Macro Tsimmis

intelligently hedged investment

1Q09 Intelledgement Macro Strategy Investment Portfolio Report

Posted by intelledgement on Mon, 13 Apr 09

Summary of Intelledgement’s Model Macro Strategy Investment Portfolio performance as of 31 Mar 2009:

Position   Bought   Shares Paid Cost Now Value Change YTD     ROI     CAGR
FXI 03-Jan-07 243 37.15 9,035.45 28.53 7,289.13 -1.83% -1.83% -19.33% -9.09%
GLD 03-Jan-07 142 63.21 8,983.82 90.28 12,819.76 4.35% 4.35% 42.70% 17.09%
IFN 03-Jan-07 196 45.90 9,004.40 16.93 6,185.76 -4.16% -4.16% -31.30% -15.35%
SLV 03-Jan-07 700 12.86 9,012.80 12.79 8,953.00 14.20% 14.20% -0.66% -0.30%
DBA 13-Mar-08 235 42.50 9,995.50 24.49 5,755.15 -6.46% -6.46% -42.42% -40.93%
SCC 16-Sep-08 112 86.23 9,665.76 85.80 13,437.11 0.86% 0.86% 39.02% 84.76%
SZK 16-Sep-08 145 68.25 9,904.25 87.20 15,417.18 14.17% 14.17% 55.66% 128.11%
TBT 21-Jan-09 233 42.84 9,989.72 43.64 10,168.12 n/a 15.66 1.79% 9.82%
cash 24,408.30 33,282.42
Overall 31-Dec-06 100,000.00 113,307.62 7.20% 7.20% 13.31% 5.73%
Macro HF 31-Dec-06 100,000.00 107,769.25 0.46% 0.46% 7.77% 3.38%
S&P 500 31-Dec-06 1,418.30 797.87 -11.67% -11.67% -43.74% -22.58%

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 = on a percentage basis, change since last report (blank for positions new since last report)
YTD = on a percentage basis, change since the previous year-end price
ROI (Return on Investment) = on a percentage basis, the performance of this security since purchase
CAGR (Compounded Annual Growth Rate) = annualized ROI for this position since purchase (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 2008 inclusively) provides a CAGR of around 14.3%. For comparison’s sake, we also show the S&P 500 index, which historically provides a CAGR of around 10.5% (although only +6.37% since 1988). 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: Three purchases and three sales—two of which canceled each other out:

Performance Review: An excellent quarter for us, as we were up 7%, beat the macro hedgies—who were flat—handily, and buried the S&P 500—who lost 12%.

Tactically, it was a quarter of gyrations. In mid-February, as the initial “obtimism” that the new administration would solve all our problems dissipated, we manuevered the portfolio sharply to the short side, with a peak of six out of our 11 total equities—SCC, SZK, SDS, TBT, PSQ, and DOG—positioned to rise as the market headed south. But barely a month later, the risk of another sharp bear-market rally—like the one that raged last Nov-Dec—waxed notably, and we cashed in half of the inverse ETF positions, booking a healthy short-term profit.

Overall, we are now 57 points ahead of the market: +13% for us and -44% for the S&P 500 in the 27 months since the inception of the model at the end of 2006. We are also beating the GAI Global Macro Hedge Fund Index over the same time span, +13% to +8%.

Analysis: As we discussed last quarter, the watchword continues to be volatility.

Our strategy is to look for long term investment opportunities congruent with macro trends, such as the rise of the Chinese, Indian, and Brazilian economies while tactically hedging against risks such as the collapse of fiat money in general and the dollar in particular with commodity plays. However, the systemic risk we have experienced over the last nine months has engendered extraordinary volatility—both down and up—as the market has struggled to process and integrate extreme eventualities into valuations. The intrusion of politics into economic decision-making has exacerbated this volatility. Consider: under normal circumstances—let’s say, from March 1950 through June 2007—the average daily change in the value of the S&P 500 index is 0.57% (up or down)…but since then, here are the number of days in each quarter categorized by the daily move up or down rounded to the nearest percentage, and the overall average:

Year 0% Days 1% Days 2% Days 3% Days 4% Days 5% Days 6% Days 7-9% Days 10%+ Days Average Daily Change
3Q07 27 23 10 3 0 0 0 0 0 0.83%
4Q07 23 27 8 6 0 0 0 0 0 0.97%
1Q08 10 33 13 4 2 0 0 0 0 1.27%
2Q08 33 18 10 2 1 0 0 0 0 0.75%
3Q08 17 21 15 4 3 3 0 1 0 1.53%
4Q08 4 19 6 9 9 5 5 5 2 3.27%
1Q09 11 17 14 9 4 4 1 1 0 2.00%

Thankfully, in 1Q09 we backed off of the surreal level of volatility experienced in 4Q08…which is to say, instead of nearly 6x normal volatility, we “only” had 3.5x normal. But the point is, when we are experiencing single days when the market moves as much as it normally moves in an entire year, one’s perspective as to what constitutes a “long term investment” is subject to being telescoped.

There’s trouble, right here in River City. In living beyond our means, we’ve been digging our own grave for years, and the new U.S. administration’s main plan to fix the problem seems to be borrowing (more) money to afford everyone the latest and greatest new shovels. 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. Yet it appears this is to be our plan of action…along with providing universal health care, switching to more expensive energy, building highspeed rail systems…etcetera, etcetera…all with (more) borrowed funds.

And we don’t believe the economy has bottomed out. The negative feedback loop of less demand-more unemployment-less demand is still intact. There are many more residential foreclosures looming, which will continue to devalue housing prices, which also inhibits demand (as consumers are less wealthy). And more credit card defaults, which dry up credit, which also inhibits demand. We’ve barely begun to scratch the surface of commercial real estate foreclosures, and the concomitant bad loans, and the ramifications for the lenders.

So we believe things are headed south. And yet, in March we sold half our short ETFs (that go up when the market declines). Why? Because this market is so volatile, that we felt it was risky to stay short in the face of “obtimism” that the new administration would somehow work a miracle. We held our short positions last November in the teeth of a post-election rally…and saw the value of the portfolio decline 29% in six weeks. Once burned, twice cautious. But, unfortunately, we do expect to be going short again, this quarter or next.

Conclusion: Things will almost certainly get worse; the real question is, how much worse? As of 1 April, we retained three inverse ETFs in the portfolio…covering the consumer goods (SZK) and services (SCC) sectors as well as long-term Treasury bonds (TBT), which we expect to decline in value as interest rates inevitably rise in order to entice buyers of the copious outpourings of US debt. 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. If the rally that ensued in March persists, we may further lighten up on the shorts and temporarily go long energy or Brazil.

But batten down the hatches. Upgrade your vegetable patch, make sure your emergency supplies of batteries, dried food, and water are current, check the ammo for your shotgun, and touch base with the neighbors to encourage them to be prepared, too. The odds still favor things not getting that bad…but those odds are not as good as they were three months ago.


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