Macro Tsimmis

Dear Senator Hagan,

intelledgement — Fri, 23 Oct 2009 19:37:27 +0000

Check out this post on Deep Capture detailing Senator Ted Kaufman’s efforts to recruit cosponsors for his efforts to require the SEC to reinstate the uptick rule and enforce other regulations against abusive short selling. Here is my letter to our North Carolina senators, Kay Hagan and Richard Burr (and please consider sending letters of your own; Deep Capture has a convenient link to all 100 senators’ e-mail interfaces):

Please consider becoming a cosponsor of SB 605: A bill to require the Securities and Exchange Commission to reinstate the uptick rule and effectively regulate abusive short selling activities.

Naked short selling is the generally illegal practice of counterfeiting and selling short shares of stock that the seller has not borrowed (as he or she is supposed to). This pernicious practice by aggressive traders has effectively frozen hundreds of U.S. companies out of the capital markets, making it impossible for them to borrow the money they need to grow—or, in some cases, even survive. It also contributed to the meltdown of Lehman, Bear Stearns, Citibank, Fannie and Freddie, and others last year. And of course it cheats investors who play by the rules and take long positions.

Here is a good summary of how abusive naked short selling works.

The SEC has the authority to enforce regulations limiting naked short selling but has turned a blind eye to the practice for years. I don’t know if this is because regulators are in thrall to the malefactors as some have claimed, or if they are merely incompetent. I do know that if we cannot count on our capital markets to operate fairly, then not only do we lose a significant competitive advantage, but faith in our entire system is undermined.

Senator Kaufman and three other of your colleagues are now seeking cosponsors for SB 605, and have sent you a letter soliciting you to join them. I hope to see your name added to that list.

Thank you for your attention to this matter.

Brad Hessel, Raleigh

Who is Brooksley Born?

intelledgement — Thu, 22 Oct 2009 18:21:20 +0000

A friend of Hillary’s passed over for Attorney General by Janet Reno, she found herself running the Commodities Futures Trading Commission in 1996 and to her growing alarm, discovered potential dangers in the unregulated multi-trillion dollar derivatives market…but when her CFTC proposed regulations, Alan Greenspan, Larry Summers, and Robert Rubin moved to crush her.

“In The Warning, veteran FRONTLINE producer Michael Kirk unearths the hidden history of the nation’s worst financial crisis since the Great Depression. At the center of it all he finds Brooksley Born, who speaks for the first time on television about her failed campaign to regulate the secretive, multitrillion-dollar derivatives market whose crash helped trigger the financial collapse in the fall of 2008.”

This Frontline documentary is 50+ minutes long but well worth the time investment!

(Although…the implication that the government bailouts of the “too-big-to-fail” institutions was the logical outgrowth of Ayn Rand’s philosophy—and the assertion that she was a Libertarian—are wrong. Rand would certainly have opposed Brooksley Born’s proposals, but she would also have allowed AIG et al to reap their own harvest and fail. That would have resulted in more immediate pain, but a quicker and healthier recovery and a lot less risk of repeating the same mistakes. And she was not a fan of Libertarianism.)

Motley Fool CAPS Roundtable: Inflation, Deflation, and Your Portfolio

intelledgement — Thu, 15 Oct 2009 04:01:47 +0000

We got to participate in a discussion about this topic with another CAPS member and the results—posted on The Motley Fool website—were pretty interesting (in our unbiased opinion LOL).

3Q09 Intelledgement Macro Strategy Investment Portfolio Report

intelledgement — Thu, 15 Oct 2009 03:48:48 +0000

Summary of Intelledgement’s model macro strategy model investment portfolio performance as of 30 September 2009:

Position	Bought	Shares	Paid	Cost	Now	Value	Change	YTD	ROI	CAGR
FXI	03-Jan-07	243	37.15	9,035.45	40.92	10,379.12	6.35%	39.78%	14.87%	5.16%
GLD	03-Jan-07	142	63.21	8,983.82	98.85	14,036.70	8.41%	14.25%	56.24%	17.59%
IFN	03-Jan-07	196	45.90	9,004.40	29.05	8,561.28	-4.50%	32.65%	-4.92%	-1.82%
SLV	03-Jan-07	700	12.86	9,012.80	16.38	11,466.00	22.42%	46.25%	32.94%	10.89%
DBA	13-Mar-08	235	42.50	9,995.50	25.46	5,983.10	0.04%	-2.75%	-40.14%	-28.19%
TBT	21-Jan-09	233	42.84	9,989.72	43.96	10,242.68	-13.67%	16.51%	2.53%	3.69%
EWM	21-Jul-09	1,062	9.41	10,001.42	10.14	10,768.68	n/a	40.83%	7.67%	46.26%
EWZ	3-Aug-09	165	60.39	9,972.35	67.67	11,165.55	n/a	93.40%	11.97%	103.75%
IYW	29-Sep-09	208	51.86	10,794.88	51.95	10,805.60	n/a	47.75%	0.10%	43.70%
cash				13,597.46		26,096.42
Overall	31-Dec-06			100,000.00		119,505.13	2.04%	13.05%	19.51%	6.70%
Macro HF	31-Dec-06			100,000.00		125,778.03	3.33%	17.28%	25.78%	8.70%
S&P 500	31-Dec-06			1,418.30		1,057.08	14.98%	17.03%	-25.47%	-10.14%

Position = security the portfolio owns
Bought = date position acquired
Shares = number of shares the portfolio owns
Paid = price per share when purchased
Cost = total paid (price per share multiplied by # shrs plus commission)
Now = price per share as of date of report
Value = what it is worth as of the date of report (price per share multiplied by # shrs plus value of dividends)
Change = on a percentage basis, change since last report (not applicable for positions new since last report)
YTD (Year-to-Date) = on a percentage basis, change since the previous year-end price
ROI (Return-on-Investment) = on a percentage basis, the performance of this security since purchase
CAGR (Compounded Annual Growth Rate) = annualized ROI for this position since purchase (to help compare apples to apples)

Notes: The benchmark for the Intelledgement Macro Strategy Investment Portfolio (IMSIP) is the Greenwich Alternative Investments Global Macro Hedge Fund Index, which historically (1988 to 2008 inclusively) provides a CAGR of around 14.3%. For comparison’s sake, we also show the S&P 500 index, which since January 1950 has produced a CAGR of around 7.2%. Note that for our portfolio’s positions, dividends are added back into the value of the pertinent security and not included in the “cash” total (this gives a more complete picture of the ROI for dividend-paying securities). Also, the “Cost” figures include a standard $8 commission and there is a 1% rate of interest on the listed cash balance.

Transactions: A moderately busy quarter, with three in and three out:

21 Jul – Bought 1,062 EWM for $9.41/shr
22 Jul – Sold 146 DOG for $62.86/shr (ROI of -8.0% and CAGR of -38.9%)
22 Jul – Sold 163 PSQ for $53.56/shr (ROI of -12.8% and CAGR of -55.3%)
22 Jul – Sold 146 SH for $62.75/shr (ROI of -8.5% and CAGR of -40.6%)
3 Aug – Bought 165 EWZ for $60.39/shr
29 Sep – Bought 208 IYW for $51.86/shr

Performance Review: Another adequate quarter for us, as we were up 2%, and now +13% YTD. For the second consecutive quarter we were beaten out by both the macro hedgies—who were up 3%—and by the S&P 500—who recorded a second consecutive great +15% quarter. YTD, both the hedgies and the S&P 500 are up 17%.

Tactically, with the market moving inexorably northwards, we unloaded three of our last four short positions early this quarter—only our short on 20+ year treasury bonds remains—and added three long ETFs (Malaysia, Brasil, and high tech).

Overall, we are now 45 points ahead of the market in terms of total return-on-investment: +20% for us and -25% for the S&P 500 in the 33 months since the inception of the IMSIP at the end of 2006. In terms of compounded annual growth rate, the GAI Global Macro Hedge Fund Index over the same time span has us by a couple of points, +9% to +7%.

Analysis: The conventional wisdom now is that we suffered a sharp recession in 2007-09, but it is now over and the main question is how sharp and fast the recovery will be. Accordingly, the market in 3Q09 was less volatile and continued to move up dramatically. Two consecutive quarters of +15% ROI is pretty impressive; in an average year, the S&P 500 index is ±16%, so we have had two years worth of movement in the last six months. (Volatility has remained low because the pace of the increase has been steady and—from day-to-day—moderately paced, with no big corrections.)

As we have said before, we got into this situation by overspending, borrowing beyond our means, and speculating on bubble-valued assets. And the policies the Bush administration implemented—and the Obama administration has continued—of attempting to paper over the cracks in the system with bailouts of bad banks, bad real estate loans, bad credit default swaps, and bad industrial companies are neither the morally correct thing to do nor in our own long-term self interest. To the extent these actions succeed in postponing our day of reckoning, they ultimately succeed primarily in digging us into a deeper hole.

However, it is clear that the massive tidal wave of liquidity that the central banks—especially the Fed—have loosed on the world has succeeded in buying a significant stay of execution, albeit at the cost of alarmingly increasing the rate of decline in the value of the dollar. Accordingly, we are (as always) long commodities and also long emerging market plays, as we agree with the market perception that those economies will fare better than ours in the near- and medium-term future, although we still anticipate a significant economic disruption that will interrupt their growth…at which point we plan to have our capital elsewhere.

But for now, the sun is shining, so we are making hay. Being short here would, we expect, prove out to be the right stance in the medium term, but right now, we believe the opportunity for long gains outweighs the risk of not being able to shift gears quickly enough when the market turns.

Conclusion: We still believe things will almost certainly get worse…but given the prevalent bullish psychology, we don’t expect the market to perceive the serious problems we see for at least three-to-six months, and possibly up to 24 months with a lot of luck. (Whether it would be good luck or bad for the true nature of our problems not to become evident for another two years is left to the reader to consider as a useful thought exercise.) As of 1 October, we have five long emerging market ETFs in the portfolio: China (FXI), India (IFN), Brasil (EWX), Malaysia (EWM), and US high tech (IYW which we consider an emerging market play as some two-thirds of the revenue of the companies comprising the ETF are ex-USA derived). We have three long commodity plays which are hedges against the decline of the dollar: gold (GLD), silver (SLV), and agriculture (DBA). And we remain short long-term Treasury bonds ETF (TBT), as we expect 20+ year treasure bonds to decline in value as interest rates inevitably rise in order to entice buyers of the copious outpourings of US debt. We have enough cash to undertake two more positions and currently are considering shorting the dollar and a “buy-what-China-needs” play such as going long energy or Canada or Australia.

Finally, the spectre of systemic risk still lurks, and while we do not anticipate it will surface unbidden in the near future, a disruptive macro event (e.g., an Israeli attack on Iran’s nuclear facilities) could roil the waters at any time. Consequently we remain prepared to reconfigure the IMSIP to be more congruent with our medium-term macro analysis.

Performance and Volatility: an Inverse Relationship

intelledgement — Wed, 14 Oct 2009 14:14:40 +0000

Volatility in the ebb and flow of the S&P 500’s valuations declined for the third straight quarter in 3Q09. The average daily change in the value of the S&P 500 index for 3Q09 was ±0.8%, down sequentially from ±1.3% in 2Q09, from ±2.0% in 1Q09, and a nightmarish ±3.3%—the highest level of volatility in a quarter since the inception of the S&P 500 index—in 4Q08 (as discussed in the previous articles, This Volatility is Off the Charts! in April 2009 and Not Your Father’s Market Volatility in July 2009).

For the entire year, 2009 at ±1.3% overall is still on track to be the second most volatile year on record—2008 set a new record at ±1.7%—but if the calming trend continues through 4Q09, we may drop below the pre-2008 record ±1.2% posted in 2002. Still, at this point we remain 118% more volatile than “normal” (namely, the all-time average daily change in the value of the S&P 500 index, which is ±0.6%).

Why do we care? Well, if you are a short-term trader, obviously more volatility is a good thing, because the opportunities for you to profit are larger and more frequent. But it turns out that if you are a long-term investor, volatility is bad news. In general, higher volatility is associated with a lower return-on-investment. Indeed, the big peaks in the above chart—when the S&P 500 experienced unprecedented volatility—were all negative ROI years: 1974 -30%, 2002 -23%, and 2008 -38%. In fact, not merely negative, but the worst three years in the history of the S&P 500 index.

But wait, there’s more! It isn’t just peak volatility that hurts. In general, the higher the volatility, the worse the ROI. Check out this chart measuring performance at various levels of volatility:

To build this chart, we calculated the ROI for the S&P 500 index for each year since 1950, and then sorted those years by the average daily change in the S&P 500 index—up or down. Clearly if you are a long-term investor seeking a 10%-or-better annual ROI, you want to root for average daily volatility around ±0.6% or less. In years when average daily volatility has exceeded ±0.8%, the S&P 500 has a negative ROI, including those three major meltdown years.

We also did a little vector analysis. Since 1950, there were 29 years in which volatility declined from the prior year and in 18 of those (62% of the time), performance improved compared to the prior year. There were 30 years in which volatility increased from the prior year, and in 24 of those (80% of the time) performance was worse than the prior year.

We are not saying that volatility causes market declines; in fact, it presumably works the other way round. But if you are a long term investor and detect a rise in volatility, be prepared for an increased probability of sub-par performance by the stock market.

BUY iShares Dow Jones US Technology ETF (IYW)

intelledgement — Tue, 29 Sep 2009 19:01:15 +0000

OK, we are going against the macros here but we plead temporary insanity.

The USA economy still has the Debt of Damocles—created by our profligate spending and indebtedness—hanging over it. While we have flooded the world with fiat currency liquidity to avert a deflationary spiral, almost nothing has been done to place limits on the use of leverage by financial institutions, nor even to increase visibility with respect to the trading of the financial WMDs—mortgage-backed securities, credit default swaps, collateralized debt obligations, and the like—that zoomed us into trouble faster than we realized. Meanwhile, most of the “toxic assets” created during our binge remain on the books of institutions deemed “too big to fail.” The residential real estate market, despite being goosed with the $8,000 tax credit—akin to pouring gasoline on a fire when we should be trying to deleverage—has failed to deal with the inventory of foreclosed homes, with many more on the way. The commercial real estate market faces a potentially calamitous wave of refinancing of projects that are no longer worth enough to cover the debt. Unemployment continues to rise and the average credit card debt per household was $8329 as of the end of 2008.

We’re in a deep hole, but the government keeps digging. Support for the zombie banks that was initiated by the Bush administration has continued apace with the Obama administration (even to the point of being run by the same guys). Interest rates are artificially low, and the secular decline of the dollar has accelerated, or at least spurted ahead. The government not only has stepped up current spending with the so-called stimulus package, but shows no inclination to rein in ruinous projected future spending on entitlements—indeed the main debate now is over how big an additional commitment of future tax payer dollars to make to support “health care reform.” Policymakers are so far out of touch with reality that they enacted a program encouraging consumers to take on additional debt (“cash-for-clunkers”).

All this will not end well. So…why is the NASDAQ up 35% on the year, and up 68% since the 9 Mar 09 low? Well, we could say that the velocity of job losses—the rate at which the rate of unemployment is growing—has slowed. We could say that 2Q09 results were surprisingly good, in terms of profitability, although revenue generally was flat to down. We could say that housing prices appear to have plateaued here (no long declining). We could say that China’s stimulus package worked a lot better than ours, putting money directly into the hands of consumers and encouraging them to spend without creating any additional debt, and consequently economic growth in China got a boost. (Of course, that manuever is a lot easier when your government cash flow numbers are positive.) We could say that confidence is up, as evidenced by the rise in the stock market…oh, wait a minute…that’s the effect we are trying to explain in the first place…never mind.

The honest answer is we don’t know why the market is up so sharply. The torrent of liquidity the central banks unleashed averted what would have been in our view a salutary cleansing crash putting a lot of ne’er-do-wells out of business, but the collective wisdom of the market is evidently that this is a good thing. Who knows; maybe postponing the battle will enable the ne’er-do-wells to transform into heros and ultimately prevail. Yeah, right.

OK, so it may be insane, but it is happening…so, let’s examine the case for the bulls. While we don’t believe it holds water, if it does, then

The economy has ceased to contract and will start expanding now
The consumer will continue spending money at a gradually expanding rate
Emerging markets will continue growing faster; demand for commodities will rise again
Most countries will continue to gain more from free trade than they lose
Inflation will resurface sooner rather than later

These are all conditions that favor the high tech sector. On the business side, productivity is at a premium in an expanding market where labor is tighter and—in an environment with a bias in favor of free trade—global competition militates efficiency. On the consumer side, an ever-expanding global middle class will stoke increasing demand for the latest and greatest entertainment and personal productivity products.

Accordingly, we are going with the iShares Dow Jones US Technology EFT (IYW) here. All things being equal, we would prefer an international fund, but the only one that has done better this year than IYW (+42% to +26%) is the SPDR S&P International Technology Sector ETF (IPK) and it is way too small and too thinly traded ($0.011B in assets trading 5000 shares per day). Also it is not a genuine international fund as it excludes USA technical companies. No problem, high tech is international in terms of customers anyway.

We would have gone with a NASDAQ index fund but the PowerShares QQQ (QQQQ) unaccountably trails the underlying index this year (+23% to +35%), and the First Trust NASDAQ-100-Tech Index ETF (QTEC) is +33% but again too small and thinly traded ($0.028B in assets and 35,000 shares per day).

So the IYW it is. This ETF “seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the largest public companies in the technology sector of the U.S. market, as represented by the Dow Jones U.S. Technology Index.” Microsoft, Apple, IBM, Cisco, Google, Intel, and Qualcom are all among their top ten holdings. They have over a billion in assets and trading volume is north of 400,000 shares/day. The P/E is running around 26 and the yield is about half-a-percent. For more information, check out iShares’ website.

We are taking this position to avoid being inundated in the rising tide of optimism; we want to participate in this ebullient upside. However, because we do expect this tide to turn—and, of course, it’s quite possible it already has!—we will tolerate no more than a ten percent loss here.

Golden Star Resources (GSS) update #13

intelledgement — Tue, 11 Aug 2009 03:59:03 +0000

Black ink! Black ink! Black ink!

Well…when we made this investment almost two years ago, we knew that Golden Star Resources was a marginal gold miner, in the sense that the gold ore they are pursuing is relatively more difficult and expensive to process. We knew we needed gold at $750/oz or higher, and we needed management to succeed in honing the complex BIOX® process, which frees the gold ore from sulphide minerals thus rendering it more amenable to standard cyanide leaching.

We expected some teething problems. We didn’t expect electricity costs to triple, production to plummet, costs to climb to as high as $900/oz, and the company to generate red ink for nine consecutive quarters (all of 2007, 2008 and 1Q09). We didn’t expect a decline in the price of the stock from the $4.19 we initially paid to as low as 40 cents a share last December. Welcome to the wonderful world of speculation in individual stocks.

Well after the close today, management announced their 2Q09 results (click here and then select “Golden Star Reports Record Quarterly Gold Sales and Financial Results for Second Quarter 2009”) and—finally!—we have regained profitability. Admittedly it’s only two-tenths of a cent per share—$380,000 total—but after nine consecutive quarters of black ink, we’ll take it!

And it’s not just the black ink. The 99,011 ounces of gold the company produced in 2Q09 was an all-time record high. The $558/oz cost of production was the lowest in two years. As announced in June, the electricity shortage/cost problem finally seems to have been solved. Cash is up from $28MM at the end of 1Q09 to $43MM. Exploration at Wassa has yielded increased reserves. Guidance provided by management confirmed 2009 targets of 400,000 ounces and an overall projected cost of $545/oz.

If management can maintain this trajectory, and the price of gold continues to rise in the face of weakened fiat currencies through the balance of 2009, we expect to see the price of GSS stock—already up from that 40-cent low to $2.45—get back into the black for us. (We optimistically bought a second tranche of GSS at $3.08 when it started to decline in 2007 and our thus our overall basis is $3.57.)

Previous GSS-related posts:

BUY Golden Star Resources (GSS)—Ghanian gold (19 Jul 07)
Golden Star Resources (GSS) update #1—2Q07 results (8 Aug 07)
Buy Golden Star Resources (GSS)—yep, again! (24 Aug 07)
Golden Star Resources (GSS) update #2—unexpected debentures sale (24 Oct 07)
Golden Star Resources (GSS) update #3—3Q07 results (7 Nov 07)
Golden Star Resources (GSS) update #4—new CEO (20 Dec 07)
Golden Star Resources (GSS) update #5—record production…is BIOX® finally working? (17 Jan 08)
Golden Star Resources (GSS) update #6—4Q07 results (28 Feb 08)
Golden Star Resources (GSS) update #7—1Q08 results (6 May 08)
Golden Star Resources (GSS) update #8—2Q08 results (9 Aug 08)
Golden Star Resources (GSS) update #9—3Q08 results (4 Nov 08)
Golden Star Resources (GSS) update #10—4Q08 results (25 Feb 09)
Golden Star Resources (GSS) update #11—1Q09 results (6 May 09)
Golden Star Resources (GSS) update #12—electricity rate cut (28 Jun 09)

Vertex (VRTX) update #29

intelledgement — Thu, 06 Aug 2009 02:32:03 +0000

Vertex Pharmaceuticals (VRTX), our biopharma spec play with the killer hepatitis C drug candidate, announced their 2Q09 results today. Thanks to a spate of one-time expenses relating to the retirement of founder and CEO Joshua Boger, the note exchange, and a restructuring charge, losses nearly doubled to $171 million compared to $91 million in 2Q08. The company ended 2Q09 with $754 million in their coffers, and are anticipating collecting $105 million more due to a restructuring of their agreement with Mitsubishi Tanabe Pharma—who have the distribution rights for telaprevir in Asia Pacific (sans Australia)—announced last week.

Phase 3 trials of telaprevir proceed apace; we are on track for a second-half 2010 application by Vertex to the FDA for USA approval (about a year later than we originally projected when we made bought VRTX stock, but such is to be expected when speculating in biotechs). For more details, check out the press release.

Previous VRTX-related posts:

BUY Vertex Pharmaceuticals (VRTX)—Hepatitis C Play (17 Apr 07)
Vertex (VRTX) update—PROVE 1 trial news and 2Q07 results (25 Jul 07)
Vertex (VRTX) update #2—down 13% on good boceprevir (SGP) results (18 Oct 07)
Vertex (VRTX) update #3—3Q07 results (30 Oct 07)
Vertex (VRTX) update #4—concerns about telaprevir Phase 3 trial delay and competition (5 Nov 07)
Vertex (VRTX) update #5—still no word on start of telaprevir Phase 3 trial (9 Jan 08)
Vertex (VRTX) update #6—down 10% on apparent FDA preference for 48-week Phase 3 (23 Jan 08)
Vertex (VRTX) update #7—4Q07 results (11 Feb 08)
Vertex (VRTX) update #8—Seven million shares sold to raise cash (19 Feb 08)
Vertex (VRTX) update #9—up 8% on good Phase 2 results for cystic fibrosis drug (27 Mar 08)
Vertex (VRTX) update #10—up 28% on excellent Phase 2 results for telaprevir (31 Mar 08)
Vertex (VRTX) update #11—more good telaprevir Phase 2 data and 1Q08 results (27 Apr 08)
Vertex (VRTX) update #12—up 13% on Cowens upgrade; still more good telaprevir Phase 2 data (9 Jun 08)
Vertex (VRTX) update #13—down 5% on unattractive FDA Phase 3 parameter preferences (24 Jun 08)
Vertex (VRTX) update #14—2Q08 results (1 Aug 08)
Vertex (VRTX) update #15—telaprevir Phase 3 trial for SOC-resistant patients launched (19 Aug 08)
Vertex (VRTX) update #16—nine million shares sold to raise cash (22 Sep 08)
Vertex (VRTX) update #17—up 16% on Phase 2 results showing 2x daily telaprevir works (24 Sep 08)
Vertex (VRTX) update #18—final Phase 2a trial results on VX-770 (CF)…on to Phase 3! (20 Oct 08)
Vertex (VRTX) update #19—3Q08 results (27 Oct 08)
Vertex (VRTX) update #20—up 5% on fresh telaprevir Phase 2 results (3 Nov 08)
Vertex (VRTX) update #21—down 11% on concerns about Obama’s drug reimbursement policies (21 Nov 08)
Vertex (VRTX) update #22—Vertex founder Joshua Boger to retire (5 Feb 09)
Vertex (VRTX) update #23—4Q08 results (9 Feb 09)
Vertex (VRTX) update #24—ten million shares sold to raise cash (18 Feb 09)
Vertex (VRTX) update #25—Vertex to acquire ViroChem Pharma for ten million shares (3 Mar 09)
Vertex (VRTX) update #26—1Q09 results (16 Apr 09)
Vertex (VRTX) update #27—seven million shares exchanged for notes (8 Jun 09)
Vertex (VRTX) update #28—sale of future JNJ milestone payments (12 Jul 09)

BUY MSCI Brazil Index (EWZ—yet again)

intelledgement — Mon, 03 Aug 2009 19:29:40 +0000

Again, it makes sense to be long Brazil strategically, as we stated back in 2006. We have moved out of our position here twice due to the risk that the odds in favor of a sharp world-wide decline that will take Brazilian equities with it had waxed. But here and now, the risk is in not being long; under these conditions a position here is di rigeur.

The instrument of our investment in Brazil is the iShares MSCI Brazil Index (EWZ). This exchange-traded fund is heavily weighted towards commodities (27%), energy (27%) and financials (19%), as befits a fund for a rapidly developing country with a maturing economy. There is also significant representation for utilities (8%), consumer staples (7%), telecom (4%), and consumer discretionary, industrials, and information technologies (2% each). The P/E ratio is running around 13 and the yield is 4%. EWZ is very heavily traded (21 MM shares/day).

Previous EWZ-related posts:

BUY MCSI Brazil Index (EWZ) (2 Jan 07)
SELL MCSI Brazil Index (EWZ) (10 Sep 08)
BUY MCSI Brazil Index (EWZ—again) (6 May 09)
SELL MCSI Brazil Index (EWZ—again) (13 May 09)

BUY MSCI Malaysia Index (EWM…again)

intelledgement — Tue, 21 Jul 2009 19:31:38 +0000

As those who were with us when we launched this portfolio back at the end of 2006 may recall, Malaysia is one of our favorite places to invest outside of the USA, and the iShares MSCI Malaysia Index ETF was one of our original 11 positions. But in March 2008, we liquidated the position at a profit (ROI of 29% and CAGR of 24%), as we moved to a more defensive position.

Now that we are lightening up on our shorts, we are looking to increase our long exposure and EWM looks good here, at virtually the same price we got it at back in January 2007. Meantime, conditions for business in Malaysia remain strong. Their per capita GDP is up from $14,200 in 2006 (the latest number we had in January 2007 was $12,900 in 2005) to $15,300 in 2008. For comparison’s sake, they are just behind Russia ($15,800) but well ahead of Brazil ($10,100), China ($6,000), and India ($2,800)…not to mention Mexico ($14,200), Turkey ($12,000), and Thailand ($8,500), to name a few. The BRIC countries are all growing faster, and GDP growth was down in 2008 to +5.1%, but that still looks good from here (the USA was +1.3% in 2008).

The iShares MSCI Malaysia Index exchange-traded fund (EWM) is heavily weighted towards financial services (31%) and industrials (20%), aptly reflecting the sweet spots of the Malaysian economy. There is also significant representation for consumer staples (15%), consumer discretionary (13%), utilities (13%), and telecom (7%), reflecting the high income levels of the populace. The P/E ratio is running around 16 and the yield is 3%. EWM is moderately traded (1.2MM shares/day).

Previous EWM-related posts:

BUY MCSI Malaysia Index (EWM) (2 Jan 07)
SELL MCSI Malaysia Index (EWM) (10 Mar 08)