Macro Tsimmis

intelligently hedged investment

Archive for September, 2007

BUY Syntax-Brillian (BRLC)—US HDTV company

Posted by intelledgement on Wed, 26 Sep 07

There aren’t many fast-growing US electronics companies these days, but Syntax-Brillian (BRLC) qualifies. The company designs, develops, and distributes LCD HDTVs (liquid crystal display high definition TVs, in this case, the critically acclaimed “Olevia” brand advertised on ESPN) and seeks to market LCoS (liquid crystal on silicon) technology, if it ever catches on with the consumer.

Although headquartered in Arizona, the company subcontracts manufacturing to enterprises in Asia, which makes for some attenuated logistical lines of supply, but enables them to aggressively manage production costs. The company has been growing revenues and despite a fiercely competitive LCD HDTV retail market with falling prices, has cut production costs and maintained a healthy profit margin. In their 2007 fiscal year—which ended 30 June—the company had $698MM in sales and a profit of $30MM, up from $193MM in 2006 revenues and a loss of $19MM.

There have been some trouble spots, however, and the stock price is down from the mid-$9s at the beginning of the year. Some Asian suppliers are having difficulty getting credit, which has decremented the units available for sale. And while the 2008 results were strong overall, the 4Q08 ending 30 June was a penny of earnings below analysts’ expectations (11 cents per share instead of 12) and the 2009 guidance was weak: sales of only $170MM-to-$180MM in the current quarter—which would be a decline from the $205MM last quarter and well below the $250MM analysts were expecting. Essentially, the stock is back where it was a year ago, when it was still losing money on less than one-third the sales.

So this is a relatively high-risk/high-reward situation, which will require close monitoring. We are betting here that this is just a hiccup and that in the long run, management can keep their balance in this volatile and competitive market while positioning themselves for future growth should LCoS technology prove marketable. In that scenario, there is significant growth potential here. If the supplier issues continue, however, the rapid growth story will rapidly dissipate.

Posted in B.1 Spec Recs | Leave a Comment »

Why you should sell short yourself

Posted by intelledgement on Sun, 23 Sep 07

We took our first short position in the Intelledgement Speculative Opportunity Portfolio (ISOP) this week, by selling 178 borrowed shares of Beazer Homes (BZH) for $11.18 a share.

The mechanics of this are simple:

  1. You place an order to sell shares of a stock you don’t own
  2. Your broker attempts to borrow the shares and, if successful, sells them for you, placing the proceeds (minus his commission) in your money market account
  3. So long as you maintain this position, the current value of the shares (number of shares multiplied by the price per share) shows up as a liability in your brokerage account
  4. To close your short position, your broker buys the same number of shares you sold, returns the newly purchased shares to where they were borrowed from, and decrements your money market fund to pay for the purchase (and for his commission)

The vast majority of individual investors never short a single stock in their entire lifetimes. There are a variety of reasons for this. One big reason is that shorting is inherently more risky than “going long” (buying a stock). Overall, the market tends to go up 10% per year so there are generally fewer stocks going down than up. Mathematically, therefore, it is more likely that any given stock—all other things being equal—will go up than down in an average year.

Also, your upside is limited. If you sell a stock short, the best you can do if the company goes out of business and the stock becomes worthless is keep 100% of the money you were paid when you sold it. If you buy the same stock and the company does really well, the stock could triple or quintuple or more…everyone knows the apocraphyl story of the couple who invested $10,000 in WMT when Wal-Mart went public in 1970 and now are sitting on $53,000,000.

Conversely, the worst-case scenario for shorting is…well…worse. If you buy a stock (go long), the worst thing that can happen is that the company goes bankrupt, the value of the stock plummets to zero dollars per share, and you lose 100% of your investment. But let’s say your research uncovers a consulting services company that the market is (over)valuing as if it were a software publisher (software publishers have much higher profit margins than services companies)—so you sell short 100 shares at, say $10/share expecting the price to fall to $5/share. Unfortunately for you, it is the middle of the dot com boom, the market is irrationally exuberant, and the share price runs to $60. You were paid $1,000 when you sold the shares short, but to buy them back now, you need to come up with $6,000…and you only have $3,000 in cash in your brokerage account…and now your broker calls and says you either have to deposit another $3,000 or else he will be forced by the margin requirement rules to sell off some of your other holdings to raise the money to close out your short position…which will saddle you with a $5,000 loss. Theoretically, the value of the stock could keep on rising and thus the limit on your loss for your short position is…well, theoretically, infinity.

Some folks also object to shorting a stock on philosophical grounds. It’s one thing to research a company, understand the vision of their management, learn their strengths and weaknesses, and conclude either that you both believe what they are doing is worthwhile and likely to be profitable—and put your money where you analysis is—or not. If decide to invest, then you can root for them, exult in their triumphs, possibly even advise them, and, if they start screwing up or having bad luck, cut your losses and move on. It’s quite another to find a company which you discern is badly run, or facing difficult strategic circumstances, or is just overvalued, and sell their stock short. In effect you are actively rooting for them to fail. If your analysis is right, then you will profit from the misfortunes of others, who may lose money or their jobs or—in extreme cases—face criminal charges.

And, of course, it’s an image thing. If you say “stock market,” virtually no one associates those words with selling short. It’s like marketing cars…the image that comes to mind is zooming down an open road on a sunny day…sometimes there is no road if the ad is for an off-road vehicle…sometimes it is a dark and stormy night if the ad is for a particularly safe vehicle…but you never see the cars going in reverse. Remember Vin Diesel’s great hard sell scene in Boiler Room? Those calls are never about selling short; they are always about buying something.

Our view is that while reverse gear may not be sexy and is rarely employed, it would be hard to drive a car effectively if you couldn’t go backwards in some situations. When we sell short, we are not necessarily rooting for the company to fail—although as badly as Beazer has behaved here in North Carolina, we won’t be shedding any tears for that management team if, as we expect, things continue to deteriorate for them—but rather we are doing our level best to help the market properly value that enterprise. It is not healthy for the economy for Yahoo! to be valued at $200/share because it distorts decisions and leads people to move in directions that are not optimally productive. Anybody wise and brave enough to short YHOO at $200 in 1999 deserves as much credit for helping make our markets efficient as anyone who plunked down $10,000 for WMT in 1970.

Our macro analysis tells us that the real estate bubble has a long way to contract before it’s done, and our review of Beazer tells us that they are in worse shape than most homebuilders. Having the option to stake out an appropriate position—in this case, a short position—is a no lose proposition: if we are right, we will profit and if we are wrong, that will call into question a lot of other expectations which may need to be adjusted…sort of a canary-in-the-coal-mine. In this case, the canary is expected to expire but if it keeps on singing, then we are dealing with an unanticipated supply of oxygen, which is the sort of thing it’s good to know about sooner rather than later. Oxygen and coal dust can be an explosive combination, and we sure don’t want our investments blowing up unexpectedly.

Posted in B. Speculative Tactics | Leave a Comment »

Oscillating Skid—Why We are Likely to Crash

Posted by intelledgement on Sat, 22 Sep 07

Sunday, 19 December 1965: scariest day of my life, so far.

I was 12 years old. My sister, Jill (10), and I had been allowed to skip a few days of school so we could start the winter break early that year, and with my parents, we flew from New York to Washington to visit my mother’s Bell clan family and—of course—go skiing. (My father, Lee, was—still is—a zealously religious skier, so any vacation that included him pretty much had to occur in a mountainous region during winter.) After a couple of obligatory days at my uncle’s Tacoma home—where it never snows—we were headed up to Packwood in the mountains, where he had a cabin near some first-rate ski areas. We took two of the Bell kids in our rented Dodge Dart, while my mother’s brother and his wife and daughter Eadie Kaye (she was my favorite both because she had the same name as my mother and we shared the same birthday—21 March—although she was two years older than I) traveled in their station wagon.

Lee was a skilled and aggressive driver, but he was more than usually anxious to make time that night, partly for the usual reason (the sooner we got there and to bed, the less trouble he would have getting us going bright and early on Monday morning so as not to lose any valuable skiing time) and partly because a significant snowstorm was brewing that night. Lee had been unable to obtain a rental car with snow tires at the SEA-TAC airport—it never snows in Seattle, either—and he wanted to get to Packwood before any significant snowfall degraded driving conditions; he figured he could rent chains once in mountain country and we’d be good to go for the rest of the week.

The Dart never made it to Packwood.

We were not familiar with black ice. It is not all that common a phenomenon in the Northeast. That night, we received a very quick education.

The Dart was doing about 85 MPH as we crested a rise on a two-lane blacktop highway about 90 minutes into our trip. Ahead of us was a downhill straightaway stretching out beyond the reach of our headlights; no traffic in sight ahead or behind us. Suddenly—all six of us could feel it—it was as if the car had become unhinged from the highway. We were still headed downhill, but the car was no longer pointed straight ahead…the rear end was fishtailing to the right, and the front end was drifting across the double yellow line into the oncoming traffic lane! Lee let up on the accelerator and turned the wheel to the right, into the skid. The turning maneuver straightened the car momentarily…and then the rear came around to the left, and we were now pointed off the road on our side…we were in a dreaded oscillating skid! The road was in a gully, and a few feet off each edge rose twelve-feet high embankments…the good news is there were no serious trees in play. Lee turned into the left skid and again our lurch towards the edge of the road—and the embankment beyond it—reversed…into another right skid. There was no question of braking, but some speed was bleeding off; we were now moving slower than 80 MPH…left, right, left, right, down to below 60 MPH…THUMP! The car had sailed off the road and the left front corner caught the embankment, we tumbled for a second or so, and…BOOM! We stopped.

The car had flipped completely over and we had landed, right side up, off the left side of the road facing back in the direction we’d come.

Have I mentioned that none of us had seat belts on? Miraculously, among the six of us we suffered only one broken collar bone (my cousin Ricky who had been in the death seat), one minor concussion (Jill, in the back seat left window) and a few days of sore ribs and minor internal bleeding for Lee (whose impact with the steering wheel had been hard enough to warp it). Possibly even more amazing, all six of our pairs of skis, stowed on a roof rack which had been torn loose when the car flipped, were virtually undamaged, save for some cosmetic scratches on the top of one of Lee’s.

The Dart, however, was totaled, with the radiator driven into the engine block.“So,” you may be wondering, “what does this have to do with investing? I already know not to buy Chrysler stock even if the Germans hadn’t taken it private.”

LOL right, well we probably wouldn’t be recommending Chrysler here—not that the accident was in any way the fault of the Dart—but that is not the takeaway. The point of the story is that the proper way to fight a skid is to turn into it, not against it.

For nearly 80 years now, the U. S. government has generally responded to economic downturns by loosening credit and spending more money, and to inflation by tightening credit and spending relatively less money…and generally speaking, the results have been pretty positive. For some months, now—as evidence of the collapse of our real estate bubble has mounted—some economists and most of the financial community have been militating in favor of a Fed rate cut, with the calls getting ever more strident and hysterical. That some big name financial institutions are seriously at risk there can be no doubt of. And on Tuesday, the Board of Governors of the Federal Reserve came through with a 50 basis point cut from 5.25% to 4.75%—the first cut in the federal funds and discount rates since June 2003, when it was lowered to 1%. Starting a year later, we had had 17 consecutive rate hikes, which streak was broken Tuesday.

Unfortunately, the tried and true response to an economic downturn here is the wrong response. We are not just dodging a pothole here. We are in a skid, and if we don’t correct it, it will take us off the road.

In a nutshell, Jim Cramer is right about the problem, but wrong about the solution. (If you didn’t listen to his famous “Ben Bernanke has no idea” rant the first time we linked to it above, please do so now.)

The problem is that there are a lot of financial institutions with bad paper out there who could be insolvent. No one knows for sure, because it is unclear how many “broken” mortgages there are (where the putative owner of the property owes more debt than the property is worth). And even if you did know that, the wizards who sliced up the mortgage obligation cattle and repackaged bit and pieces of them into new debt hamburger-style instruments have done such an arcane job that it is hard to sort out the true value of each individual security. For example, your interest payments—or just the first, say, five years of them—on your mortgage might have been repackaged into one mortgage-backed security currently owned by Lehman Brothers while the principal payments—or maybe just your payments from the 23rd to the 30th years of your mortgage—may be in another mortgage-backed security being held now by Wachovia. And your end-of-your mortgage payments may be mixed with other end-of-mortgage payments—which would be relatively easier to value—or with some other early-year payments or some interest-only payments on high interest loans, or whatever—which are harder to value. About the only things we know about many of these securities is that [a] the lapdog credit agencies rubber-stamped them all AAA and [b] the utility of those ratings is about the only thing we can confidently price: zero.

So, if you run a financial institution, and another financial institution you suspect may be insolvent asks to borrow money from you—as all these companies routinely do every day in order to conduct business—is it prudent for you to say “yes”? Obviously not…and that’s the problem. Cramer is right: some of these guys stand to go out of business if things continue on this path.

Which brings us to Cramer’s proposed solution: loosen credit by lowering the fed funds rate. The prime rate will come down, the mortgage rate will come down, fewer homeowners will be rate-adjusted out of their properties, the value of the mortgage-backed securities will be saved from extinction, no financial institutions will face insolvency and bankruptcy, and everybody can go back to buying the latest cool cell phone.

We see only two problems with this solution: [a] it won’t work and [b] it will make matters worse.

Lowering interest rates won’t help homeowners with balloon mortgages here because the problem is they bought their properties at sky-high prices in a bubble market on spec with the intention of flipping the property at a profit before their higher mortgage payments kicked in. That bubble no longer exists and they can’t flip the property to a greater fool at a higher price, irrespective of the mortgage rate. And, irrespective of the mortgage rate, they owe more on the house than it is worth and once they face that reality, the rational move is to default on the mortgage…which obviously is bad for whatever mortgage-backed securities include a portion of that mortgage.

Lowering interest rates will have an effect, but unfortunately it is not a good one, in our view: it will accelerate the decline in value of the dollar.

Everyone knows that the dollar has been declining more or less steadily since the end of the Second World War, but most of that decline has been in opposition to inflation. When inflation was high, the dollar has been relatively weaker, and when inflation is low, the dollar has been relatively strong. But even with inflation still relatively tame here, the dollar as seen a marked decline of late. Check out this chart, which shows the performance of several dollar-denominated currency-based ETFs over the last 15 months. Despite low inflation and interest rates that—until this week—were steady and relatively high, in dollar terms, every currency has appreciated in value. Even the loonie, which was losing ground to the dollar for much of that time, is now +10%. (Note the momentary spike in the value of the dollar when the Fed surprized folks—and sent Cramer over the edge—by not lowering rates in August.)

So if the dollar was uncharacteristically weak even while the fed discount rate was steady at a relatively high level, what happens now that rates are headed down and a flood of new dollars are being created both electronically and on paper?

What will happen is that the banks who facilitated bad behavior on the part of the mortgage and home sellers and buyers will get a lease on life that they don’t deserve, and the cost of that lifeline will be borne by dollar holders, domestic and foreign both, because their wealth is being devalued.

We are hooked on easy credit and we were responsible, we would employ some tough self-love to get ourselves detoxed, cold turkey. We would feel like dying for a spell, but in relatively short order we would bounce off our collective sickbed healthier and wiser…and a lot wealthier than we are going to end up the way things are going. Which is, we are not feeling great so they are force feeding us more credit! This makes about as much sense as treating an alcoholic by increasing his bar tab limit—and will have consequences just about as devastating.

Under normal conditions, it makes sense for the Fed—when they see an economic downturn pothole ahead—to steer the economic car away towards easier credit…and when they see an inflation obstacle in the road, to steer back towards tighter credit. But these are not normal driving conditions. In effect, we are in an oscillating skid, an a huge patch of economic black ice, zooming ever closer to either edge of the road with every swerve…and our driver, instead of turning into the skid, is fighting it every inch of the way…and instead of slowing down, is speeding up.

These violent maneuvers may postpone the inevitable for a spell, but with every wrench of the steering wheel, our control is less effective and with every boost in speed, the damage we will likely incur when the crash eventually comes, as it must, increases.

Hope you’re smarter than we were in Washington so many years ago: hope you have your seat belt securely fastened.

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SELL SHORT Beazer Homes (BZH)—shooting fish in a barrel

Posted by intelledgement on Tue, 18 Sep 07

OK, it’s not news that the housing market is in rout mode after the bubble popped nearly 18 months ago. The combination of the collapse of the subprime credit market—which took marginal borrowers out of play—and the degradation in credit power of consumers—which took some heretofore “good” borrowers out of play—has resulted in a steep decline in demand, which in turn has resulted in a drop in prices, which in turn has hurt consumer credit more, which in turn has lowered demand still further, which in turn…well you’ve heard of a feedback loop, right? What we have here, folks, is a feedback noose. And the necks lined up for the noose include the housing industry, the lenders who made aggressive loans and investors who are long mortgage-backed securities, and homeowners.

Our sister portfolio, the Intelledgement Macro Strategy Investment Portfolio (IMSIP), has purchased two “short” ETFs that benefit from this situation: the Ultrashort Financials (SKF) and the Ultrashort Real Estate (SRS). In our view, this situation will get a lot worse before it gets better. So, we want to look at homebuilders to see who is the most vulnerable. Which brings us to Beazer.

Actually, most of what you need to know about Beazer is illustrated in this chart of the stock prices of a half-dozen homebuilders since April 2006. As you can see, shorting housing stocks since then has been a shooting-fish-in-a-barrel proposition: you can’t miss. The best performer—Toll Brothers (TOL), a ruthlessly disciplined company that caters to high-end buyers who have been less affected by the credit crunch—is down 35% in 17 months. All the others are down 55% or more in the same time frame…and BZH is the worst of all, down 85% between April 2006 and yesterday’s close.

The point here is, that the combined market intelligence of investors over 18 months has concluded that BZH is the biggest fish in the barrel. So that’s our starting point.

LOL ok, now that we have our conclusion—well, at least our hypothesis—let’s see if we can find any evidence to support it. Let’s start with their quarterly report from their 3Q07 (for the quarter that ended 30 Jun 07). Oops…little problem. It seems management have had to delay the filing of this report with the SEC due to the possibility that they may need to restate their numbers. Turns out the CFO may have made some mistakes. Actually, in fact, the company had to fire him in June for shredding documents related to an FBI investigation of shady lending practices in Charlotte, first reported in March by the Charlotte Observer. Seems Beazer not only marketed their homes aggressively to marginal buyers but they set up a lending division which created Venus fly trap-like lures, such as a deal where the buyers put $500 down to secure their purchase and then had got a $499 check from Beazer at the closing (of course all these promotional costs were built back into the back end of the loan which the homeowner had to pay later). Most of the mortgages were federally insured, so that when 77 buyers lost homes to foreclosure in one 406-home Beazer-built subdivision, the Federal Housing Authority—that is to say, we taxpayers—ponied up $5MM to Beazer to cover the defaults, according to the newspaper.

Beazer management at first maintained the company strictly adhered to all laws and did nothing wrong. Presumably excepting the fired CFO. Then on 10 August, when they notified the SEC about the need to delay filing their 3Q07 financials, BZH cited as a reason that their BoD investigation had turned up “certain evidence that the Company’s subsidiary, Beazer Mortgage Corporation, violated U.S. Department of Housing and Urban Development…regulations and may have violated certain other laws and regulations in connection with certain of its mortgage origination activities.” So that internal investigation, the FBI investigation, and an SEC investigation into possible securities law violations that was disclosed in May are ongoing.

Anyway, later last month, BZH management issued “unaudited” 3Q97 results. Among other problems, the company may have been understating expenses, and so these numbers and potentially earlier quarterly results statements may ultimately have to be restated. But we can say with reasonable authority that at the end of June 2007, the company had approximately $123MM of cash on hand (down from $219MM last quarter) and $1.8B of debt. We can say that the company lost $3.20/share in the quarter (compared to a profit of $2.37 in 3Q06) and has lost $5.86 for the year so far (compared to a profit of $6.70/share in the first nine months of 2006). The losses include $159MM of writeoffs for abandoned land options (no point building more homes when the ones on hand aren’t selling) and property purchased for more than it is now worth. We can say that revenue for the quarter ($761MM) was down 37% from 3Q06 and home sales (2,666) were down 36%.

And while we are on the subject of unaudited results, BZH are now preemptively suing their own bondholders ($1.4MM of debt) in Federal court to prevent them from declaring that the company is in default because of their failure to file their 3Q07 10-Q with the SEC. According to Beazer’s court filings “vulture investor” bondholders who purchased the paper at a steep discount from bondholders worried about the company’s travails “are now improperly seeking to secure a windfall by demanding accelerated repayment in full” (quotes from this Forbes report). This demand (which actually no bondholders have made as yet) would be improper, BZH lawyers contend in the complaint, because the company, while required to forward a copy of their 10-Q with the bondholders within 15 days of filing with the SEC, is under no obligation according to the bond agreements to file the 10-Q with the SEC on time, or ever, for that matter. LOL if BZH win this case, a lot of corporate bondholders who depend on timely reporting from the companies to whom they have loaned money are going to be pretty nervous. In any event, if the bondholders could and did demand immediate repayment of the $1.4MM, it would bankrupt the company, and as that is not in the bondholders’ interest (possibly excepting any vulture hedge fund bondholders who are also short the stock), this is not likely to happen—most likely, before this case is even tried, there will be some sort of settlement. But in the meantime, fighting this battle is one more drain on BZH’s limited supply of money and management cycles.

In short, these are not happy times in housing industry land in general, or at Beazer in particular.

Ah, and speaking of short…clever as we are, shorting BZH is not an idea unique to Intelledgement. Short sales of BZH stock amount to about 70% of the float, which lands Beazer on the top ten list of the most-shorted NYSE stocks for September and means that if something really good happens, there is a very high potential of a “short squeeze” event as most everybody who has sold short attempts to buy stock to cover their position. The stock price could rise dramatically quickly, which makes shorting BZH a potentially risky play. Such is the way of speculative plays. (If you are not familiar with short selling, you may want to check out our recent discussion of the tactic.)

And speaking of unhappy times, you will have noted that BZH has been having them for quite awhile now, and indeed that the stock is down 85% in the last 18 months. So why are we shorting it now? Well, the ISOP has only been around since the beginning of 2007, so we could not have shorted anything in April 2006 (when it was north of $60). Ideally, we should have gone short on BZH in January…say instead of buying TMY which has lost 40% for us…or maybe a compromise and just shorted TMY! LOL The fact is that we were focused primarily on launching our investment advising service and secondarily on getting the IMSIP—which is our model investment portfolio—up and running. We did pay more attention that we had intended to this portfolio but that was mostly because of the Dendreon (DNDN) drama.

We’ve been eyeballing BZH as a short for some time now—we didn’t just research and write all this today!—but were looking for a decent entry point. There was a rumor that Beazer was going bankrupt that sent the stock tumbling 42% on 1 August (from $13.99 down to $8.10 although it recovered to close at $11.37) and we were thinking we had missed the boat entirely here. However, today’s “shock and awe” 50-basis-points rate cut has afforded us just the opening we’ve been looking for, as BZH is trading 20% higher here on volume that will be close to 3x normal. It is totally irrational for The Street to imagine that lower interest rates can fix the subprime credit crisis when the problem is a lack of credit-worthy borrowers, not a lack of funds to loan. LOL it was easy credit (in part) that got us into this mess in the first place! Primarily what the Fed is accomplishing here is to fan the flames of the fire that is immolating the dollar—we think it is a panicky, bad move—but Beazer’s house is mos def burning here too, and we are betting it collapses first.

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Aug 07 Intelledgement Speculative Opportunity Portfolio Report

Posted by intelledgement on Thu, 13 Sep 07

Position Purchased Shares Paid Cost Now Value Change ROI CAGR
TMY 03-Jan-07 300 3.30 998.00 2.03 609.00   12.78% -38.98% -52.84%
PTR 23-Jan-07 8 127.17 1,025.36 144.33 1,192.42 -0.09%   16.29% 28.48%
IFN 13-Feb-07 24 41.76 1,010.24 46.45 1,114.80 1.53% 10.35% 19.81%
FXI 27-Feb-07 10 95.00 958.00 150.31 1,503.10 7.43% 56.90% 143.34%
FDG 20-Mar-07 44 22.68 1,005.92 32.72 1,491.07 -1.18% 48.23% 140.27%
ELN 04-Apr-07 129 13.90 1,801.10 19.38 2,500.02 3.47% 38.81% 123.40%
VRTX 18-Apr-07 57 31.65 1,812.05 38.96 2,220.72 20.62% 22.55% 73.37%
NBIX 22-May-07 158 11.33 1,798.14 9.97 1,575.26 -1.97% -12.40% -38.03%
BQI 13-Jul-07 565 3.35 1,900.75 5.04 2,847.60 14.55% 49.81% 1,935.14%
GSS 19-Jul-07 451 4.19 1,897.69 3.09 1,393.59 -16.94% -26.56% -92.74%
GSS 24-Aug-07 613 3.08 1,896.04 3.09 1,894.17 n/a -0.10% -5.02%
cash       -6,103.29   1,577.07      
Overall 03-Jan-07     10,000.00   19,918.82 3.69% 99.19% 185.39%
Global HF 03-Jan-07     10,000.00   10,634.52 -1.64% 6.35% 9.81%
NASDAQ 03-Jan-07     2,415.29   2,596.36 1.97% 7.50% 11.63%

Position = security the portfolio owns
Purchased = date position acquired
Shares = number of shares the portfolio owns
Paid = price per share
Cost = what portfolio paid (including commission)
Now = price per share
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 portfolio is the Greenwich Alternative Investments Global Hedge Fund Index, which historically (1988 to 2006 inclusively) provides a CAGR of around 15.4%. For comparison’s sake, we also show the NASDAQ index, which over the same time frame has yielded a CAGR of around 11.0%. Note that for the portfolio, 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 3% rate of interest on the listed cash balance.

Transactions: Added a second irresistibly-priced tranche of GSS.

News:

Comments: A genuinely quiet month, during which we lead our little parade, outdistancing both the hedgies and the NASDAQ. VRTX was up 20% on speculation they will soon be announcing their plans for phase 3 telaprevir trials. BQI was up 15% on continued realization that their bitumen reserves are the real McCoy. For no particular reason TMY was up 13% and GSS was down 17%. (OK, the BIOX plant underperformed again in 2Q07…so, what else is new?) Overall we are now +99% so far in 2007 compared to +8% for the NASDAQ and +6% for the Greenwich Alternative Investment’s hedge fund index.

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