 --> 0:18:47.960 in the process of just understanding what the macro environment is, 0:18:48.000 --> 0:18:50.520 what the trends are. And so from our standpoint, we 0:18:50.520 --> 0:18:52.280 want to be able to quantify that for people so 0:18:52.280 --> 0:18:54.720 that they didn't have to become technicians, but they could 0:18:54.720 --> 0:18:56.720 look at it and say, okay, I understand that the 0:18:56.800 --> 0:18:59.159 risks are high in technology, that the opportunity set is 0:18:59.160 --> 0:19:02.520 actually high and in adustrials and have some quantification around that. 0:19:02.760 --> 0:19:05.679 And that's really what we provide. So n MAC is 0:19:05.840 --> 0:19:10.480 creating a dimensional analysis that simply isn't available to from 0:19:10.480 --> 0:19:13.320 other researches. Is that what sets you guys apart from 0:19:13.359 --> 0:19:15.800 everyone else. Absolutely, I think that's that's that's a huge 0:19:15.800 --> 0:19:19.639 part of it. And and how does one combine economics, 0:19:19.760 --> 0:19:24.040 quant fundamentals and technicals in one package. Well, we we 0:19:24.080 --> 0:19:26.720 don't do the fundamental side per se UM. We have 0:19:26.840 --> 0:19:29.400 Neil Datta who does our our economic side, and that's Look, 0:19:29.440 --> 0:19:32.760 there's a lot of high frequency data in economics and 0:19:32.760 --> 0:19:34.840 and even more so when you think about the globe 0:19:35.280 --> 0:19:37.679 UH and those are important data points. So what we 0:19:37.760 --> 0:19:40.600 do is we use those data points UM, we test 0:19:40.640 --> 0:19:43.760 those data points. We look at them within the context 0:19:43.800 --> 0:19:47.080 of what's happening to trends to see if they're useful. Again, 0:19:47.200 --> 0:19:49.280 some of those conditional factors that I spoke about in 0:19:49.280 --> 0:19:51.879 the earlier segment UM and that's how we we we 0:19:52.000 --> 0:19:55.720 marry it together in terms of this UM conditional elements. 0:19:55.880 --> 0:19:59.160 One of the things that you're known for is changing 0:19:59.200 --> 0:20:02.080 the weight of certain indicators depending on whether or not 0:20:02.119 --> 0:20:05.919 we're in a bullish or bearish market. Few people managed 0:20:05.960 --> 0:20:09.120 to do this. Well, how do you go about approaching that? 0:20:09.320 --> 0:20:11.239 You have to quantify it. You can't do it by 0:20:11.240 --> 0:20:13.879 the seat of your pants. You have to have UM, 0:20:13.880 --> 0:20:17.160 a quantification of the discipline, and you have to test 0:20:17.200 --> 0:20:19.800 that over time. And we've done that. And so a 0:20:19.840 --> 0:20:22.359 big one for us is our trend model UM, where 0:20:22.440 --> 0:20:26.719 we have basically a bullish bearish trend UM. It can 0:20:26.720 --> 0:20:28.520 go neutral, but we don't really have a neutral state. 0:20:28.520 --> 0:20:30.520 We'd like to have either black or white. And what 0:20:30.560 --> 0:20:32.480 we find is that other indicators that if you looked 0:20:32.520 --> 0:20:35.440 at over the entire spectrum of bullish and bearish might 0:20:35.480 --> 0:20:37.639 not be worth a damn. But when you break it 0:20:37.680 --> 0:20:41.159 down between bearish and bullish, UM, some indicators work very 0:20:41.240 --> 0:20:44.280 very well in a bear state. Other indicators work very 0:20:44.359 --> 0:20:46.560 very well in a bull state, but they don't work 0:20:46.600 --> 0:20:50.280 well across those different states. So for us, the quantification 0:20:50.600 --> 0:20:52.960 trend is a big one. The quantification of trend and 0:20:53.000 --> 0:20:56.879 then understanding what conditions work within that trend are a 0:20:56.960 --> 0:20:58.720 huge part of what we do. So what do you 0:20:58.760 --> 0:21:01.040 do in a crisis? We saw the oh eight o 0:21:01.160 --> 0:21:04.840 nine crisis ramping up. Essentially all the correlations went to 0:21:04.920 --> 0:21:08.399 one and it seemed like you were either in bonds 0:21:08.560 --> 0:21:10.960 or equity like products and there was nothing in between. 0:21:11.280 --> 0:21:13.960 How do you analyze as those sort of circumstances. Well, 0:21:13.960 --> 0:21:17.280 we we have ways to measure sentiment, which obviously was 0:21:17.800 --> 0:21:20.119 a disaster. I mean people were apocalyptic as we like 0:21:20.200 --> 0:21:22.600 to call it at the time. UM, we have ways 0:21:22.640 --> 0:21:26.159 to measure the UM, the severity of the downtrend, the 0:21:26.280 --> 0:21:29.080 risk adjusted returns UM, and we look at those and 0:21:29.080 --> 0:21:31.879 when they're they're so bad, um believe it or not, 0:21:31.960 --> 0:21:34.119 our system flags it. So we have an understanding that 0:21:34.119 --> 0:21:37.400 there's probably some capitulation taking place. And then we look 0:21:37.400 --> 0:21:39.920 at the credit markets. Credit markets are a huge part 0:21:39.960 --> 0:21:41.480 of our input that I don't think a lot of 0:21:41.480 --> 0:21:44.080 people pay as much attention to as they should. And look, 0:21:44.119 --> 0:21:48.000 the credit markets made their low UH in November two 0:21:48.000 --> 0:21:51.080 thousand and eight, and we're healing for a good three 0:21:51.119 --> 0:21:54.040 months prior to the equity low. Right, So when we 0:21:54.080 --> 0:21:56.600 looked at that that combination of things going on, saying, boy, 0:21:56.640 --> 0:21:58.879 credits getting better, but the equity markets are turning in 0:21:58.920 --> 0:22:02.560 a new low. There some opportunity here. And while we 0:22:02.560 --> 0:22:05.040 were warming up to equities again, we needed that spark. 0:22:05.080 --> 0:22:08.520