Macro Tsimmis

intelligently hedged investment

4Q07 Intelledgement Macro Strategy Investment Portfolio Report

Posted by intelledgement on Wed, 16 Jan 08

Summary of Intelledgement’s Model Macro Strategy Investment Portfolio performance as of 31 Dec 2007:

Position Purchased Shares Paid Cost Now Value Change ROI CAGR
EWM 03-Jan-07 988 9.10 8,998.80 12.73 12,978.37 10.48% 44.22% 44.70%
EWZ 03-Jan-07 192 46.85 9,003.20 80.70 15,725.38 11.36% 74.66% 75.54%
FXI 03-Jan-07 81 111.45 9,035.45 170.45 13,975.74 -4.14% 54.68% 55.28%
GLD 03-Jan-07 142 63.21 8,983.82 82.46 11,709.32 12.18% 30.34% 30.65%
IFN 03-Jan-07 196 45.90 9,004.40 62.26 13,806.24 29.72% 53.33% 53.92%
IXC 03-Jan-07 81 111.47 9,037.07 141.88 11,717.70 4.80% 29.66% 29.97%
PHO 03-Jan-07 489 18.41 9,010.49 21.40 10,506.65 0.32% 16.60% 14.28%
SLV 03-Jan-07 70 128.64 9,012.80 146.97 10,287.90 7.63% 14.15% 14.28%
USO 03-Jan-07 174 51.60 8,986.40 75.76 13,182.24 21.12% 46.69% 47.20%
SKF 26-Jul-07 107 84.14 9,010.90 99.88 10,809.94 27.29% 19.96% 52.32%
SRS 31-Aug-07 92 97.84 9,009.28 110.78 10,259.47 24.12% 13.88% 47.56%
cash 907.31 2,014.96
Overall 03-Jan-07 100,000.00 136,973.91 11.92% 36.97% 37.36%
Macro HF 03-Jan-07 100,000.00 112,655.88 3.60% 12.66% 12.78%
S&P 500 03-Jan-07 1,418.30 1,468.36 -3.82% 3.53% 3.56%

Position = security the portfolio owns
Bought = date position acquired
Purchase Price = price per share
Shares = number of shares the portfolio owns
Cost = what portfolio paid (including commission)
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 S&P 500 index, 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 and there is a 3% rate of interest on the listed cash balance.

Transactions: Just the usual spate of year-end dividends this quarter:

  • 20 Dec – SKF dividend of $0.708/shr
  • 20 Dec – EWM dividend of $0.406/shr
  • 21 Dec – PHO dividend of $0.018/shr
  • 24 Dec – EWZ dividend of $1.203/shr
  • 24 Dec – FXI dividend of $2.09/shr
  • 24 Dec – IXC dividend of $2.783/shr
  • 27 Dec – IFN dividend of $8.18/shr

Performance Review: Our best quarter yet, to cap a year in which we nearly tripled the hedgies’ benchmark and outstripped The Market by 10x. In the meantime, the economic situation continues to decline. The continued depression in the US housing market finally seems to be slowing at least the growth of US consumer spending and the risk appears to be growing that financial services woes could expand beyond the subprime mortgage lending arena to credit card debt and commercial paper. The Fed is attempting to ameliorate the reluctance of banks to loan each other money by injecting liquidity into the system and stimulate the housing sector by lowering interest rates, but the principal effect of these moves seems to be further deterioration of the already weak dollar. Commodity prices in general continued north in the quarter, although at a slower pace than in 3Q07: oil (USO +21%), gold (GLD +12%), silver (SLV +8%), and water (PHO +0%…good enough to beat the market for the quarter this time). Except for China, the emerging markets continued to charge ahead: India (IFN +30% and it would have been more but for the assassination of Benazir Bhutto at the end of December which roiled the Subcontintental markets), Brazil (EWZ +11%), and Malaysia (EWM +10%) were all up while China pulled back a tad (FXI, -4% but still up 55% overall on the year). Our integrated energy sector investment lagged again, but still managed to beat the market (IXC +4%). And finally, in another sign that a storm approaches, our “portfolio insurance” positions paid some dividends this quarter: both the finance sector reverse ETF (SKF +27%) and the real estate reverse ETF (SRS +24%) were up. (However, in a nod to the conventional wisdom that one should never change the answers on a multiple choice test, we would have ended the year $1300 further ahead had we never sold EWH and EWA midyear in favor of SKF and SRS. Actually, we believe that the risk mitigation the presense of the SKF and SRS ETFs in the portfolio afforded us was worth the slight performance hit.)

Bottom line, the strategy worked exceedingly well for the third straight quarter, and was outstanding for the year overall…too outstanding to reasonably expect we can replicate the performance anytime soon, most likely! Consider: the Macro Hedge Fund Index had its best year since before the dotcom bubble, beating the S&P 500 index by 10 points (+13.45% to +3.54%…biggest differential since the hedgies won by 13 points in 1994)…but we, in turn, creamed the hedgies by 23 points, to say nothing of beating the S&P by 33 points. To put this achievement in perspective, consider that the Macro Hedge Fund Index has never beaten the S&P 500 Index by more than 23 points, and that was back in 1988.

Analysis: We continue to believe things will get worse before they get worst. That is, in a nutshell, the dollar is going to collapse and the US economy has a long way to go to adjust to the new reality where we are no longer king of the value-add hill in either manufacturing or services…but we don’t think that is all likely to be telescoped into 2008.

Howsoever, the risks of “the big one”—a major market meltdown—occurring in 2008 are greater than they were in 2007. The Fed’s conversion to rate cutting is gaining in fervor but the problem is that cheap money contributed both to the subprime crisis—by encouraging bad real estate loans and overextended consumer credit—and the erosion of the value of the dollar and it is hard to see how cheap money (or more liquidity) can get us out of it. The banks are not making loans to each other not because they don’t have the money to lend, but because they can’t assess the risk level. They typically know their own situation is secretly more dire than is being let on, so in common prudence they have to assume the same is true for any other bank seeking a loan. More liquidity injected into the system won’t magically turn bad paper into good paper, and so it won’t help the credit crunch.

What it probably can do is avert (or, at least, postpone) some real estate defaults at the margin and thereby prolong the US consumer spending splurge for a spell…thus—likely—rendering 2008 meltdown free. But while that provides tactical relief in postponing bad things from happening, it is not making things better on a strategic level; most likely the reverse. The more debt we have when we finally run out of foreigners willing to finance it, the bigger the splash when the end is nigh…and the more soaked we’re gonna get. In effect, the Fed is treating the symptoms, not the disease (which is the only thing it can do; only Congress can treat the disease and there is no political will to do so). Meanwhile the disease is progressing, and eventually, it will overwhelm our increasingly futile efforts to mask the symptoms.

But speaking of foreigners-willing-to-finance-our-debt, there remain some trumps yet to be played. None of these will enable us to avert our rendezvous with destiny, but they can and likely will delay Judgment Day and/or help us recover afterwards. First, so long as the US consumer keeps buying, the rest of the world (ROW) in general and China in particular have an incentive to keep purchasing our bad paper and thus propping up the credit pyramid scheme. This is because our purchase of goods manufactured offshore is fueling economic growth, which is of paramount importance to countries with a constant imperative to create jobs to absorb folks still making the rural-to-urban transition such as China and India. It will be several more years before the Chinese middle class will have enough purchasing power to carry the bulk of this load themselves; until then, our profligate consumption is irreplaceable, and if the American consumption spigot turns off before than (as is likely, we believe), the effects will be felt from Beijing to Riyadh, and they won’t be pleasant.

Another trump is the pile of dollars the ROW have accrued. This trove provides incentive on the part the treasure holders to support the value of the dollar and to slow down the pace at which it is being supplanted as THE international currency. You want to get out of the dollar, sure thing, but you dare not move too fast for fear of setting off a panic and losing value faster than you can make the transition. One likely solution will be a spate of acquisition by foreigners of USA property—real estate, corporate, intellectual, you name it. Sure, the US economy is likely to be dicey for several years, but would you rather own depressed-value real estate in Miami or wheel barrels full of dollars each worth less than a penny? As the economy in the USA weakens, this offshore demand could allow folks to extract more value from real property for a longer span of time than they otherwise might under the circumstances, and it could also encourage more offshore interest in financing a comeback here once we have worked through our debt issues.

And speaking of wheel barrels, there is another potential trump card—and this one is in our own hand: repudiation. Played early enough—i.e., when it still appears we have the capacity to pay back some of our debt—a strategically savvy US government might be able to parlay it into something that would cushion our fall and/or enhance recovery. For example, by making it appear as if the USA is coercing/threatening our debtholders, the government might be able to build a domestic consensus for taking draconian actions—paired with debtholder concessions—to address our structural weaknesses (entitlements, tax policy, education, infrastructure) sooner than otherwise, and thus retain more control over our own fate. Admittedly, democracies are bad at being strategic and it is more likely the politicians will dither and paper over our problems until it is too late for us to have much say over how things play out and we are reduced to bootless nuke-rattling. But one can always hope…Ron Paul might be able to pull it off. LOL

Conclusion: For the nonce, we are maintaining all our current positions. We think the most likely eventuality is that disaster will be averted through the Olympics/US elections. The USA may sink into recession, but we believe the government will step up to the plate to knock away the prospect of mass housing defaults (at the cost of incurring more debt) and thus keep the rickety structure working for the rest of 2008, and accordingly the US consumer will continue to spend, albeit at a reduced level. In this environment, we expect reduced but continued growth in emerging markets and reduced but continued growth in demand for commodities. The US markets will be flat at best and the dollar will continue its slow motion plotz.

Things are, however, heating up…the ice is thinner…and thus the odds of a meltdown sooner rather than later are greater than before. Accordingly, we are laser focused on one key question: what would Al Gore do? He should know; he invented global warming, right?

J/K. Actually, where we are is focused on the US consumer…we see him as the linchpin. Should the largess there dry up, then it’s Katie bar the door, and we stand ready to sell off the emerging market ETFs (EWZ, IFN, FXI, EWM) and possibly the energy ETFs (IFC, USO) in favor of additional sector/index “reverse” ETFs (such as the SKF and SRS already in the portfolio).

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