Macro Tsimmis

intelligently hedged investment

3Q08 Intelledgement Macro Strategy Investment Portfolio Report

Posted by intelledgement on Thu, 09 Oct 08

Summary of Intelledgement’s Model Macro Strategy Investment Portfolio performance as of 30 Sep 2008:

Position Purchased Shares Paid Cost Now Value Change ROI CAGR
FXI 03-Jan-07 243 37.15 9,035.45 34.47 8,591.00 -20.55% -4.92% -2.86%
GLD 03-Jan-07 142 63.21 8,983.82 85.07 12,079.94 -6.93% 34.46% 18.54%
IFN 03-Jan-07 196 45.90 9,004.40 32.82 8,036.00 -5.88% -10.75% -6.33%
PHO 03-Jan-07 489 18.41 9,010.49 18.40 9,057.75 -11.09% 0.52% 0.30%
SLV 03-Jan-07 700 12.86 9,012.80 11.85 8,295.00 -31.36% -7.96% -4.65%
SRS 31-Aug-07 92 97.84 9,009.28 76.99 7,235.14 -26.22% -19.69% -18.31%
DBA 13-Mar-08 235 42.50 9,995.50 30.21 7,099.35 -25.74% -28.97% -46.30%
SKF 08-Sep-08 97 103.24 10,022.28 100.99 9,813.83 n/a -2.08% -29.46%
SCC 19-Sep-08 112 86.23 9,665.76 100.90 11,325.24 n/a 17.17% 19,168.67%
SZK 19-Sep-08 145 68.25 9,904.25 72.00 10,465.36         n/a 5.67% 523.27%
cash       6,355.97   18,968.10      
Overall 03-Jan-07     100,000.00   111,041.71 -15.46%   11.04% 6.20%
Macro HF 03-Jan-07     100,000.00   108,261.02 -6.25% 8.26% 4.66%
S&P 500 03-Jan-07     1,418.30   1,166.36 -8.88% -17.76% -10.62%

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 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 2% rate of interest on the listed cash balance.

Transactions: Our most active quarter since the inception of the portfolio with five transactions—two sells and three buys, all in September—plus a spate of late-quarter dividends on our reverse ETFs:

  • 8 Sep – Bought 97 SKF for $103.24/shr
  • 10 Sep – Sold 192 EWZ for $46.85/shr (ROI of 30.4% and CAGR of 17.1%)
  • 10 Sep – Sold 243 IXC for $37.16/shr (ROI of 2.8% and CAGR of 1.6%)
  • 19 Sep – Bought 112 SCC for $86.23/shr
  • 19 Sep – Bought 145 SZK for $68.25/shr
  • 24 Sep – SRS dividend of $0.06611/shr
  • 24 Sep – SKF dividend of $0.18351/shr
  • 24 Sep – SKZ dividend of $0.25196/shr
  • 24 Sep – SCC dividend of $0.26147/shr

Performance Review: Yikes! A disastrous quarter for us…and pretty bad for most everyone else, too. It was the worst quarter since we started tracking performance for everyone: us, the Macro Hedge Fund index, and the market overall. Most worst for us, however—the meltdown cost us two-thirds of our profits and nearly allowed the Macro Hedge Fund index to catch back up with us overall. (But not quite.)

We probably waited too long to cash in our Brazil (EWZ) and energy (IXC) funds, but we did manage to notch profits on both transactions…and for what it’s worth, both closed 30 Sep at lower prices than we realized in selling them on 10 Sep. Meanwhile, two of the three reverse ETFs we purchased in September were up for us by the end of the month, so the flurry of transactions definitely improved matters. Our Asian holdings (FXI and IFN) were down again this month as were all of our commodity plays (GLD, SLV, PHO, and DBA). Perversely, even with the market in a panicked retreat, our real estate reverse inverse fund (SRS) was down the most of anything.

YTD, the Macro Hedge Fund index is down 4% while we are down 19%(!) and the S&P 500 index is down 21%(!!). But despite this disastrous quarter, we are still outperforming the field overall, with a total return after 21 months of operation of +11% compared to +9% for the average macro hedge fund and -18% for the market overall.

Analysis: Wow! That happened fast.

We were half right in thinking the crash could most likely be postponed past the Olympics/Election. The Lehman Brothers Chapter 11 bankruptcy filing—and narrow escape for Merrill Lynch, which was taken out for a bargain basement price by Bank of America—on 15 September appears to have been the straw that broke the camel’s back. Credit almost immediately froze solid with banks essentially refusing not only to loan money to each other—that had been the case for months—but to anyone. The Fed responded the next day with an additional $50B injection of liquidity and an $85B loan to AIG (which was already close to failing). By the end of the week, U.S. Treasury Secretary Henry Paulson asked Congress for $700B to fund the so-called “bailout” plan to buy bad paper—mostly mortgage-backed securities—in an effort to improve balance sheets of those institutions holding said failed investments. (A revised version of the plan was enacted on 3 October, after the end of the 3Q08).

Among the many ironies of this extraordinary situation is the spectacle of the princes of capitalism—whose mantra with respect to their relationship to government has consistently been “deregulate, deregulate, deregulate”—on their knees begging for public largess to avert the worst consequences of the meltdown they had helped to engender. But in truth, there is plenty of blame to go around, and poor public governance and poor private governance are most definitely in the mix along with poor corporate governance. In his “Taking Stock” blog on SmartMoney (scroll down to “Fixing Blame”), Igor Greenwald—with tongue somewhat in cheek—took a stab at allocating blame mathematically:

  • Mortgage industry – 29%
  • Greedy Wall Street CEOs – 16%
  • Regulators – 13%
  • Alan Greenspan – 11%
  • China – 9%
  • Credit Agencies – 9%
  • Congress – 5%
  • Ben Bernanke – 2%
  • Henry Paulson – 2%
  • Short-sellers – 1%
  • OPEC Arabs – 1%
  • President Bush – 1%
  • Trial lawyers, the media, used-car dealers, drug dealers, pedophiles, bibliophiles, Masons, the Trilateral Commission – 1%

Not a bad first attempt. We would allocate some fault to the promoters and practitioners of consumerism who value instant gratification over considered judgment and who certainly contributed to record debt levels and our near negative savings rate. Presidents Reagan, HW, Clinton, and W all deserve some of the blame for promoting the welfare of special interests over the general good, not to mention presiding over the mistakes of regulators they appointed. W gets a special demerit for declaring after 9/11 that the best way for U.S. citizens to contribute to the triumph of western civilization was to go to a mall and shop. Not to get too nitpicky, but the U.S. Congress is at least as much to blame for our recent trials as China.

It is, of course, important to understand who did wrong—and more importantly, what went wrong—in order to decrease the odds of making the same mistake again anytime soon. But it is more important for us to understand what happens next, so we can optimally deploy our capital. We continue to believe that the underlying strategic problem is that the USA have been living beyond their means both as individuals and as a nation and borrowing money to fund their addiction to conspicuous consumption (rather than investing the proceeds of those loans strategically). The tactical problems stem from an easy-credit fueled housing value bubble which has now burst, resulting in [a] a pullback of consumer spending in particular and the economy in general and [b] a liquidity crisis stemming from the uncertain solvency of financial institutions saddled with varying quantities of “toxic” mortgage-backed securities and corporate paper of unknowable (but certainly reduced) value. These in turn are fueling an economic slowdown that will constrain corporate spending and produce more unemployment, which is likely to exacerbate and lengthen the consumer spending decline…in short, a negative feedback loop is developing here.

The so-called “bailout” package is designed to take the bad paper off the hands of the banks in order to enable them to resume lending to each other and thus unfreeze credit. It is ironic—if not worrisome—that the primary action the government has undertaken to fend off the worst effects of a crisis caused (in large part) by too much easy money is to provide gobs more of easy money. This “solution” doesn’t do much to address the problem of having so many people saddled with mortgages on residential real estate that is now worth less than the money they owe on it. Those loans will obviously have to be renegotiated/restated to avoid a tidal wave of foreclosures that would sink the real estate market still lower. The $700B bailout also does not address the rapid decline in consumer spending—and concomitant slowdown in the world economy—that is happening now. Manifestly some combination of public works/infrastructure projects are needed in that quadrant.

Three months ago, we expressed the hope that if we did get a pre-November crisis, it would elevate the level of political discussion in the USA. LOL so much for that! One candidate has pretty much avoided saying anything except that the crisis demonstrates that the party in power has screwed things up and the other has appeared erratic and buffoon-like, announcing that he would skip the first debate and suspending his campaign to concentrate on the crisis, and then failing to accomplish much and sheepishly showing up for the debate afterall. And that was a letdown—only a murky discussion of the crisis, no mention of entitlements, no serious analysis of the overall financial picture (neither candidate was willing to admit any of their initiatives might have to be scaled back because of lack of funding), no discussion of what the average American has done wrong and what he or she might do differently to make things better. <Sigh>

Conclusion: Hard to be optimistic here. We have not resolved the housing bubble-related issues—foreclosures, toxic mortgage-backed securities, value destruction leading to decreased consumer spending. And whole new sets of problems are arising—corporate profit declines and layoffs, corporate paper issues, the cumulative effect of the liquidity injections on the dollar, collateral damage in emerging markets. Plus we have the “old” strategic issues still hanging around—demographic-related problems such as caring for aging populations, finding non-agrarian jobs for folks coming off the farms in China, adjusting to the contract labor norm and retraining for lost production jobs in the western economies, not to mention a raft of infrastucture and ecological concerns. Accordingly, we now have four sector “reverse” ETFs in the portfolio…we expect continuing challenges for the real estate sector (SRS)—which we already owned a quarter ago—as well as the those we’ve added in the last three months: financials (SKF) and the consumer goods (SZK) and services (SCC) sectors. Although the dollar has been stronger of late, we expect the cumulative effect of the liquidity injections and increased need for borrowing by the USA to eventually degrade value there, and consequently remain long our commodity plays (GLD, SLV, and DBA). As a hedge against a quicker-than-anticipated recovery, we still retain our China and India emerging market funds—as we expect those economies to lead the recovery—and our PHO infrastructure play.

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