Macro Tsimmis

intelligently hedged investment

Archive for July, 2009

BUY MSCI Malaysia Index (EWM…again)

Posted by intelledgement on Tue, 21 Jul 09

As those who were with us when we launched this portfolio back at the end of 2006 may recall, Malaysia is one of our favorite places to invest outside of the USA, and the iShares MSCI Malaysia Index ETF was one of our original 11 positions. But in March 2008, we liquidated the position at a profit (ROI of 29% and CAGR of 24%), as we moved to a more defensive position.

Now that we are lightening up on our shorts, we are looking to increase our long exposure and EWM looks good here, at virtually the same price we got it at back in January 2007. Meantime, conditions for business in Malaysia remain strong. Their per capita GDP is up from $14,200 in 2006 (the latest number we had in January 2007 was $12,900 in 2005) to $15,300 in 2008. For comparison’s sake, they are just behind Russia ($15,800) but well ahead of Brazil ($10,100), China ($6,000), and India ($2,800)…not to mention Mexico ($14,200), Turkey ($12,000), and Thailand ($8,500), to name a few. The BRIC countries are all growing faster, and GDP growth was down in 2008 to +5.1%, but that still looks good from here (the USA was +1.3% in 2008).

The iShares MSCI Malaysia Index exchange-traded fund (EWM) is heavily weighted towards financial services (31%) and industrials (20%), aptly reflecting the sweet spots of the Malaysian economy. There is also significant representation for consumer staples (15%), consumer discretionary (13%), utilities (13%), and telecom (7%), reflecting the high income levels of the populace. The P/E ratio is running around 16 and the yield is 3%. EWM is moderately traded (1.2MM shares/day).

Previous EWM-related posts:

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SELL ProShares Short S&P500 (SH), Short QQQ (PSQ), & Short Dow30 (DOG)

Posted by intelledgement on Tue, 21 Jul 09

We still believe there is a lot more “down” coming, but for the time being the bulls are clearly in charge here, and we remain chastened by our error in staying short during the rally last November-December, which cost us a 29% haircut.

So despite continued rising unemployment, falling house prices, deepening government debt, and  a weakening dollar…despite looming commercial real estate and credit card default issues…despite government policies that seem tailored to extending and worsening the economic decline (bailing out failed institutions, failing to address serious systemic flaws with respect to the market for synthetic “securitizationed” equities such as credit default swaps and mortgage-backed securities, not to mention the naked short-selling scandal, increasing health care and energy costs and raising taxes on business)…we are cashing in our short chips here to ride out the bull-market storm. This market is too volatile to ignore sentiment which can drive two-or-three year’s worth of “normal” movement into just a few weeks…even if such a move is in the “wrong” direction.

We’ll be back.

Previous index short ETF-related posts:

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2Q09 Intelledgement Macro Strategy Investment Portfolio Report

Posted by intelledgement on Tue, 14 Jul 09

Summary of Intelledgement’s Model Macro Strategy Investment Portfolio performance as of 30 June 2009:

Position   Bought   Shares Paid Cost Now Value Change     YTD         ROI       CAGR  
FXI 03-Jan-07 243 37.15 9,035.45 38.37 9,759.47 33.89% 31.89% 8.01% 3.13%
GLD 03-Jan-07 142 63.21 8,983.82 91.18 12,947.56 1.00% 5.39% 44.12% 15.73%
IFN 03-Jan-07 196 45.90 9,004.40 31.11 8,965.04 44.9%3 38.90% -0.44% -0.17%
SLV 03-Jan-07 700 12.86 9,012.80 13.38 9,366.00 4.61% 19.46% 3.92% 1.55%
DBA 13-Mar-08 235 42.50 9,995.50 25.45 5,980.75 3.92% -2.79% -40.17% -32.68%
TBT 21-Jan-09 233 42.84 9,989.72 50.92 11,864.36 16.68% 34.96% 18.77% 48.08%
DOG 21-May-09 146 68.23 9,969.58 66.50 9,709.00 n/a -2.99% -2.61% -21.48%
PSQ 21-May-09 163 61.29 9,998.27 56.35 9,185.05 n/a -22.84% -8.13% -53.91%
SH 21-May-09 146 68.44 10,000.24 65.71 9,593.66 n/a -8.76% -4.07% -31.55%
cash 14,010.22 29,745.37
Overall 31-Dec-06 100,000.00 117,116.26 3.30% 10.79% 17.12% 6.53%
Macro HF 31-Dec-06 100,000.00 113,249.73 5.09% 5.57% 13.25% 5.11%
S&P 500 31-Dec-06 1,418.30 919.32 15.22% 1.78% -35.18% -15.94%

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 (not applicable 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 since January 1950 has produced a CAGR of around 8.0% (although only +6.4% since 1988). Note that for our portfolio’s positions, 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: The busiest quarter in the two-and-a-half year history of the portfolio, with five purchases and four sales:

Performance Review: An adequate quarter for us in absolute terms, as we were up 3%, although in relative terms we were outshone by the macro hedgies—who were up 5%—and were lapped four times by the S&P 500—who recorded a spectacular +15% quarter, easily their best since the inception of the IMSIP two-and-a-half years ago.

Tactically, it’s hard to tell if we are coming or going. We started the quarter with two long positions (China and India), three inflation-hedge commodity positions (gold, silver, and agriculture), and three short positions (consumer goods, consumer services, and treasuries), down from six short positions earlier in 1Q09. With the market rally gathering stream, we sold off the two consumer short funds at the start of the quarter, and then in May, briefly got longer with a Brazil and energy ETF. But the market rally fizzled and as our strategic bias remains negative, we jettisoned those positions after just a week, and then took positions in index short funds for the DOW, S&P 500, and NASDAQ. So at the end of the quarter, the overall lineup includes the same two long positions (China and India), the same three inflation-hedge commodity positions (gold, silver, and agriculture), and now four short positions (treasuries plus the three index shorts).

Overall, we are now 52 points ahead of the market: +17% for us and -35% for the S&P 500 in the two-and-a-half years since the inception of the model at the end of 2006. And we are still ahead of the GAI Global Macro Hedge Fund Index, +17% to +13% (as we have been every quarter since inception except 4Q08).

Analysis: 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 year 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. As a result, it is difficult to implement any static long-term strategy without risking significant short-term capital losses.

The good news is we have now had two consecutive quarters of relatively calmer trading. 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—2.00% average daily change, down from 3.27%. And the sequential decline in the direction of normalcy (0.58%) continued in 2Q09, when the average daily change in the S&P 500 was “only” 2.2x normal (1.27%).Should this calming trend continue, the obvious implication would be that in the collective wisdom of the market, there is less uncertainty as to the valuation of equities. Such a development would be bullish, as the uncertainty is much more defined by the spectre of systemic risk than it is by the fear that we are grossly undervaluing GOOG or GE or C here. In other words, if the market is materially misvalued, it is much more likely that it is overvalued here than undervalued. Thus as the likelihood that the market is misvalued declines, the risk of a near-term market collapse is perceived to decline along with it. This is not quite the same thing as saying that the actual risk of a sudden sharp drop has declined—given all the shoes of Damocles hanging up there that could drop at any moment—but if investors and traders believe the risk has declined, they are more likely to bid prices north until such time that someone in plain view gets beaned with a dropping shoe.

As we have said before, we got into this mess by overspending, borrowing beyond our means, and speculating on bubble-valued assets. And we still don’t believe the economy has bottomed out. The negative feedback loop of less demand-more unemployment-less demand is still chugging along. 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.

We believe that the policies the Bush administration implemented—and the Obama administration has continued—of attempting to paper over the cracks in the system with bailouts of bad banks, bad real estate loans, bad credit default swaps, and bad industrial companies are neither the morally correct thing to do nor in our own long-term self interest. To the extent these actions succeed in postponing our day of reckoning—manifestly, they have done so for at least a year now—they ultimately succeed primarily in digging us into a deeper hole. No matter how brilliantly one conducts a retreat down a blind alley, in the end, there’s nowhere to go—and by then, the long-lasting damage to our financial institutions and to our confidence in our own ability to manage our affairs will be greater, and our resources and capacity to retrace our steps and chart a new path will be much reduced.

And speaking of reduced resources, the Obama administration seems hellbent on making things worse, with plans to fritter away our scant remaining funds on a myriad of grandiose mandates such as providing subsidized health care and promoting production of uneconomic energy. They can’t even come up with a stimulus package without vectoring the majority of the funds to exisiting Federal, state, and local government programs rather than allocating them to new job-creating infrastructure work, as they originally promised.

Of course, it is in the interests of both government policy makers and financial institutions to make a silk purse out of a sow’s ear with respect to these dubious policies. If folks stop believing that government policies have a reasonable chance of succeeding here, all sorts of unpredictable behavior could ensue. Therefore, we are likely to continue to hear the message that things are getting better, no matter what the reality.

Consequently, we continue to forecast heavy weather ahead, with a risk of unaccountable bouts of sunshine. Those are more likely than not eyes in the storm; conducting picnics during them is not advised.

Conclusion: Things will almost certainly get worse…but when, and how much worse? As of 1 July, we have four inverse ETFs in the portfolio…three short index funds covering the DJIA (DOG), S&P 500 (SH), and NASDAQ (PSQ) respectively—these go up if the market goes down and vice versa—as well as the short long-term Treasury bonds ETF (TBT), as we expect 20+ year treasure bonds 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. Indeed, if we perceive increased risk of a sharp rally similar to the ones that started in November 2008 and March 2009, we may again lighten up on the shorts and temporarily go long energy or Brazil as we did in 2Q09.

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Vertex (VRTX) update #28

Posted by intelledgement on Sun, 12 Jul 09

Yay!

Vertex Pharmaceuticals (VRTX) have come up with a cash-raising mechanism that does not require the dilution of all existing shares: they are selling their rights to receive $250 million in milestone payments from Janssen Pharmaceutica N.V., a Johnson & Johnson (JNJ) company, for the successful development and launch of their hepatitis C drug, telaprevir, in the European Union. Shareholders reeling from a succession of dilutive secondaries and other transactions—seven million shares sold in Feb 08, nine million shares sold in Sep 08, ten million shares sold in Feb 09, ten million shares issued to the owners of ViroChem Pharma in Mar 09 to acquire that company, seven million shares exhanged with bondholders to retire convertible notes due 2013 in Jun 09—were presumably happy to see the company raise funds without issuing any new shares for once.

According to the press release, “Morgan Stanley is acting as a structural advisor to Vertex in connection with this transaction.”

Previous VRTX-related posts:

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Still not your father’s volatility

Posted by intelledgement on Fri, 03 Jul 09

The second quarter of 2009 is over and there’s good news and bad news on the volatility front.

First the good news: the average daily change in the value of the S&P 500 index for 2Q09 was ±1.3%, down sequentially for the second consecutive quarter from ±2.0% in 1Q09 and a nightmarish ±3.3%—the highest level of volatility in a quarter since the inception of the S&P 500 index—in 4Q08.

The bad news is that we still have a long way to go to get back to what we like to think of as “normal”—March 1957-to-June 2007, when the average daily change in the value of the S&P 500 index was ±0.6%, and more than half the time—53% of all market sessions during those 50 years—the change in the index rounded to the nearest whole number was 0%. We had such quiescent sessions just 29% of the time in 2Q09.

While the immediate trend shows dampening volatility, on a year-over-year basis, so far 2009 is looking much more volatile than 2008. 1Q09 was 57% more volatile than 1Q08 and 2Q09 was 67% more volatile than 2Q08. This is deceptive, however, because the vast majority of the craziness in 2008 occurred during the second half of the year. Through the first six months of 2009, we are seeing an average daily change of ±1.6% which looks bad compared to the first six months of 2008 (±1.2%) but is squeezing in under the full year 2008 figure of ±1.7%. Unless things become unglued again down the stretch in 2009, the year-over-year comparables are likely to get considerably better.

So, who cares about volatility levels? Well…you do…or at least if you are a long-term investor you should.

In April, we reported that during the 50 years when the market experienced daily volatility averaging ±0.6%, it performed well, and that the poor performance that has pundits proclaiming the death of “buy-and-hold” as a viable strategy is associated with this volatility singularity that we are currently experiencing: daily volatility of ±1.5%—150% higher than normal!—for the last two years. To gain that outlook, we analyzed daily performance data between the present and March 1950, but in conducting subsequent research, we determined that the S&P 500 per se was created in March 1957. The earlier performance data posted on Yahoo! is presumably derived.

Excluding the 1950-to-1957 data is painful, because the market was up a compounded annual growth rate of 14% in that period, but doing so doesn’t change the overall picture: market performance when volatility was low—your father’s volatility—is generally good. Here is a decade-by-decade S&P 500 index performance summary:

Date Price Volatility 10-yr ROI 10-yr CAGR All-time ROI All-time CAGR
04-Mar-57 44.06 n/a n/a n/a n/a n/a
03-Mar-67 88.29 0.39 100.39% 7.20% 100.39% 7.20%
04-Mar-77 101.20 0.56 14.62% 1.37% 129.69% 4.25%
04-Mar-87 288.62 0.60 185.20% 11.05% 555.06% 6.47%
04-Mar-97 790.95 0.54 174.05% 10.61% 1695.17% 7.49%
29-Jun-07 1,503.35 0.79 90.07% 6.42% 3312.05% 7.27%
30-Jun-09 919.32 1.48 -33.73% -16.19% 1986.52% 5.98%

Date = end-date in the time period
Price = final closing price of S&P 500 index for that time period
Volatility = average daily change in absolute value (up or down) of S&P 500 index for the previous ten years
10-yr ROI = total return-on-investment for the previous ten years
10-yr CAGR = compounded annual growth rate for the previous ten years
All-time ROI = return-on-investment since 4 Mar 57
All-time CAGR = compounded annual growth rate since 4 Mar 57

Note that we adjusted the 2007 decade by 90 days to include the last “calm” quarter and isolate the high-volatility quarters into their own decade. And, obviously, the “decade” ending 30 Jun 09 comprises just two years of data.

So, a belated Happy Fathers’ Day to all…and here’s hoping for more of them, volatility-wise, for the rest of 2009 and beyond.

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