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 (Year-to-Date) = 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 the Intelledgement Macro Strategy Investment Portfolio (IMSIP) 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 7.2%. 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: A moderately busy quarter, with three in and three out:
Performance Review: Another adequate quarter for us, as we were up 2%, and now +13% YTD. For the second consecutive quarter we were beaten out by both the macro hedgies—who were up 3%—and by the S&P 500—who recorded a second consecutive great +15% quarter. YTD, the S&P 500 is up 17%, we are up 13%, and the hedgies are up 9%.
Tactically, with the market moving inexorably northwards, we unloaded three of our last four short positions early this quarter—only our short on 20+ year treasury bonds remains—and added three long ETFs (Malaysia, Brasil, and high tech).
Overall, we are now 45 points ahead of the market in terms of total return-on-investment: +20% for us and -25% for the S&P 500 in the 33 months since the inception of the IMSIP at the end of 2006. In terms of compounded annual growth rate, we are edging out the GAI Global Macro Hedge Fund Index over the same time spans, +7% to +6%.
Analysis: The conventional wisdom now is that we suffered a sharp recession in 2007-09, but it is now over and the main question is how sharp and fast the recovery will be. Accordingly, the market in 3Q09 was less volatile and continued to move up dramatically. Two consecutive quarters of +15% ROI is pretty impressive; in an average year, the S&P 500 index is ±16%, so we have had two years worth of movement in the last six months. (Volatility has remained low because the pace of the increase has been steady and—from day-to-day—moderately paced, with no big corrections.)
As we have said before, we got into this situation by overspending, borrowing beyond our means, and speculating on bubble-valued assets. And 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, they ultimately succeed primarily in digging us into a deeper hole.
However, it is clear that the massive tidal wave of liquidity that the central banks—especially the Fed—have loosed on the world has succeeded in buying a significant stay of execution, albeit at the cost of alarmingly increasing the rate of decline in the value of the dollar. Accordingly, we are (as always) long commodities and also long emerging market plays, as we agree with the market perception that those economies will fare better than ours in the near- and medium-term future, although we still anticipate a significant economic disruption that will interrupt their growth…at which point we plan to have our capital elsewhere.
But for now, the sun is shining, so we are making hay. Being short here would, we expect, prove out to be the right stance in the medium term, but right now, we believe the opportunity for long gains outweighs the risk of not being able to shift gears quickly enough when the market turns.
Conclusion: We still believe things will almost certainly get worse…but given the prevalent bullish psychology, we don’t expect the market to perceive the serious problems we see for at least three-to-six months, and possibly up to 24 months with a lot of luck. (Whether it would be good luck or bad for the true nature of our problems not to become evident for another two years is left to the reader to consider as a useful thought exercise.) As of 1 October, we have five long emerging market ETFs in the portfolio: China (FXI), India (IFN), Brasil (EWX), Malaysia (EWM), and US high tech (IYW which we consider an emerging market play as some two-thirds of the revenue of the companies comprising the ETF are ex-USA derived). We have three long commodity plays which are hedges against the decline of the dollar: gold (GLD), silver (SLV), and agriculture (DBA). And we remain 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 have enough cash to undertake two more positions and currently are considering shorting the dollar and a “buy-what-China-needs” play such as going long energy or Canada or Australia.
Finally, the spectre of systemic risk still lurks, and while we do not anticipate it will surface unbidden in the near future, a disruptive macro event (e.g., an Israeli attack on Iran’s nuclear facilities) could roil the waters at any time. Consequently we remain prepared to reconfigure the IMSIP to be more congruent with our medium-term macro analysis.