Macro Tsimmis

intelligently hedged investment

2Q10 Intelledgement Macro Strategy Investment Portfolio Report

Posted by intelledgement on Wed, 14 Jul 10

Summary of Intelledgement’s model macro strategy model investment portfolio performance as of 30 June 2010:

Position   Bought   Shares Paid Cost Now Value   Change       YTD         ROI       CAGR  
FXI 03-Jan-07 243 37.15 9,035.45 39.13 10,109.63 -5.69% -6.03% 11.89% 3.26%
IFN 03-Jan-07 196 45.90 9,004.40 30.25 8927.80 -2.75% -0.98% -0.85% -0.24%
DBA 13-Mar-08 235 42.50 9,995.50 23.99 5,637.65 -0.95% -9.27% -43.60% -22.07%
TBT 21-Jan-09 233 42.84 9,989.72 35.48 8,266.84 -27.13% -28.87% -17.25% -12.34%
EWZ 3-Aug-09 165 60.39 9,972.35 61.83 10,628.21 -15.19% -17.13% 6.58% 7.28%
IYW 29-Sep-09 208 51.86 10,794.88 51.60 10,771.70 -11.48% -10.32% -0.21% -0.29%
GLD 21-May-10 95 115.22 10,953.90 121.68 11,564.54 n/a 13.39% 5.57% 64.11%
SLV 21-May-10 636 17.29 11,004.44 18.21 11,614.63 n/a 10.10% 5.54% 63.69%
DOG 25-May-10 204 54.01 11,026.04 54.01 11,018.04 n/a 3.21% -0.07% -0.73%
PSQ 25-May-10 246 44.74 11,014.04 45.26 11,133.96 n/a 3.64% 1.09% 11.61%
SH 25-May-10 201 9.41 10,978.58 55.01 11,057.01 n/a 4.66% 0.71% 7.49%
cash -13,769.30 10,174.48
Overall 31-Dec-06 100,000.00 120,904.29 -4.01% -4.56% 20.90% 5.58%
Macro HF 31-Dec-06 100,000.00 120,194.43 0.70% 2.39% 20.19% 5.40%
S&P 500 31-Dec-06 1,418.30 1,030.71 -11.86% -7.57% -27.33% -10.09%

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: The sudden return of volatility in 2Q10 had us jumping through hoops with not only more transactions than usual but some hard zigging and zagging…but in the end, all profitable (at least the closed trades):

Performance Review: Normally you’d have no difficulty characterizing a 4% loss as a bad quarter, but when you still beat the market (-12%) by eight points, the waters get a bit muddy. We did lose to the hedgies (±0%) by five points. Tactically, reflecting the schizoid market we are close to neutral here, with our three BRIC country funds plus our high tech fund bullish, our four short funds bearish, plus three commodity plays including two flight-to-safety/inflation insurance precious metal funds. Our BRIC ETFs overall were down—as one would expect in a -12% market: India (IFN, -3%), China (FXI, -6%), and Brazil (EWZ, -15%); plus the emerging markets-oriented US Technology ETF (IWY) tracked the market (-11%, which BTW did edge out the NASDAQ for the quarter by one point, for those keeping score at home). Our repurchase of the precious metal EFTs looks good so far with GLD +13% and SLV +10%; the agriculture commodities ETF (DBA) held its own (-1%). Our UltraShort Lehman 20+Year Treasury ETF (TBT), which goes up when the value of long-term treasuries decline, as they tend to do when long-term interest rates rise, had a disastrous quarter (-27%), as the European sovereign debt crisis sparked a flight-to-safety run on US government bonds, and interest rates consequently plummeted. Some of those losses were offset by profits on the purchase and sale of the three index short ETFs for the DOW (DOG), NASDAQ (PSQ), and S&P 500 (SH) during the quarter; we purchased them again towards the end of the quarter and were slightly ahead. We also made a profit on our sale of the Malaysia ETF (EWM), although the sale price was a tad lower than the close at the end of last quarter.

Overall, we are now 48 points ahead of the market in terms of total return-on-investment: +21% for us and -27% for the S&P 500 in the three-and-a-half years since the inception of the IMSIP at the end of 2006. We are one point ahead of our benchmark, the GAI Global Macro Hedge Fund Index, +21% to +20%. In terms of compounded annual growth rate, after three years IMSIP is +6%, the GAI hedgies are at +5%, and the S&P 500 is -10%.

Analysis: After five straight quarters of declining volatility, things got interesting—as in, “may you live in interesting times”—in 2Q10. A combination of continued slower-than-expected economic growth and the specter of sovereign debt defaults among European countries combined to spook the markets big time. The potential threat of defaults by any of the PIIGS (Portugual-Ireland-Italy-Greece-Spain) is considered to be extremely serious because it could engender a cascade of bank collapses—all over Europe and beyond—similar to the danger in 2008 attendant to a collapse of AIG, Bear Stearns, Citibank, Freddie, Fannie, Merrill Lynch, and/or Wachovia (all of whom were eventually bailed out by the US government). The powers-that-be most definitely consider that this would be a catastrophic eventuality, to be avoided at all costs. Thus the likelihood that central banks will once again deploy taxpayer dollars to bailout the moneyed elites, this time for their fecklessness in loaning money to over-extended governments instead of for their foolishness being lured into ludicrous spectulative bets by Goldman Sachs and their ilk.

Our perspective is that this is yet another swerve in the extended oscillating skid which we have written of before. The combination of intrinsically short-sighted democratically elected—and, more to the point, re-elected—politicians and a culture that increasingly craves instant gratification has done us in. We got into this situation by overspending, borrowing beyond our means, and speculating on bubble-valued assets. The U. S. government’s attempts to address our problems have generally been short on addressing systemic issues and long on creating the temporary illusion that things are getting better.

The proper way to defeat an oscillating skid is to turn into it, thus affording your tires traction and enabling you to regain control. In our case, we could do this by allowing the insolvent financial institutions to go out of business, as they so richly deserve to. We could require more stringent capital requirements for both lenders and borrowers doing business in the USA. We could clean house at the regulatory agencies so they will actually enforce the rules already on the books (e.g., not allowing naked short selling). We could make it illegal for ratings agencies to accept payment from any company they rate. We could create an exchange for the trading of derivatives. We could encourage good corporate governance practices (e.g., favoring for government contracts companies that reward management with long-term stock options rather than instant cash bonuses so that corporate leaders’ interests were better aligned with the long-term interest of shareholders). We could reduce social welfare spending commitments to sustainable levels going forward.

But instead, we are fighting the skid at every turn. We are throwing good taxpayer money after bad propping up the “too big to fail” banks. We are debasing our currency in futile attempts to reinflate the housing and credit bubbles that got us into this latest fix in the first place. Instead of addressing the systemic problem of overcommitted government largesse, we are expanding the role of government and increasing our commitments.

Conclusion: There is no such thing as a free lunch. Someone always pays, sooner or later. For decades, we—through our elected leadership—have relentlessly whipped out our national credit card to, in effect, pass the debt on to future suckers. Well, if you have a mirror handy, you can meet one of those future suckers right now. The government is still flashing plastic, but now it is a debit card, and the account being charged is the one that’s comprised of your life savings.

In our best effort to avoid those charges, as of 1 July, we continue to hold four long emerging market ETFs in the portfolio: China (FXI), India (IFN), Brasil (EWX), 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 believe that in a deleveraging environment, the economies that are still growing will fare far better than those that are not; thus these long positions will be the last we will surrender if and when things get really dicey. Already, things are somewhat dicey…enough so that we now have four inverse ETFs (that go up when whatever they are tied to goes down) to serve as insurance against a sudden worsening of the sovereign debt crisis (which could be either European- or domestic state/local government-based): the short DOW index ETF (DOG), the short NASDAQ index ETF (PSQ), the short S&P 500 index ETF (SH), and the inverse long-term Treasury bonds ETF (TBT). We are considering unloading this last because the (up-to-now) European sovereign debt crisis has engendered a perverse flight-to-safety that is driving U.S. bond rates down (and the values of the bonds up), even though in the long run the USA is no more solvent than Greece. We believe the value of those bonds will eventually plummet but we have held TBT for over a year now with no joy and it could be we can do better with the funds between now and a more opportune time to be short treasuries.

We also still have three long commodity plays: the agriculture ETF (DBA) and precious metals ETFs for gold (GLD) and silver (SLV). The dollar actually stronger again last quarter, the flight-to-safety reaction to the European sovereign debt crisis resulted in increased gold and silver prices anyway. In the longer run, we expect another massive round of central bank quantitative easing in response to the next crisis—or the one after that—and in the deluge of dollars that results, the commodities positions should provide some dry shelter for our assets.

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One Response to “2Q10 Intelledgement Macro Strategy Investment Portfolio Report”

  1. 2Q10 Intelledgement Macro Strategy Investment Portfolio Report…

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