Macro Tsimmis

intelligently hedged investment

Archive for October, 2009

Dear Senator Hagan,

Posted by intelledgement on Fri, 23 Oct 09

Check out this post on Deep Capture detailing Senator Ted Kaufman’s efforts to recruit cosponsors for his efforts to require the SEC to reinstate the uptick rule and enforce other regulations against abusive short selling. Here is my letter to our North Carolina senators, Kay Hagan and Richard Burr (and please consider sending letters of your own; Deep Capture has a convenient link to all 100 senators’ e-mail interfaces):

Please consider becoming a cosponsor of SB 605: A bill to require the Securities and Exchange Commission to reinstate the uptick rule and effectively regulate abusive short selling activities.

Naked short selling is the generally illegal practice of counterfeiting and selling short shares of stock that the seller has not borrowed (as he or she is supposed to). This pernicious practice by aggressive traders has effectively frozen hundreds of U.S. companies out of the capital markets, making it impossible for them to borrow the money they need to grow—or, in some cases, even survive. It also contributed to the meltdown of Lehman, Bear Stearns, Citibank, Fannie and Freddie, and others last year. And of course it cheats investors who play by the rules and take long positions.

Here is a good summary of how abusive naked short selling works.

The SEC has the authority to enforce regulations limiting naked short selling but has turned a blind eye to the practice for years. I don’t know if this is because regulators are in thrall to the malefactors as some have claimed, or if they are merely incompetent. I do know that if we cannot count on our capital markets to operate fairly, then not only do we lose a significant competitive advantage, but faith in our entire system is undermined.

Senator Kaufman and three other of your colleagues are now seeking cosponsors for SB 605, and have sent you a letter soliciting you to join them. I hope to see your name added to that list.

Thank you for your attention to this matter.

Brad Hessel, Raleigh

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Who is Brooksley Born?

Posted by intelledgement on Thu, 22 Oct 09

A friend of Hillary’s passed over for Attorney General by Janet Reno, she found herself running the Commodities Futures Trading Commission in 1996 and to her growing alarm, discovered potential dangers in the unregulated multi-trillion dollar derivatives market…but when her CFTC proposed regulations, Alan Greenspan, Larry Summers, and Robert Rubin moved to crush her.

“In The Warning, veteran FRONTLINE producer Michael Kirk unearths the hidden history of the nation’s worst financial crisis since the Great Depression. At the center of it all he finds Brooksley Born, who speaks for the first time on television about her failed campaign to regulate the secretive, multitrillion-dollar derivatives market whose crash helped trigger the financial collapse in the fall of 2008.”

This Frontline documentary is 50+ minutes long but well worth the time investment!

(Although…the implication that the government bailouts of the “too-big-to-fail” institutions was the logical outgrowth of Ayn Rand’s philosophy—and the assertion that she was a Libertarian—are wrong. Rand would certainly have opposed Brooksley Born’s proposals, but she would also have allowed AIG et al to reap their own harvest and fail. That would have resulted in more immediate pain, but a quicker and healthier recovery and a lot less risk of repeating the same mistakes. And she was not a fan of Libertarianism.)

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Motley Fool CAPS Roundtable: Inflation, Deflation, and Your Portfolio

Posted by intelledgement on Wed, 14 Oct 09

We got to participate in a discussion about this topic with another CAPS member and the results—posted on The Motley Fool website—were pretty interesting (in our unbiased opinion LOL).

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3Q09 Intelledgement Macro Strategy Investment Portfolio Report

Posted by intelledgement on Wed, 14 Oct 09

Summary of Intelledgement’s model macro strategy model investment portfolio performance as of 30 September 2009:

Position   Bought   Shares Paid Cost Now Value   Change   YTD     ROI     CAGR
FXI 03-Jan-07 243 37.15 9,035.45 40.92 10,379.12 6.35% 39.78% 14.87% 5.16%
GLD 03-Jan-07 142 63.21 8,983.82 98.85 14,036.70 8.41% 14.25% 56.24% 17.59%
IFN 03-Jan-07 196 45.90 9,004.40 29.05 8,561.28 -4.50% 32.65% -4.92% -1.82%
SLV 03-Jan-07 700 12.86 9,012.80 16.38 11,466.00 22.42% 46.25% 32.94% 10.89%
DBA 13-Mar-08 235 42.50 9,995.50 25.46 5,983.10 0.04% -2.75% -40.14% -28.19%
TBT 21-Jan-09 233 42.84 9,989.72 43.96 10,242.68 -13.67% 16.51% 2.53% 3.69%
EWM 21-Jul-09 1,062 9.41 10,001.42 10.14 10,768.68 n/a 40.83% 7.67% 46.26%
EWZ 3-Aug-09 165 60.39 9,972.35 67.67 11,165.55 n/a 93.40% 11.97% 103.75%
IYW 29-Sep-09 208 51.86 10,794.88 51.95 10,805.60 n/a 47.75% 0.10% 43.70%
cash 13,597.46 26,096.42
Overall 31-Dec-06 100,000.00 119,505.13 2.04% 13.05% 19.51% 6.70%
Macro HF 31-Dec-06 100,000.00 116,830.85 3.16% 8.91% 16.83% 5.82%
S&P 500 31-Dec-06 1,418.30 1,057.08 14.98% 17.03% -25.47% -10.14%

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.

Posted in A.2 Investment Reports | Tagged: , , , , , , , , , , , | 1 Comment »

Performance and Volatility: an Inverse Relationship

Posted by intelledgement on Wed, 14 Oct 09

Volatility in the ebb and flow of the S&P 500’s valuations declined for the third straight quarter in 3Q09. The average daily change in the value of the S&P 500 index for 3Q09 was ±0.8%, down sequentially from ±1.3% in 2Q09, 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 (as discussed in the previous articles, This Volatility is Off the Charts! in April 2009 and Not Your Father’s Market Volatility in July 2009).

For the entire year, 2009 at ±1.3% overall is still on track to be the second most volatile year on record—2008 set a new record at ±1.7%—but if the calming trend continues through 4Q09, we may drop below the pre-2008 record ±1.2% posted in 2002. Still, at this point we remain 118% more volatile than “normal” (namely, the all-time average daily change in the value of the S&P 500 index, which is ±0.6%).
1950-3Q09_s&p_volatility

Why do we care? Well, if you are a short-term trader, obviously more volatility is a good thing, because the opportunities for you to profit are larger and more frequent. But it turns out that if you are a long-term investor, volatility is bad news. In general, higher volatility is associated with a lower return-on-investment. Indeed, the big peaks in the above chart—when the S&P 500 experienced unprecedented volatility—were all negative ROI years: 1974 -30%, 2002 -23%, and 2008 -38%. In fact, not merely negative, but the worst three years in the history of the S&P 500 index.

But wait, there’s more! It isn’t just peak volatility that hurts. In general, the higher the volatility, the worse the ROI. Check out this chart measuring performance at various levels of volatility:

ROIvsVolatility

To build this chart, we calculated the ROI for the S&P 500 index for each year since 1950, and then sorted those years by the average daily change in the S&P 500 index—up or down. Clearly if you are a long-term investor seeking a 10%-or-better annual ROI, you want to root for average daily volatility around ±0.6% or less. In years when average daily volatility has exceeded ±0.8%, the S&P 500 has a negative ROI, including those three major meltdown years.

We also did a little vector analysis. Since 1950, there were 29 years in which volatility declined from the prior year and in 18 of those (62% of the time), performance improved compared to the prior year. There were 30 years in which volatility increased from the prior year, and in 24 of those (80% of the time) performance was worse than the prior year.

We are not saying that volatility causes market declines; in fact, it presumably works the other way round. But if you are a long term investor and detect a rise in volatility, be prepared for an increased probability of sub-par performance by the stock market.

Posted in A. Investment Strategy, B. Speculative Tactics, General | Tagged: , , , , , , , , | Leave a Comment »