Macro Tsimmis

intelligently hedged investment

Dec 07 Intelledgement Speculative Opportunity Portfolio Report

Posted by intelledgement on Mon, 14 Jan 08

Position Purchased Shares Paid Cost Now Value Change ROI CAGR
TMY 03-Jan-07 300 3.30 998.00 1.97 591.00 11.30% -40.78% -41.06%
FDG 20-Mar-07 44 22.68 1,005.92 38.60 1,799.69 13.23% 78.91% 110.20%
ELN 04-Apr-07 129 13.90 1,801.10 21.98 2,835.42 -4.56% 57.43% 84.34%
VRTX 18-Apr-07 57 31.65 1,812.05 23.23 1,324.11 -8.51% -26.93% -35.97%
NBIX 22-May-07 158 11.33 1,798.14 4.53 717.32 -65.13% -60.11% -77.80%
BQI 13-Jul-07 565 3.35 1,900.75 4.08 2,305.20 -9.33% 21.28% 50.99%
GSS 19-Jul-07 451 4.19 1,897.69 3.16 1,425.16 4.64% -24.90% -46.95%
GSS 24-Aug-07 613 3.08 1,896.04 3.16 1,937.08 4.64% 2.16% 6.25%
BZH 18-Sep-07 -178 11.18 -1,982.04 7.43 -1,322.54 12.49% 33.27% 174.22%
SLT 5-Oct-07 111 19.75 2,200.25 26.07 2,893.77 -0.87% 31.52% 215.91%
WB 12-Nov-07 -59 40.63 -2,389.17 38.03 -2,281.53 11.56% 4.51% 38.89%
BZP 19-Nov-07 245 9.77 2,401.65 11.18 2,739.10 -1.93% 14.05% 213.73%
cash -3,340.38 6,881.41
ISOP Overall 03-Jan-07 10,000.00 21,845.19 -4.34% 118.48% 119.99%
Global HF 03-Jan-07 10,000.00 11,112.68 0.59% 11.13% 11.23%
NASDAQ 03-Jan-07 2,415.29 2,652.28 -0.33% 9.81% 9.90%

Position = symbol of the security for each position
Purchased = date position acquired (for long positions) or sold (for short positions)
Shares = number of shares long or short in the portfolio
Paid = price per share
Cost = what portfolio paid (including commission); note for short sales, the portfolio gains cash
Now = price per share as of the date of the report
Value = what it is worth as of the date of the report (# 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 the ISOP is the Greenwich Alternative Investments Global Hedge Fund Index, which historically (1988 to 2007 inclusively) provides a CAGR of around 15.1%. For comparison’s sake, we also show the NASDAQ index, which over the same time frame has yielded a CAGR of around 10.1%. 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 2% rate of interest on the listed cash balance.

Transactions: A quiet end to a great year.

  • 27 Dec—FDG dividend of $0.534/shr

News:

Comments: How apropos…the first year of our speculative fund—which soared in March due to the surprise decision by an FDA advisory commitee to recommend approval of one drug (Dendreon’s provenge)—crashed in December due to a surprise FDA decision not to approve another (Neurocrine’s indiplon). That pretty much sums up the way it goes when you speculate in individual stocks: youse pays your money and youse takes your chances.

In the wake of the bizarre decision by the FDA to nix what would have been the company’s first significant product, Neurocrine (NBIX) stock plunged 65%, dragging the entire portfolio deep into last place for the month of December, with a 4% loss. The hedge fund index lead the parade in December with a 1% gain while the NASDAQ was flat.

For the year as a whole, the ISOP turned in a spectacular +118% performance while finishing with the best ROI in seven out of the twelve months of 2007. The Greenwich Global Hedge Fund index finished +11% while winning two months (November and December to come from behind) and the NASDAQ was +10% while winning three months.

We started this fund with the intention of [a] gathering intelligence that should help us make better decisions for our macro strategy investment fund (IMSIP), [b] demonstrating the vagaries of speculation, and [c] having fun. If you are thinking that we have achieved objectives “a” and “c” but we needed to lose money to properly demonstrate “b”, think again.

Our success this year was lucky, with over half of our profits ($6100) coming from one trade—the Dendreon (DNDN) options. (Plus we eventually made $500 on our sale of DNDN stock after the FDA ignored their committee’s recommendation.) The vote in that committee hearing was actually going the other way when someone thought to question the wording of the efficacy question. The question was reworded on the spot and that turned around several votes and most probably reversed the outcome. Now had the outcome of that vote been negative, we still would have profited because we owned puts that would have gained in value (in the event we sold them at a 99% loss), but we also would have lost money on the DNDN stock we owned. Overall, perhaps we might have ended up with $3000 in profits, instead of $6600. Had the vote been more neutral, then the value of the stock probably would not have changed much in which case neither the puts nor the calls would have been worth anything…and accordingly we would have lost $2000 instead of gaining $6600…a turnaround of $8600!

So that one reworded question could have been the difference between an ROI of +118% and +32%. (Or, in different circumstances, between, say, +50% and -36%.) The potential for this sort of risk is why we commit only 10% of our funds to speculation, and focus 90% of them on investment.

‘Nuff said.

Here is a thumbnail sketch of the ISOP holdings as of 31 Dec 07:

  • Transmeridian (TMY, -41%)—management have failed to capitalize on this glorious asset play and need to sell out to someone better financed; best we can hope for here is coming close to getting our initial investment back…we should know early in 2008
  • Fording Canadian Coal Trust (FDG, +79%)—appears to be approaching full value
  • Élan (ELN, +57%)—with tysabri sales growing and a promising Alzheimer’s candidate product in the pipeline, this looks like a hold for 2008
  • Vertex (VRTX, -27%)—the delay in the launch of a Phase 3 test for telaprevir, the candidate hepatitis-C treatment has hurt here, but we anticipate better news in 2008 and beyond
  • Neurocrine Biosciences (NBIX, -60%)—ah, a poster child for the risks of speculation: a stock that plunged 65% in a few days…indiplon is dead but we still like the endometriosis candidate drug currently in Phase 2b testing, so for now we are holding on here in the expectation we will recoup some losses here
  • Oilsands Quest (BQI, +21%)—great asset play; long-term buy-and-hold
  • Golden Star (GSS, -23% net, counting both positions)—good gold mining asset play beset by operational issues but another long-term buy-and-hold
  • Beazer Homes (BZH, short position, +33%)—a weak link in an over-stressed chain
  • Sterlite Industries (SLT, +32%)—major player in Indian buildout; long-term buy-and-hold
  • Wachovia (WB, short position, +5%)—expect more shoes to drop here in 2008
  • BPZ Resources (BZP, +14%)—good natural gas and oil asset play with integrated power story; long-term buy-and-hold

And here is a brief review of the positions we divested ourselves of during 2007:

  • 30 Mar/Apr $5 DNDN calls (UKODA, +742%)—our big hit for the year…if we had held on for a few more days instead of liquidating the day after the advisory committee meeting, we could have redoubled our money—up to an ROI of +1400% or so—but no one’s complaining
  • 30 Mar/Apr $5 DNDN puts (UKOPA, -99%)—happy to get 1% of our money back on these, which eventually expired worthless
  • 9 May/Dendreon (DNDN, +55%)—again, if we had held on for a few days instead of liquidating the day the negative FDA decision was announced, we could have done a bit better, but since then the stock declined back to near where we bought it, so selling was clearly the right decision
  • 16 Jun/LionOre (LMGGF, +88%)—nickel mining play that got bought out, probably too cheaply…but no one’s complaining
  • 5 Oct/Syntax-Brillian (BRLC, +21%)—buying a consumer play in the face of an impending recession was, theoretically, a dumb move—on top of which, the stock has since collapsed due to company-specific issues, so it turns out buying BRLC was, in practice, a dumb move—but we got lucky when a better opportunity came along a week later and we had to sell something to raise funds…so at the end of the day, this is a useful example of why speculation is a lot closer to gambling than investing is
  • 5 Nov/Petrochina (PTR, +76%)—we could have gotten $250/shr instead of $222 but it closed the year at $175 so again, no one’s complaining
  • 5 Nov/India Fund (IFN, +44%)—this one closed the year higher than we sold if for, but we wanted to eliminate all duplication with our IMSIP
  • 5 Nov/FTSE/Xinhua China 25 ETF (FXI, +97%)—was going for $215+/shr in October and $197/shr in December, but we are happy with our $190/shr proceeds…closed the year at $170/shr

In conclusion, obviously we don’t expect an ROI of 118% every year (or else we would have all our money in the ISOP, instead of just 10%!). In the long run, if we can break even here—and garner intelligence that helps inform our IMSIP decisions—it will be well worth the effort. Anything beyond that is gravy.

Bottom line, no two ways about it—2007 was a great year for gravy-lovers.

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