Macro Tsimmis

intelligently hedged investment

1Q08 Intelledgement Macro Strategy Investment Portfolio Report

Posted by intelledgement on Fri, 18 Apr 08

Summary of Intelledgement’s Model Macro Strategy Investment Portfolio performance as of 31 Mar 2008:

Position Purchased Shares Paid Cost Now Value Change ROI CAGR
EWZ 03-Jan-07 192 46.85 9,003.20 77.03 15,020.74 -4.48% 66.84% 51.09%
FXI 03-Jan-07 81 111.45 9,035.45 135.14 11,115.63 -20.46% 23.02% 18.18%
GLD 03-Jan-07 142 63.21 8,983.82 90.41 12,838.22 9.64% 42.90% 33.36%
IFN 03-Jan-07 196 45.90 9,004.40 45.47 10,515.40 -23.84% 16.78% 13.32%
IXC 03-Jan-07 81 111.47 9,037.07 129.54 10,718.16 -8.53% 18.60% 14.75%
PHO 03-Jan-07 489 18.41 9,010.49 19.24 9,459.22 -9.97% 4.98% 4.00%
SLV 03-Jan-07 70 128.64 9,012.80 170.41 11,928.70 15.95% 32.35% 25.36%
SRS 31-Aug-07 92 97.84 9,009.28 99.34 9,244.78 -9.89% 2.61% 4.52%
DBA 13-Mar-08 235 42.50 9995.50 36.45 8,565.75 …..n/a….. -14.30% -95.64%
cash       17,907.99   27,258.74      
Overall 03-Jan-07     100,000.00   126,665.34 -7.53%   26.67%   21.00%
Macro HF 03-Jan-07     100,000.00   112,791.99 0.12% 12.79% 10.19%
S&P 500 03-Jan-07     1,418.30   1,322.70 -9.92% -6.74% -5.47%

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 (not applicable for positions new since last report)
Return on Investment = on a percentage basis, performance to date (since date of purchase for each security and since 3 Jan 07 for the IMSIP overall and the benchmarks)
Compounded Annual Growth Rate = annualized ROI (to help compare apples to apples)

Notes: The benchmark for this account is the Greenwich Alternative Investments Global Macro Hedge Fund Index—listed in the table as “Macro HF”—which historically (1988 to 2007 inclusively) provides a CAGR of around 15.3%. 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: We had a veritable flurry of activity this quarter; we have already sold off more positions in 2008 (three) than all of last year (two):

  • 23 Jan – Sold 174 USO for $69.50/shr (ROI of 34.5% and CAGR of 32%)
  • 13 Mar – Sold 988 EWM for $11.36/shr (ROI of 29.1% and CAGR of 24%)
  • 13 Mar – Bought 235 DBA for $42.50/shr
  • 20 Mar – Sold 107 SKF for $106.66/shr (ROI of 27.9% and CAGR of 46%)
  • 20 Mar – PHO dividend of $0.018/shr
  • 31 Mar – SRS dividend of $0.41072/shr

Performance Review: Right, well when we said in January that our 2007 performance (+37%) was “too outstanding to reasonably expect we can replicate the performance anytime soon,” it was not our intention to immediately prove our point. But we have: we just turned in our worst quarterly performance, and first loss. We did increase separation from the S&P 500—which wracked up a nightmarish quarter—but lost ground to the Macro Hedge Fund index—which eked out a win in an admittedly tough environment.

And tough it was. India (IFN, -24%) and China (FXI, -20%) were quaking in the shadow of a possible collapse of the USA banking system. Our agriculture and water ETFs (DBA -14% and PHO -10%) and our energy ETF (IXC, -9%) were no help either. Our one remaining short sector play, the real estate ETF (SRS, -10%), was perversely down for us, meaning real estate companies somehow were up in a down market. Even mighty Brazil (EWZ, -4%) was down. Only silver (SLV, up 16%) and gold (GLD, up 10%) bucked the trend on the long side.

In retrospect, we would have been better off not making any moves this quarter. Selling off the United States Oil ETF (USO) in January in anticipation of an economic slowdown cost us when a combination of political and technical supply concerns and the slumping dollar combined to trump the factor of an anticipated slump in demand and send the price of crude skyrocketing to new all-time highs. Selling off the Ultrashort Financials ETF (SKF) also backfired in the wake of the collapse of Bear Stearns (BSC) and unrelenting thud of other shoes hitting the ground. And our purchase of the skyrocketing Powershares Agriculture Commodities ETF proved to be near an interim high from which the price backed off by the end of the quarter.

Bottom line, even if we had not made these moves, we still would have been in the red and lost to the hedgies in 1Q08. But despite the losses we incurred, we are in a good place overall, with a compounded annual growth rate after five quarters of operation of 21% compared to 10% for the average macro hedge fund and -5% for the market overall.

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 still don’t think that is all likely to be telescoped into 2008.

Howsoever, the risks of “the big one”—a major market meltdown—continue to increase. As we have been saying, the Fed’s cheap money policy can’t solve the problem. 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.

The Bear Stearns collapse illustrates this. It took years for that company to accrue the leveraged securities based on unsound loans that rendered them vulnerable. And, in fact, they had been operating for over a year in no worse shape than they were on Wednesday, 12 March, when BSC CEO Alan Schwartz went on CNBC to assert that everything was fine. And he wasn’t lying—basically, Bear Stearns was no more or less exposed to disaster on 12 March than at any time over the prior several months. They were capable of conducting business all those months and they could have continued doing business indefinitely. What happened between Wednesday and Friday—by which time Schwartz was on his knees begging Morgan Stanley to bail him out for pennies on the dollar—is that BSC was hit by a panic run on the bank, and not even Goldman Sachs (who are in the best shape of any of them) could survive similar circumstances. Once that snowball starts rolling downhill…look out below! It was Bear Steans this time, but it could easily have been Lehman or UBS or any number of others had the hand been played out a bit differently.

Perhaps the efforts of the central banks—most of them world-wide are aiding the Fed by buying excess dollars—will buy enough time for the banking firms to deleverage and survive. But a panic like the one that hit Bear Stearns (technically not a run, per se, but rather a boycott by all their erstwhile trading partners…maybe “freezeout” would be a better word) would take out any one of them…even, theoretically speaking, in good times. The takeaway here is that [a] the odds of such phenomena occuring is up from the normal one-ten thousandth of one percent to something like a third of a percent on any given day, and [b] when it happens, it happens lighting fast.

It is really hard to be optimistic in light of a presidential election in the USA where candidates on one side vie to outbid each other with respect to adding entitlement obligations to the deficit-ridden Federal government and blame the actions of other countries for our economic plight…and the candidate on the other side hasn’t considered economics important enough in several decades of public service to educate himself on the subject…but who never-the-less is willing to commit us to a financially ruinous military adventure for the next century. With the exception of the fringe candidate Ron Paul, none of the many contenders are willing to discuss (or seemingly even aware of) our real problems: soaring deficits, a currency in a death spiral, and a social/political/financial system that provides incentives for both individuals and government to spend beyond their means and discourages savings or capital investment. How can it be that our physical infrastructure, our manufacturing sector, and our dollar are all collapsing and if these issues even come up in debates the best our political elite can muster by way of a response is to whine about the undervalued Chinese yuan? If they even have time to mention it between discussing the apparently more pressing matters of personality flaws, misstatements, and the foibles of each other’s supporters. Or illegal immigration. LOL if we keep wasting what little time we have left before the day of reckoning on sideshow issues, the collapse will be bad enough here that emigration will be more of a concern than immigration.

Humans have a built-in aversion to change—evolutionarily speaking, if you have survived up to now, why risk changing the conditions that made that possible?—but the process of modernization since the invention of agriculture over the last few thousand years has discounted that conservative predilection.

And just as our experience with modernization is but a small fraction timewise of the whole of human existence, the history of the USA is short compared with that of China, India, Russia, and Europe. But our history has been informed by a propensity to go where no one has gone before, socially, economically, and politically. And in pursuit of these ground-breaking endeavors, we have had little in the way of geographic or resource constraints. We have done more to challenge the wisdom of the ages with respect to change than anyone in human history. If things ended here, “new and improved” would be an apt epitaph for the United States of America.

And make no mistake: our long winning streak in solving the problems those challenges have engendered is sorely threatened here. Sailing in uncharted waters is nothing new for us, but it’s gotten really dark and stormy out there, we are moving at flank speed…and icebergs abound. Meanwhile, the band plays on.

Conclusion: As we expected, the strategic level intervention by the Fed and world’s central banks—huge infusions of liquidity and lower interest rates in the USA and massive dollar buying to shore up its value abroad—appear to be holding the line for the most part…and the Fed has demonstrated the will and capability to intervene in acute tactical situations where the line threatens to break, as with Bear Stearns. Thus we still anticipate it is most likely the markets will muddle through the Olympics/USA election without a major collapse.

We remain focused on the US consumer and the US dollar as our “canaries in the coalmine.” Should either the dollar or US consumer spending appear likely to collapse, then we stand ready to sell off the emerging market ETFs (EWZ, IFN, FXI) and possibly the energy and commodity ETFs (IFC, DBA) in favor of additional sector/index “reverse” ETFs (such as SRS already in the portfolio).

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