Macro Tsimmis

intelligently hedged investment

4Q09 Intelledgement Macro Strategy Investment Portfolio Report

Posted by intelledgement on Fri, 15 Jan 10

Summary of Intelledgement’s model macro strategy model investment portfolio performance as of 31 December 2009:

Position   Bought   Shares Paid Cost Now Value Change YTD     ROI       CAGR  
FXI 03-Jan-07 243 37.15 9,035.45 42.26 10,758.69 3.66% 44.89% 19.07% 5.98%
GLD 03-Jan-07 142 63.21 8,983.82 107.31 15,238.02 8.56% 24.03% 69.62% 19.22%
IFN 03-Jan-07 196 45.90 9,004.40 30.70 9,016.00 5.31% 39.69% 0.13% 0.04%
SLV 03-Jan-07 700 12.31 8,625.00 16.54 11,577.30 0.97% 47.67% 34.23% 10.29%
DBA 13-Mar-08 235 42.50 9,995.50 26.44 6,213.40 3.85% 0.99% -37.84% -23.20%
TBT 21-Jan-09 233 42.84 9,989.72 49.88 11,622.04 13.47% 32.20% 16.34% 17.43%
EWM 21-Jul-09 1,062 9.41 10,001.42 10.62 11,429.24 6.13% 47.50% 14.28% 34.86%
EWZ 3-Aug-09 165 60.39 9,972.35 74.61 12,691.47 13.67% 113.23% 27.27% 79.88%
IYW 29-Sep-09 208 51.86 10,794.88 57.54 11,979.14 10.86% 63.65% 10.97% 50.50%
cash 13,597.46 26,161.66
Overall 31-Dec-06 100,000.00 126,686.96 6.01% 19.84% 26.69% 8.20%
Macro HF 31-Dec-06 100,000.00 117,384.80 0.47% 9.43% 17.38% 5.49%
S&P 500 31-Dec-06 1,418.30 1,115.10 5.49% 23.45% -21.38% -7.70%

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 2009 inclusively) provides a CAGR of around 14.0%. For comparison’s sake, we also show the S&P 500 index, which since January 1950 has produced a CAGR of around 7.3%. 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: We had an uncharacteristically quiet quarter, with only some year-end coupon clipping to break the monotony.

  • 21 Dec – FXI dividend of $0.222/shr
  • 22 Dec – EWM dividend of $0.142/shr
  • 23 Dec – IYW dividend of $0.052/shr
  • 29 Dec – EWZ dividend of $0.111/shr

For the year overall, there were 16 buy and sell transactions, compared with 13 in 2008 and 15 in 2007.

Performance Review: A strong quarter for IMSIP, as we were up 6%, narrowly beating out the S&P 500 (up 5%) and whupping the macro hedge funds (flat). For 2009 overall, we were +20%, which trailed the +23% performance of the S&P 500 but came in far ahead of the hedgies (+9%).

Tactically, with the market strong again this quarter and the dollar weak, we let our emerging market and commodity long positions ride. Every single position was up in the quarter, including our one remaining short position, the UltraShort Lehman 20+Year Treasury ETF (TBT, +13%), which goes up when the value of long-term treasuries decline, as they tend to do when long-term interest rates rise. Also boosted by the weaker dollar, our commodity ETFs all advanced in price during 4Q09: gold (GLD +9%), agriculture (DBA, +3%), and silver (SLV, +1%). The emerging market ETFs also did well: Brazil (EWZ, +14%), Malaysia (EWM, +6%), India (IFN, +5%), and China (FXI, +4%). Finally, our economic recovery hedge, the US Technology ETF (IYW) was up 11% for us; despite it’s name, the ETF has considerable offshore exposure as many of the US companies the fund invests in have material revenues and profits outside the USA.

Overall, we are now 48 points ahead of the market in terms of total return-on-investment: +27% for us and -21% for the S&P 500 in the three years since the inception of the IMSIP at the end of 2006. We are nine points ahead of our benchmark, the GAI Global Macro Hedge Fund Index, +27% to +18%. In terms of compounded annual growth rate, after three years IMSIP is +8%, the GAI hedgies are at +5%, and the S&P 500 is -8%.

Analysis: The naked emperor is still marching grandly down main street, and the populace appear to see nothing amiss—at least not the S&P 500, who applauded to the tune of +5% in 4Q09, as volatility edged down closer yet to normal. What’s not to like? The increase in unemployment has slowed if not ceased, corporate profits have been strong and sales may be edging up again with inventories extremely lean, inflation and interest rates (except for credit card debt) remain low, and the stock market has recovered 60% since the March 2009 lows.

As we have said before, we got into this situation by overspending, borrowing beyond our means, and speculating on bubble-valued assets. In point of fact, the emperor is a very sick man—you will recall that scary visit to the emergency room in late 2008—and marching him around in the dead of winter with no clothes on does not rate up there with the smartest of moves the USA has made.

Speaking of late 2008, nearly every time he makes a speech about the economy, Barack Obama makes it a point to blame the previous administration for the mess “we inherited.” That’s good politics 101, most definitely—and W was indeed a disaster—but blaming him for wrecking the economy is a dangerous exaggeration. The economy was already on the brink of breakdown due to decades of short-term thinking and bad management by both government (deficit spending, neglect of the dollar, refusal to deal with structural issues such as entitlements and energy, nurturing of bubbles) and business (failure of manufacturing industries to innovate and adapt, failure of finance industry to manage risk). The economy was already desperately ill; W took us on a walk in the freezing rain with no coat and so we ended up in the emergency room.

Unfortunately, the current administration actually do appear to believe their own rhetoric—they genuinely do blame W for making us sick in the first place, rather than just facilitating a breakdown. As a logical extension of that thinking, the Obama administration are—just as W did at the end, ironically—pumping us full of decongestants and painkillers (loose money and low interest rates) in a frantic attempt to get us to feel better. LOL they are even consulting the same “doctors” (Bernenke, Geithner, and a cabal of Goldman Sachs graduates). They are treating a serious disease as if it were a bad cold. Plus, they are so clueless that they are making things worse by committing us to huge new entitlements and subsidies (e.g., health care and so-called “green” energy). Like the freezing emperor’s storied new clothes, these programs sound great in theory but with no money to fund them, there’s no there there.

This is why it is dangerous to blame W. Unless and until we recognize that we have long-term structural issues and begin to seriously address them, whether or not inflating the dollar, cash-for-clunkers, artificially low interest rates et al lure the stock market higher and make us feel better, the underlying health of our economy will continue to deteriorate.

Until, that is, it totally collapses. Because if we keep treating symptoms and ignoring the disease, we ain’t seen nuthin yet.

And speaking of symptoms, another big blip on the radar screen as 2010 ensues is the quality of sovereign debt. Not just the USA, that is. The bankruptcy of Iceland’s banks in late 2008 and the narrowly averted collapses in Greece and Dubai in late 2009 have exacerbated concerns that defaults on national debt are increasingly likely. Check out this WSJ interview with Harvard economics professor Ken Rogoff about how sovereign defaults may play out, and also this list of sovereign debts ranked as a percentage of annual gross domestic product. And while we’re on the subject of Prof. Rogoff, here is an article about his study concluding that (surprize!) high levels of debt as a percentage of GDP are strongly associated with slow-to-no economic growth. Specifically, growth drops off a cliff at around a 60% ratio of debt-to-GDP—where the USA is now—and pretty much disappears entirely around an 80% ratio or higher.

When you look at Japan, for example—not that Japan is on anyone’s list of countries in imminent danger of default—and see public debt that exceeds GDP by 70%, you have to scratch your head and wonder how they get out of that box. Up to now, the Japanese have been able to finance their debt at very favorable terms internally—over 90% of it, in contrast to the USA (we depend much more on foreign borrowers, including Japan). But Japan has virtually no immigration, and a falling birthrate; consequently, their citizens are, on average, getting older. Retirees are more likely to be selling government bonds than buying them. And there are relatively fewer younger workers to take up the slack. Of course, once Japan is constrained to go to the world markets to refinance their debt, they will presumably have to pay higher (market) interest rates…and we already know that a debt-to-GDP percentage of 170% is not conducive to economic growth so raising revenue to make ends meet is unlikely to serve.

Conclusion: While we are confident the stroll of the naked emporer will not end well, we have no earthly idea how far he will get before [a] everyone realizes his new clothes are a sham or [b] he collapses from exposure…or even which is more likely to happen first. We can say that so long as this parade of unbridled optimism ensues, it is a greater risk to capital to fight it (go short) than to go with the flow.

Accordingly, as of 1 January, we continue to hold 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). Most of these would go—and be replaced by inverse index ETFs (that go up when the market goes down) if and when things get dicey again.

We also still have three long commodity plays which are hedges against the decline of the dollar: gold (GLD), silver (SLV), and agriculture (DBA)…these are more likely to stay in the portfolio, although one risk we are concerned about is a short term “flight-to-safety” dollar rally in the event of an exogenous macro event such as Spain defaulting on their debt or Israel attacking Iran’s nuclear facilities. Such a development could also adversely affect our short long-term Treasury bonds ETF (TBT), at least in the short run.

So while we have made no changes in the lineup recently, we are prepared to make significant changes any time now. Well, actually, any time, period.

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