Macro Tsimmis

intelligently hedged investment

4Q08 Intelledgement Macro Strategy Investment Portfolio Report

Posted by intelledgement on Wed, 14 Jan 09

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

Position   Bought   Shares Paid Cost Now Value   Change       ROI     CAGR
FXI 03-Jan-07 243 37.15 9,035.45 29.09 7,425.21 -14.48% -17.82% -9.38%
GLD 03-Jan-07 142 63.21 8,983.82 86.52 12,285.84 1.70% 36.76% 17.01%
IFN 03-Jan-07 196 45.90 9,004.40 18.30 6,454.28 -19.68% -28.32% -15.38%
SLV 03-Jan-07 700 12.86 9,012.80 11.20 7,840.00 -5.49% -13.01% -6.76%
DBA 13-Mar-08 235 42.50 9,995.50 26.18 6,152.30 -13.34% -38.45% -45.39%
SCC 16-Sep-08 112 86.23 9,665.76 84.78 13,322.87 17.64% 37.84% 202.14%
SZK 16-Sep-08 145 68.25 9,904.25 74.01 13,504.05 29.04% 36.35% 191.03%
SDS 19-Nov-08 88 112.98 9,950.24 70.94 7,253.88 n/a -27.10% -93.60%
cash 24,447.78 31,458.21
Overall 03-Jan-07 100,000.00 105,696.64 -4.81% 5.70% 2.81%
Macro HF 03-Jan-07 100,000.00 107,271.13 -0.91% 7.27% 3.57%
S&P 500 03-Jan-07 1,418.30 903.25 -22.56% -36.31% -20.18%

Position = security the portfolio owns
Bought = date position acquired
Shares = number of shares the portfolio owns
Paid = price per share when purchased
Cost = total paid (price per share multiplied by # shrs plus commission)
Now = price per share as of date of report
Value = what it is worth as of the date of report (price per share multiplied by # shrs plus value of dividends)
Change = Change since last report (blank for positions new since last report)
ROI (Return on Investment) = on a percentage basis, the performance of this security to date
CAGR (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 1% rate of interest on the listed cash balance.

Transactions: Another relatively active quarter with five transactions—three sells and one buy—plus the usual bevy of year-end dividends and capital gain distributions:

  • 7 Oct – IFN dividend of $6.45/shr
  • 11 Nov – Sold 489 PHO for $13.02/shr (ROI of -28.8% and CAGR of -16.7%)
  • 19 Nov – Bought 88 SDS for $112.98/shr
  • 16 Dec – Sold 92 SRS for $61.74/shr (ROI of -35.27% and CAGR of -27.78%)
  • 16 Dec – Sold 97 SKF for $104.70/shr (ROI of 1.5% and CAGR of 4.9%)
  • 22 Dec – FXI dividend of $0. 20802/shr
  • 23 Dec – SCC dividend of $0.008631/shr and capital gains distribution of $33.91358/shr
  • 23 Dec – SZK dividend of $0.006616/shr and capital gains distribution of $18.85726/shr
  • 23 Dec – SDS dividend of $0.028553/shr and capital gains distribution of $11.46188/shr

Performance Review: A mediocre quarter for us, as we beat the market by a country mile, but still both lost to the macro hedgies and lost money overall. For the market, at -22.6% it was not just the worst quarter since the inception of the IMSIP two years ago, but the worst quarter since the fourth quarter of 1987—which included Black Monday—when it finished  -23.3%. The S&P also recorded its worst six month period, -29.4%, since 1974 when it logged -32.4% in the second and third quarters. As for the hedge fund pros, overall 2008 was the first ever negative annual return for the industry since Greenwich Alternative Investments (GAI) began keeping track in 1988. Hedge funds overall clocked in at -15.95% for the year; macro hedge funds, however—our heros!—were the fourth-best performing class out of 18 tracked by GAI at -4.8% for 2008. Not so bad in a year when the market produced a -38.5% ROI.

Tactically, our sale of the water infrastructure ETF PHO in early November was probably a bit premature, as it could run up here on stimulus package-related “obtimism” (that is, Obama administration-related optimism that things will turn around—or, at least, a lot of money will get spent on infrastructure—under new leadership after the inauguration on 20 January). It ended the year at $14.39, so at a minimum, a little patience would have netted us a better sale price. We also should have waited on our SDS purchase in mid-November, for the same reason. Obtimism could drive the price down in the short-to-medium term; certainly the price at the end of the year, $70.94, would have been a much better entry point than the dividend-adjusted $98.10 we paid. Pursuant to our recent analysis of the performance of leveraged short ETFs, we will be looking to replace this fund with the 1x SH fund when the opportunity presents itself.

Obtimism considerations lead us to dump our reverse ETFs for the financial (SKF) and real estate (SRS) sectors in mid-December. So far, so good on this front, as both were lower at the end of the year. Sad to say, we anticipate buying back in post-20 January—once obtimism about how quickly the new administration can effect economic recovery abates—as we still expect things get worse before they get better. (As of now, there are now 1x inverse financial or real estate sector ETFs available.)

Overall for the two years we’ve been tracking the IMSIP, we are now narrowly trailing the GAI Macro Hedge Fund Index, +6% for us to +7% for them. The market overall is a very distant third at -36%.

Analysis: Too bad we don’t recommend individual stocks for most clients because if we did, a neck brace manufacturer would look good just about now. While 4Q08 at -22.6%s was not the worst ever for the S&P 500, it may well have been the most volatile quarter ever. Normally, the daily ebb and flow of prices amounts to less than ±1% for the S&P 500 index. If you round off the nearest whole number, the average daily change in the S&P 500 in all of 2006 was 0%…in 2007 it was 1%…and last year it was 2%. Here is a comparison of the fourth quarter for all three years:

Year 0% Days 1% Days 2% Days 3% Days 4% Days 5% Days 6% Days 7-9% Days 10%+ Days
4Q06 48 15 0 0 0 0 0 0 0
4Q07 23 27 8 6 0 0 0 0 0
4Q08 6 16 6 9 9 5 6 4 2

Six days in 4Q08—10% of the trading sessions—on which the market was up or down between 7% and 12%! About six year’s worth of value change in six days! Folks, this is a cry for help. The market is telling us that no one knows from day-to-day what the right value for stocks is. And the reason this uncertainty exists, in our opinion, is that almost all the “rescue” plans promulgated so far by the Paulson administration (W having apparently taken early retirement here) seem to be aimed at papering over our problems, rather than dealing with them forthrightly and genuinely moving forward.

As we have said before, we got into this mess by overspending, borrowing beyond our means, and speculating on bubble-valued assets. Any “solution” that involves lowering interest rates, increasing our debt levels, and easing credit/issuing more money is, essentially, attempting to put out a fire by dousing it with gasoline. The government does not have the resources to “rescue” all the zombie banks whose obligations exceed their assets, not to mention all the homeowners whose mortgage obligations now exceed the value of their properties, not to mention all the industrial companies whose profligate and short-sighted management have left them vulnerable to the economic tsunami we are experiencing…etcetera, etcetera. Aside from laudibly refusing to rescind the mark-to-market rule, the only honest move the administration made in this sorry mess was allowing Lehman Brothers to go bankrupt…and typically, that is now seen as a misstep.

The one facet of our desultory march into hades has surprised us is the strength of the dollar. We expected that the gobs of money the Fed has injected into the system in an effort to stimulate lending would be immediately inflationary; we failed to adequately reckon with two contrary effects. The first of these is the deflationary effects of demand destruction. When everyone has degraded retirement savings, a home that is worth 30% less, and—if still employed—job security issues, no one is out there buying new cars or even new clothes…or, at least, not with the same old reckless abandon. When demand fades, supply waxes…and prices fall. The second effect that surprised us was the flight-to-safety effect that—ironically—has money piling into treasuries. So desperately were money managers seeking a safe haven for funds that last month we had the spectacle of the USA borrowing money at 0% interest! Folks, when the safest place on the planet to put money is in bonds issued by a virtually insolvent government, we are in deep doo-doo.

Of course, Paulson is history and Obama is imminent. No matter what, 20 January will be a day of optimism and celebration for the USA. Perhaps the new man’s vaunted pragmatism will light the way towards smarter and less short-range responses. We hope so with our hearts, but our heads are saying, “don’t invest on it.”

Conclusion: Let’s hope for the best. The incumbant crew was most definitely leading us deeper into the morass; the new crew recognizes we are in a big hole…perhaps they will be smart and brave enough to stop digging. We subscribe to the injunction to make love, not war, but we still believe in being prepared for both. Accordingly, we retain three inverse ETFs in the portfolio…covering the consumer goods (SZK) and services (SCC) sectors as well as the S&P 500 overall (SDS). We still expect the cumulative effect of the liquidity injections and increased need for borrowing by the USA to eventually degrade the dollar’s value, and consequently remain long our commodity plays (GLD, SLV, and DBA). And finally as a hedge against a quicker-than-anticipated recovery, we still retain our China and India emerging market funds (FXI and IFN)—as we expect those economies to lead the recovery.

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