Macro Tsimmis

intelligently hedged investment

Archive for November, 2008

Goldman Sachs (GS) update #2—the fix is in

Posted by intelledgement on Mon, 24 Nov 08

Great news for Goldman Sachs (GS) today: President-elect Barack Obama announced his intention to nominate Timothy Geithner to be Secretary of the Treasury. While not a Goldman alumnus, Geithner was undersecretary as a protégé of then-Secretary of the Treasury—and former Goldman CEO—Robert Rubin. More to the point, as President of the New York Fed earlier this year, Geithner managed the demise/sale of Bear Stearns and was a key player—working with current Secretary of the Treasury (and former Goldman CEO) Hank Paulsen—in the decision to let Goldman competitor Lehman Brothers go bankrupt while orchestrating rescues of Merrill Lynch and Goldman debtor AIG.

The takeaway is that Geithner is not only committed to the bank bailout strategy, but a key architect of it. With this nomination—as well as the appointment of Larry Summers (for whom Geithner also worked when the former was Secretary of the Treasury) to head the National Economic Council, also announced today—Obama has effectively ended any hope that his economic policy might differ in any substantial way from that of the current administration. We will get more easy credit, more deficit spending, more easy money, more desperate attempts to paper over the cracks in the broken system rather than a serious attempt at reform.

We should probably cash in our financial company shorts here. GS was up 17% today, BAC was +24%, HBC was +4%, and WFC was +20%. But there is still substantial systemic risk in play—and in truth, most of these companies probably remain on thin ice (not to mention that in the long run, we’d be better off without them)—so we will hold on for now just to be sure an immediate collapse has actually been averted.

Previous banking company short-related posts:

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Vertex (VRTX) update #21—down sharply on Obamafear

Posted by intelledgement on Wed, 19 Nov 08

Shares of our biopharma company Vertex (VRTX) were hit hard today, down 11% in heavy trading, amid concerns that new Obama administration policies will hurt the profitability of the pharmaceutical industry. Biopharma indices in general were down 5% or more. There is speculation that the imperative to limit health care costs—in order to be able to afford universal coverage—will drive policies to scrutinize how drugs are administered, which could limit usage, and to subject reimbursement rates to cost-benefit analysis, which has been used in Europe to limit prices.

While health care reform in general is a top priority for the incoming administration, we continue to believe that hepatitis C is a big enough—and costly enough—public health problem to make it unlikely that they will adopt measures that would limit access to a treatment as effective as telaprevir appears to be. But the jury is still out and the charge sheet is full, as summarized in this street.com article (Vertex in particular is mentioned on page 4). This situation needs continued attention.

Previous VRTX-related posts:

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BUY ProShares UltraShort S&P500 (SDS)

Posted by intelledgement on Wed, 19 Nov 08

We are late to this party but it is still in full swing. We foresee at least two quarters of negative growth in the US economy and it could be more like two years.

The value of real estate continues to decline, and the issue of how to handle all the folks with diseconomic mortgages, whose most rational option is to default, has not yet been addressed. Credit card debt is still a problem, and consumer spending is in a steep decline. Consequently, business earnings are at risk. Consequently jobs are at risk. Consequently credit card debt and consumer spending become more of a problem. Consequently business earnings are at risk…rinse and repeat.

And meanwhile, the U.S. government has now decided not to purchase “toxic” mortgage-backed securities, credit default swaps, and other arcane derivatives—as they said they would—in favor of acting as the investor-of-last resort in the companies that made those bad debts. We think it’s a better deal for the government to get equity…but then how do we get that bad paper off the balance sheets? (Maybe we don’t need to, as credit does appear to be loosening in the one “good” sign we do have…we say “good” on account of: wasn’t it easy money that got us into this pickle in the first place? Just askin’.) And speaking of bad paper, there’s still more out there we haven’t focused much on yet, in terms of questionable corporate debt for many shaky companies.

We are in a deflationary spiral so powerful that the dollar is swimming upstream against torrents of fresh liquidity, which would normally be sinking it. We have the spectacle of everyone on the planet lining up to buy fresh U.S. treasury debt at breathtakingly low interest rates because despite the shocking heights to which governmental debt is climbing (and don’t forget all those entitlement obligations, and all the other industries lining up for TARP-style bailouts from the incoming administration), it still appears to be the safest place to put your money. Folks, this is not a good sign.

With the dollar rocketing northwards, we are tempted just to stay in cash and collect our 2%…but at some point, the lenders will lose some confidence in the solvency of the U.S. government, interest rates will rise, and the dollar will resume its long descent into the dust bin of history. In the meantime, it is a safe bet that the U.S. stock market is likely to continue to decline.

So, the ProShares UItraShort S&P 500 ETF is designed to “correspond to twice (200%) the inverse (opposite) of the daily performance of the S&P500® Index,” using short sales, options, derivatives, and other relatively arcane maneuvers. We don’t actually care if it hits the 2X mark or not; just so long as the inverse performance promise is met, we will be happy with this one. For at least the next quarter or two, we expect.

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Bank of America (BAC) update #7—TARP bait and switch now official

Posted by intelledgement on Wed, 12 Nov 08

Outgoing Secretary of the Treasury Hank Paulson today made it official: the TARP funds he begged Congress for so as to purchase toxic assets in order to save the Republic will now be used for anything but that. With the outgoing administration pulling out all the stops to prop up the corrupt bankers who got us into this mess rather than actually address the underlying problems—and the incoming administration conniving right along—we may just end up skating by the thin ice one more time…unfortunately. But today’s action makes it clear that the powers-that-be are improvising, and that systemic risk is still on the table. Thus, we are holding our financial company shorts—Bank of America (BAC), Goldman Sachs (GS), HSBC Holdings (HBC), and Wells Fargo (WFC)—for the time being.

Previous banking company short-related posts:

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Oct 08 Intelledgement Speculative Opportunity Portfolio Report

Posted by intelledgement on Wed, 12 Nov 08

Position Purchased Shares Paid Cost Now Value Change YTD ROI CAGR
VRTX 18-Apr-07 57 31.65 1,812.05 26.21 1,493.97 -21.15% 12.83% -17.55% -11.79%
NBIX 22-May-07 158 11.33 1,798.14 4.13 652.54 -11.94% -9.03% -63.71% -50.40%
GSS 19-Jul-07 451 4.19 1,897.69 0.88 396.88 -42.11% -72.15% -79.09% -70.36%
GSS 24-Aug-07 613 3.08 1,896.04 0.88 539.44 -42.11% -72.15% -71.55% -65.28%
BZH 24-Mar-08 -214 10.99 -2,343.86 2.28 -487.92 -61.87% 69.31% 79.18% 162.20%
BAC 8-Sep-08 -69 34.73 -2,388.37 24.17 -1,667.73 -30.94% -41.42% 30.17% 515.49%
GS 8-Sep-08 -14 169.73 -2,368.22 92.50 -1,299.90 -27.73% -56.99% 45.11% 1201.23%
HBC 8-Sep-08 -30 79.11 -2,365.30 59.00 -1,770.00 -27.01% -29.52% 25.17% 369.76%
DUG 10-Sep-08 56 42.83 2,406.48 37.05 2,186.91 -4.63% 2.97% -9.12% -49.60%
BBY 19-Sep-08 -58 41.49 -2,398.42 26.88 -1,567.16 -28.32% -48.95% 34.66% 1230.08%
MA 19-Sep-08 -11 225.18 -2,468.98 147.82 -1,627.67 -16.64% -31.31% 34.08% 1180.79%
WMT 19-Sep-08 -40 59.70 -2,380.00 55.81 -2,232.40 -6.81% 17.42% 6.20% 68.75%
CAB 19-Sep-08 170 14.08 2,401.60 7.95 1,351.50 -34.19% -47.25% -43.73% -99.33%
WFC 09-Oct-08 -73 33.06 -2,405.38 34.05 -2,485.65 n/a 14.45% -3.34% -43.08%
cash 16,906.53 31,343.96
ISOP 03-Jan-07 10,000.00 24,826.77 7.70% 13.65% 148.27% 64.54%
Global HF 03-Jan-07 10,000.00 9,429.20 -6.01% -15.15% -5.71% -3.17%
NASDAQ 03-Jan-07 2,415.29 1,720.95 -17.73% -35.11% -28.75% -16.94%

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—or minus for short positions—the value of dividends)
Change = Change since last report (not applicable for positions new since last report)
Year-to-Date = Change since 31 Dec 07
Return on Investment = on a percentage basis, the performance of this security since purchase
Compounded Annual Growth Rate = annualized ROI for this position since purchase (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: The ISOP was a bedrock of stability this month; with the market going totally insane in terms of volatility, we felt constrained to make only one transaction…and that was essentially a move to bring the port more into congruence with the way it used to be, in that we replaced our Wachovia (WB) short position (covered last month) with a short position in the stock of the company that acquired WB, viz. Wells Fargo (WFC). A big contrast from last month, when we had a portfolio-record 14 transactions in moving to a net short stance. Speaking of our shorts, we did cheerfully pay out several dividends for our financial services and retailing stocks (when you are short a stock that pays a dividend, you have to pony it up).

  • 3 Oct—paid out BBY dividend of $0.14/shr
  • 8 Oct—paid out MA dividend of $0.15/shr
  • 9 Oct—Sold short 73 WFC for $33.06/shr
  • 23 Oct—paid out GS dividend of $0.35/shr

News:

Comments: LOL you might think that the amount of effort that goes into managing portfolios in a month with one transaction would be a lot less than the effort expended in a 14-transaction month…but when the market is going insane and repricing everything from day-to-day, just about the same degree of close attention is required, regardless of whether or not anything is being bought or sold. On average, the NASDAQ goes up about 10% a year…well there were two DAYS in October where the NASDAQ index was up 10%+…and this in a month were overall, the index was down 18%, the two gigantic up days notwithstanding.

The level of volatility this month was positively staggering. Normally, the index changes (up or down) an average of about 0.5% each day. The average daily change in October: ±3.7%…more than seven times normal!

Obviously, when the level of systemic risk is high, the potential variation in the value of any given company is extremely high, depending. For example, if the economy recovers, then Best Buy (BBY)—which we are short—is worth, say, $15+ billion. But if we fall into a depression where no one can afford to buy big flat screen TVs, then maybe they go out of business. Pretty big range in valuation! Add to that the complexities of the economy, and the impossibility of instantly and accurately calculating the impact of the latest government actions, the inevitable result is a wildly gyrating consensus.

Be that as it may, when the dust settled, we were +8%, the hedgies were -6%, and the NASDAQ was, as we said, -18%. A great month for the good guys! Overall after 22 months of operations, the ISOP is now +148% compared with -6% for the hedgies and -29% for the NASDAQ.

It was a bull market for news this month. On 3 October, W signed the bank bailout bill (after rejecting it last month, the House took another vote after some fig leaves were applied and enough Republicans changed their votes to “yes” to pass it). Also on 3 October, Wells Fargo (WFC) outbid Citigroup (C) for our former short, Wachovia (WB). On 6 October with the market tanking, the Fed announced an emergency $900 billion in short-term loans to banks (this is in addition to TARP funds). On 7 October with the market tanking still more, the Fed announced an emergency move to lend $1.3 trillion to non-financial services companies. On 8 October with the market still on the express elevator headed for the sub-basement, the Fed cut interest rates in a move coordinated with other prominent central banks including those of China, the ECB, the UK, and Switzerland. Overall, the S&P 500 dropped 18.2% for the week ending 10 October, its worst week ever. On 14 October, the US Treasury announced distribution of $250 billion of the TARP funds in the form of loans to several large banks, including our shorts Bank of America (BAC), Goldman Sachs (GS), and Wells Fargo (WFC) as well as C and others. On 21 October, the Fed announced another emergency short-term loan program, this time to money market mutual funds, which had stopped lending to banks in the wake of a huge wave of redemptions.

The fix is clearly in, with Democrats in Congress and working hand-in-glove with the Republican Secretary of the Treasury and Republican appointee Fed Chairman Ben Bernanke to “stablize” the current broken-down system. It appears that none of the broken financial services companies—not even AIG, Freddie Mac (FRE), or Fannie Mae (FNM), who are in the worst shape—will be allowed to fail so long as the Fed’s printing presses are still able to pump out funds to loan them to “tide them over.” W has practically turned invisible during the crisis but evidently has no objections (if any opinions whatsoever). Senator Barack Obama, the Democratic party nominee for President, has pretty carefully avoided saying much of anything, but on 1 October he voted for the bailout (as did his running mate, Senator Joe Biden). The GOP standard bearer, Senator John McCain, has been somewhat more vocal and way more incoherent; in the event, he, too, voted for the bailout on 1 October. We believe this approach is both morally wrong—bailing out wealthy bankers with taxpayer money—and shortsighted, in that it will only delay the day of reckoning and ensure both that the eventual nadir will be lower and the recovery therefrom harder and longer.

Speaking of hard, that it was for our portfolio, as ever single equity was down in October. (WFC, which we are short, was up between the day we bought it—9 October at the open—and the end of the month but we obviously sold it short too late because it was down overall for the month.) Fortunately, we are now short eight positions and long only six so on balance, a down market is a good thing for our portfolio. Among the long positions, our two biotech companies (VRTX down 21% and NBIX down 12%), our gold miner (GSS down 42%), and our relatively new retailer (CAB down 34%) were no help whatsover.

We also own DUG, which is an ETF that is supposed to move twice the inverse of the price of oil…well crude was down sharply in October, but on extremely volatile trading, and DUG somehow managed to lose 5%, declining more on the days that the price of oil increased sharply that it gained on the days oil declined. We need to keep this one on a short leash as it is evidently poorly designed and not behaving as we expected it to.

Aside from the aforementioned WFC, we were very happy with the performance of our shorts. Our real estate short (BZH) was down 62%! The other financials shorts were all down sharply (BAC -31%, GS -28%, and HBC -27%). All three retail-related shorts were down big (BBY -28%, MA -17% and WMT -7%).

Clearly, the risk of a serious downturn continues to be significant here, and consequently we remain net short.

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SELL PowerShares Water Resources (PHO)

Posted by intelledgement on Tue, 11 Nov 08

We are hitting the silk here—at a loss, to boot—not because we don’t like the infrastucture/fresh water scarcity story long term, but because we like the dollar more with deflation looming…and we expect to be able to get more shares of PHO for our money down the road aways.

Previous PHO-related posts:

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Golden Star Resources (GSS) update #9

Posted by intelledgement on Tue, 04 Nov 08

We are beginning to wonder if our red ink-producing gold mining spec play, Golden Star Resources (GSS), might be better off reincorporating as a non-profit charity, in the wake of their 3Q08 results announced today. This comes in the wake of the juxtaposition of last month’s announcement (click here and then on “Golden Star Awarded Nedbank Capital Green Mining Award”) that the company had won the Nedbank Capital Green Mining award—in consideration of the company’s Golden Star Oil Palm Plantation Project (GSOPP), which grants four-hectare farm plots to qualifying farmers—and their seventh consecutive (and worst-yet) money-losing quarter.

Today, the company unveiled 3Q08 losses of $22.4 million (10 cents/share) on sales of $74 million. Not much mystery here; the company sold each ounce of gold for $897, but it cost them $866 to produce each ounce…a gross profit margin that is no where’s near fat enough to cover overhead. $866 is a new record for the highest quarterly cost per ounce, and extends an unhappy trend line:

  • 4Q07 = $602/oz
  • 1Q08 = $652/oz
  • 2Q08 = $757/oz
  • 3Q08 = $866/oz

This vector is unsustainable; if management cannot figure out how to stop the bleeding here, the company—or at least their mining operation in Ghana—is doomed. Fortunately, there is a reasonable expectation for improvement: $60-to-$85 of the 3Q08 cost is attributable to doubled rates for electricity that Ghana imposed on miners (click here and then on “Golden Star Reports Increases in Power Costs in Ghana”) to offset the huge run-up in the price of oil, and the miners are negotiating for some relief, which is likely now that oil prices have retreated from their summer highs. And the mix of gold production this quarter was skewed towards the more expensive Bogoso/Prestea facility as one of the two milling facilities at Wassa was disabled (click here and then on “Golden Star Announces Wassa Mill 2 Repairs Complete”) due to a pinion gear malfunction—and that has now been fixed.

Still, the burden of proof on management to make this operation work economically is getting heavier following what is now seven consecutive quarters of red ink. This is not what we signed up for, and if things don’t improve soon, we will be looking for greener pastures.

Previous GSS-related posts:

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Vertex (VRTX) update #20

Posted by intelledgement on Mon, 03 Nov 08

Shares of VRTX, our development-stage biotech company, popped up as much as 5% today in the wake of the presentation of new data over the weekend at the biannual American Association for the Study of Liver Diseases meeting in San Francisco. The data—from the company’s unusually large phase 2 trials which have recently been completed—confirmed the efficacy of telaprevir in treating hepatitis C patients who had previously failed to be cured by the current standard of care treatment (48 weeks of interferon plus ribaviron).

Also, there were more data indicating that a twice-a-day regimen of telaprevir may suffice, from interim results of another ongoing phase 2 trial.

For more details on all the results, check out the press release from Saturday. And for a good summary of where telaprevir stands in relation to the competition—primarly, Schering-Plough’s boceprevir—see Adam Feuerstein’s report from the AASLD posted early today.

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Cabela’s (CAB) update #2—3Q08 results: record sales, but weaker outlook

Posted by intelledgement on Sun, 02 Nov 08

Another quarter, another sales record.

Cabela’s (CAB), our outdoors provision retailer and direct marketer, announced 3Q08 results Thursday and for the 18th time out of 18 quarters since the company went public in 2004, their revenues set an all-time record for that quarter. Sales in the quarter amounted to $612 million, 12% ahead of last year’s then-all-time-record-3Q sales of $547 million. Of course, the company has more outlets now than a year ago, most notably their first “next generation” 80,000 square foot store which opened in Rapid City this quarter. Same store sales were actually down 9% and profits declined 27% to $10 million from $13 million a year ago.

“The challenging macro-environment, general consumer concerns about the economy and the unprecedented events in the financial markets impacted sales trends in our business during the quarter,” stated CEO Dennis Highby. “We continue to monitor our business carefully and remain focused on managing factors within our control, including executing on our profit-improvement initiatives, implementing additional cost reductions and aggressively managing inventory levels. To that end, we have experienced significant improvements in inventory levels and cash generated from operations. Additionally, despite the difficult environment we continue to gain market share, grow our direct customer file and add Cabela’s CLUB Visa cardholders. The significant progress we have made in these areas positions us extremely well for future market share growth.”

The company cut their guidance on overall revenue growth for 2008 from around 15% to less-than-10% and slashed profit projections from a 5% increase over 2007 to a 10%-to-15% decline. The market reacted well to the report, with the stock up 7.6% on Thursday and, after opening sharply lower, finished the day Friday up another 2.4%. Of course this may have had more to do with the overall market rallying both days, after falling as much as 32% between 19 September—the day we bought CAB—and Tuesday.

In any event, we are licking our wounds here—now down 34% since buying the stock six weeks ago—but with sales holding up as well or better than expected and the basic business model extremely sound, we are here for the long haul.

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