Macro Tsimmis

intelligently hedged investment

2Q07 Intelledgement Macro Strategy Investment Portfolio Report

Posted by intelledgement on Wed, 18 Jul 07

Summary of Intelledgement’s Model Macro Strategy Investment Portfolio performance as of 29 Jun 2007:

Position Purchased Shares Paid Cost Now Value Change ROI CAGR
EWA 03-Jan-07 383 23.50 9,008.50 28.47 10,904.01 9.71% 21.04% 48.30%
EWH 03-Jan-07 562 16.00 9,000.00 17.02 9,565.24 5.98% 6.28% 13.39%
EWM 03-Jan-07 988 9.10 8,998.80 11.80 11,658.40 8.96% 29.56% 70.63%
EWZ 03-Jan-07 192 46.85 9,003.20 61.42 11,792.64 24.79% 30.98% 74.53%
FXI 03-Jan-07 81 111.45 9,035.45 128.85 10,436.85 25.79% 15.51% 34.65%
GLD 03-Jan-07 142 63.21 8,983.82 64.27 9,126.34 -2.24% 1.59% 3.30%
IFN 03-Jan-07 196 45.90 9,004.40 43.65 8,555.40 14.45% -4.99% -10.02%
IXC 03-Jan-07 81 111.47 9,037.07 129.33 10,475.73 16.04% 15.92% 35.64%
PHO 03-Jan-07 489 18.41 9,010.49 20.92 10,256.78 12.26% 13.83% 30.65%
SLV 03-Jan-07 70 128.64 9,012.80 123.50 8,645.00 -7.50% -4.08% -8.24%
USO 03-Jan-07 174 51.60 8,986.40 53.00 9,222.00 -0.66% 2.62% 5.49%
cash 919.07 928.28
Overall 03-Jan-07 100,000.00 111,566.67 9.44% 11.57%   25.34%
Macro HF 03-Jan-07 100,000.00 105,150.39 3.80% 5.15% 10.92%
SPY 03-Jan-07 141.62 151.64 6.37% 7.07% 14.70%

Position = symbol of the security the portfolio owns
Purchase = date when the security was acquired
Shares = number of shares the portfolio owns
Paid = price per share at time of purchase
Cost = total portfolio paid (including commission)
Now = price per share at time of statement
Value = what it is worth as of the date of the statement (# shrs multiplied by price per share plus value of dividends)
Change = Change since last report (blank for positions new since last report)
Return on Investment = on a percentage basis, the performance of this security to date
Compounded Annual Growth Rate = annualized ROI for this position (to help compare apples to apples)

Notes: The benchmark for this account is the Greenwich Alternative Investments Global Macro Hedge Fund Index, which historically (1988 to 2006 inclusively) provides a CAGR of around 15.5%. For comparison’s sake, we also show the SPDR S&P 500 ETF, which historically provides a CAGR of around 10.5%. Note that 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 (except for the SPY) and there is a 2% rate of interest on the listed cash balance.

Transactions: There were no sales or purchases this quarter. We booked a dividend of $0.031/share for PHO on 15 Jun.

Review: Excellent quarter. Right now, conditions are perfect for the emerging market economies, with the US consumer still piling on debt to fund a continuing import frenzy, and energy prices moderating for the time being. Besides silver (SLV -8%), only our Indian fund (IFN) is still in the red for the year, and even there we were up 14% in the quarter. The Chinese (FXI +26%) and Brazilian (EWZ +25%) ETFs had spectacular performances. Aside from our Water Resources ETF (PHO +12%) and the aforementioned silver ETF, our commodity plays were flat. But while oil (USO -1%) was marking time, energy industry valuations continued to move smartly northwards (IXC +16%).

Another factor working in our favor (for now) is the weakness of the dollar. The appreciation of the Malaysian ringgit (EWM +9%) and Brazilian real contributed materially to the increase in the dollar-denominated value of those respective market index-linked ETFs this quarter. If the yuan were allowed to move freely, it would also be worth much more relative to the dollar.

Bottom line, the strategy worked well this past quarter, as despite a first-rate quarter for the SPY (+6%) we easily outstripped the market (+9%), while our benchmark Macro Hedge Fund Index actually underperformed (+4%). Year-to-date, we are +12% as compared to +7% for the SPY and +5% for the Macro Hedge Fund benchmark.

Analysis: What we have now is a Goldilocks scenario, in that the dollar is falling gradually enough so as not to panic the markets or kill off the US consumer market – which is just the way the powers that be in the USA and China like it, and thus will do their utmost to keep it that way, at least through next year’s macro events (Olympics in China and presidential election in USA). US political leaders get no points for telling the voters tough times are ahead, so their incentive is to paper over the cracks and hope the cosmetics last until the next guy has to deal with the problems. And aside from the fact that so long as the US consumers keeps buying it helps Chinese companies expand, China’s coffers contain trillions of dollars they should prefer to convert into real property before the charade ends…so in the meantime, it is in their interest to prop up the greenback.

Ideally, spirit gum and baling wire can keep the US dollar flying – and the US consumer in buy mode – until the Asian middle class cavalry arrives to take up the slack (probably five to ten years away). But there are huge structural weaknesses inherent in the value of the dollar and USA consumer spending is a house of credit cards…and these situations are not improving. Accordingly, the margin of error shrinks, and there is a rising danger that an unanticipated random event could trigger an avalanche here beyond the ability of the bankers to control. If the US economy stalls and takes a sudden dive before the rising Asian middle class is ready to take over the burden of living large, there will be a world-wide economic slowdown, potentially severe. In that event, we would shift out of the emerging markets ETFs and energy into a defensive posture (short the market indices and possibly long non-dollar currencies).

And of course if the global warming folks are right, then all bets are off…but likely the final vote there won’t be in in time to much influence how this situation plays out.

Conclusion: We know the direction we are headed, and recognize that there are alternative paths forward…including middle-ground scenarios where the dollar continues to decline short of a collapse and markets overall continue to rise, albeit more slowly…as well as the extreme scenarios where intelligent folks get elected in the USA and change our course by addressing all the problems in time to avert a steep decline (pretty farfetched) or there is a hard landing sooner or later (not so farfetched). We need to be prepared for all eventualities.

To that end, for now we are sticking with our mix of emerging market and commodity ETFs; if we perceive increased risk of a dollar or US credit collapse, our first step would be to consider cashing in the slowest of the emerging market ETFs (right now it would be EWH) and buy some insurance in the form of a Euro or Sterling ETF, or possibly increase our GLD position.

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