Macro Tsimmis

intelligently hedged investment

Archive for October, 2010

Market volatility declines in 3Q10

Posted by intelledgement on Mon, 25 Oct 10

Here is a link to our 3Q10 update on volatility, “Market Volatility Resumes Post-Crash Decline,” published on The Motley Fool website. While the macro clouds still appear ominous, the stock market water appears…well, if not safe, at least less unsafe.

Previous volatility-related articles:

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BUY PowerShares DB US Dollar Bearish ETF (UDN)

Posted by intelledgement on Wed, 20 Oct 10

“Dollar devaluations will continue until purchasing power improves.”   —Tyler Durden

Well, in the sense that the dollar is down 40% since 1985, and down 20% since 2003, and down 10% since June, one could say we are late to this party. However, given the micro threat of QE2 layered on top of the macro trend of the weakening of fiat money since the end of Bretton Woods in 1971 (at least), we feel the need to take a position here, not so much seeking to profit from the fall of the dollar as merely insuring the value of our assets.

Governments have been debasing their currencies ever since (at least) a succession of Roman governments adulterated the denarius by decreasing it’s silver content. Of course nowadays, human technology has advanced to the point where the U.S. government can achieve the same end with the click of a mouse by some functionary, instantly creating gobs of dollars bearing no relation to silver or any real world commodity whatsoever. And our government has, in congruence with the prevailing Keynesian cant, consistently “loosened” the money supply—created gobs of new dollars—to “stimulate” the economy whenever growth slowed down to the point where job creation was failing to keep pace with population growth. They have also slowed down the growth of the money supply when inflation got too high…but somehow, the tightening has, over time, failed to balance out the loosening. Consequently as the increase in the supply of dollars has, over time, outstripped the growth in the goods and services to spend them on—not to mention outstripping the growth in the number of spenders—the value of the dollar over time has declined.

This imbalance has occurred, in our opinion, because attempting to “manage” the ups and downs of the economy is a fool’s game. Artificial fiat-created incentives fosters malinvestment, distorting valuations and inevitably leading to unnaturally large bubbles. In essence—as we have said before—it is akin to fighting an oscillating skid. The proper way to react to a skid is to turn into it to reestablish control, not to fight it, which only makes it more likely you will crash.

Economists have been arguing about this for decades. But regardless of whether one favors Keynes or Hayak, the existence of the imbalance—in the sense that overall, the dollar has lost more value than it has gained—is inarguable, as you can see in this chart showing the value of the dollar for the last 25 years:

U.S. Dollar, October 1985-October 2010

Unfortunately, the bias towards inflation is reinforced when the government falls into debt itself. This is because if the government is unable to collect enough revenues to pay the interest and principal due on bonds as well as maintain their other expenditures, the temptation grows to simply print (or electronically create) more dollars to make up the shortfall. We are clearly moving in that direction here…and then there is the proximate imperative for more quantitative easing—in this case, using the funny money to purchase bonds—to “stimulate” inflation or job growth (or whatever). We know the effect will be to inflate/devalue the dollar; we fear the (likely) risk of stoking a currency war, or even the (less likely but possible) risk of igniting runaway hyperinflation.

Our choice to protect ourselves against devaluation is the PowerShares DB US Dollar Bearish Fund (UDN). This ETF is based on the Deutsche Bank Short US Dollar Index (USDX®) Futures Index™ (DB Short USD Futures Index). The Index, which is managed by DB Commodity Services LLC, is a rules-based index composed solely of short USDX® futures contracts. The USDX® futures contract is designed to replicate the performance of being short the US Dollar against the following currencies: Euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona and Swiss Franc.

UDN has a twin brother, the PowerShares DB US Dollar Bullish Fund (UUP, of course). Both funds opened for business in February 2002. Since then, the U.S. dollar index is -9%, while the UDN is +11% (two percent better than expected) and the UUP is -11% (two percent worse than expected). This gives the UDN an Intelledgement ETF Rating (IER) of +5 (meaning on a compounded annual growth rate basis, it is about 5% ahead of where we should expect it to be). So no problem there. Here is a chart showing the performance of both ETFs as well as the dollar index:

UDN & UUP vs. the dollar index, Feb 02 to Oct 10

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3Q10 Intelledgement Macro Strategy Investment Portfolio Report

Posted by intelledgement on Wed, 13 Oct 10

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

Position   Bought   Shares Paid Cost Now Value   Change       YTD         ROI       CAGR  
FXI 03-Jan-07 243 37.15 9,035.45 42.82 11,006.30 8.87% 2.30% 21.81% 5.40%
IFN 03-Jan-07 196 45.90 9,004.40 36.37 10,127.32 13.44% 12.33% 12.47% 3.18%
DBA 13-Mar-08 235 42.50 9,995.50 27.87 6,549.45 16.17% 5.41% -34.48% -15.28%
EWZ 3-Aug-09 165 60.39 9,972.35 76,95 13,122.68 23.47% 3.13% 31.59% 26.75%
GLD 21-May-10 95 115.22 10,953.90 127.91 12,156.39 5.12% 19.20% 10.98% 33.40%
SLV 21-May-10 636 17.29 11,004.44 21.31 13,586.23 16.98% 28.84% 23.46% 79.17%
DOG 25-May-10 204 54.01 11,026.04 48.16 9,824.64 -10.83% -7.97% -10.90% -28.05%
PSQ 25-May-10 246 44.74 11,014.04 38.85 9,556.88 -14.16% -11.04% -13.23% -33.30%
SH 25-May-10 201 9.41 10,978.58 48.90 9,828.90 -11.11% 6.96% -10.47% -27.07%
LQD 11-Aug-10 99 110.60 10,957.40 113.09 11,237.89 n/a 11.83% 2.56% 20.28%
cash -3,942.10 19,027.59
Overall 31-Dec-06 100,000.00 126,024.27 4.23% -0.52% 26.02% 6.37%
Macro HF 31-Dec-06 100,000.00 121,336.09 0.95% 3.37% 21.34% 5.30%
S&P 500 31-Dec-06 1,418.30 1,141.20 10.72% 2.34% -19.54% -5.63%

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 7.2%. 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. Finally, The “cash” line for the “Cost” column is negative because the total cost of the positions the IMSIP presently hold exceeds the total cash we started with—which is, of course, a good thing—and profits from earlier sales have been reinvested into more recently acquired positions.

Transactions: Less volatility this quarter, and fewer transactions…could this be causal relationship? 🙂

Performance Review: Wow, a mirror image quarter! We were up 4%, which normally is good, but we lost to the market (+11%) by seven  points. This is an almost perfect reversal of the prior quarter, in which we lost 4% but beat the market (-12%) by eight points. The IMSIP is just a rock of stability, relatively speaking. We did beat the macro hedge fund index (+1%) by three points. Heck, those guys are even more stable than we are—they gained 1% in 2Q10, too.

Tactically, we ended the quarter still pretty neutral, with three BRIC country long ETFs balanced by three index  short ETFs, plus three commodity plays including two flight-to-safety/inflation insurance precious metal funds and our agriculture ETF plus our new high grade corporate bonds ETF, which is a bet on the Fed keeping interest rates low. Our BRIC ETFs overall were up—as one would expect in a +11% market: Brazil (EWZ, +23%), India (IFN, +13%), and China (FXI, +9%). The commodity ETFs also did well, with SLV +17%, DBA +16, and GLD +5%. The three index short ETFs had a tough quarter, of course: DOW (DOG) -11%, NASDAQ (PSQ) -14%, and S&P 500 (SH) -11%. Our newly acquired corporate bond fund (LQD) was up 3% in a month-and-a-half. We also made a profit on our sale of the high tech ETF (IYW), and took a loss unloading the treasuries short fund (TBT).

Overall, we are now 46 points ahead of the market in terms of total return-on-investment: +26% for us and -20% for the S&P 500 in the 45 months since the inception of the IMSIP at the end of 2006. We are five points ahead of our benchmark, the GAI Global Macro Hedge Fund Index, +26% to +21%. 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 -6%.

Analysis: The fix is in.

We can argue about why this is happening. Some see dark bankster conspiracies aimed purposefully at destroying confidence in national governments and creating chaos in order to facilitate a world-wide takeover by the powerful elite. Some see an inherent flaw in the democratic process that makes it impossible for leaders to engage in long-term thinking, making the system vulnerable to situations where short-term pain is needed to avert long-term catastrophe…because the very design of the system ensures that short-term pain is always avoided at all costs. Some see nothing more remarkable than the inexorable rise and fall of empires at work here.

Leaving aside the theoretical explanations, as a practical matter, it is more and more clear that the central banks in the developed world are hell-bent on fending off the collapse of any “too big to fail” (TBTF) institutions at all costs. All the Sturm und Drang about the financial reform legislation that was supposed to end TBTF, all the jawboning about greedy bankers and unconscionable bonuses, all the expressions of piety with respect to the need for a strong dollar…all fade to insubstantial misdirection beside the solid reality of never-ending bailouts and so-called “quantitative easing.”

It was bad in the 50s and 60s when the USA financed both wars and increasingly expensive social programs via debt and the dollar began to weaken. It was worse in the 70s and 80s when we divorced the dollar from gold entirely, continued to run up debts, and accelerated the process of eschewing production and manufacturing in favor of financial “services” and ever-more arcane ways to manipulate money. In the 90s and the first decade of the 21st century, we engineered asset bubbles in real estate and stocks to inveigle folks to keep accumulating individual debt and eschew savings, even as a combination of irresponsible new entitlements obligations and an aging population worsened the debt situation of the government.

2008 was a watershed. Or, to borrow an analogy from South African finance minister Pravin Gordhan, a waterpipe—a broken one. Not a pipe we could see, because it was behind the wall, but we could hear the water dripping and see the stains on the wall. It was obvious to everyone that the proximate cause of the crash was the debt-funded asset bubbles. We could have chosen to own up to the errors of our ways, punished the guilty, sorted out the mess of the bursting bubbles, and applied our considerable energies to moving forward building a stabler, healthier financial system with safeguards against the abuses that brought us to this pass.

But instead, we chose to reinflate the bubbles! Rather than allowing housing prices to fall to sustainable levels, we bailed out homeowners who owed more than their properties were worth. Rather than allowing banks who had written bad loans to fail, we bailed them out, by artificially lowering interest rates and firing up the printing presses so they could borrow cheaply and reinvest the funds to make a profit and earn their way out of insolvency. Never mind that [a] it won’t work and [b] in trying to make it work we risk igniting a ruinous currency war. In effect, we threw good public money after bad private money, directly increasing the debt and indirectly—by weakening the dollar—reducing the wealth of all citizens (and their children).

Instead of fixing the broken pipe, we replastered the wall and painted over the water stains. The fix is in, not in the sense of repairing the damage, but in the sense that unscrupulous insiders have rigged it—while we are meant to believe that things are getting better, in fact what is happening is that those in the know have bet on the room being flooded, sooner or later.  The flood, of course, will not be water. It will be wheelbarrels full of worthless U.S. dollars.

Conclusion: We know that the foolhardy efforts of the central banks to save the corrupt and insolvent financial system are doomed. What we don’t know is how and when that doom will play out. For the past several months, we have been betting that things may fall apart sooner rather than later; hence our commodities and short positions. There are so many potential black swans flitting about—bad real estate loans, bad banks, insolvent local and state governments, sovereign debt, hyperinflation, potential social unrest in China, Iran and their nukes, North Korea and their nukes, Pakistan and their nukes, the threat of a major terrorist attack, a plague, global warming—that one or more could land at any moment.

In our best effort to avoid black swan excrement, as of 1 October, we continue to hold three long emerging market ETFs in the portfolio: China (FXI), India (IFN), and Brasil (EWX). 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 hold three inverse index 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: the short DOW index ETF (DOG), the short NASDAQ index ETF (PSQ), the short S&P 500 index ETF (SH). We are considering unloading some or all of these shorts because [a] the cost of holding them has risen along with the strong 3Q10 rally in the stock market and [b] our concern about hyperinflation in the face of a likely second round of quantitative easing by the Fed after election day is daunting. As it is, the overall performance of macro funds has been constrained by the prevalence of significant short positions,  in concert with the way the macros are pointing but—thanks at least in part to profligate quantitative easing and related shenanigans by the central banks—contrary to the way the markets are behaving.

We also still have three long commodity plays: the agriculture ETF (DBA) and precious metals ETFs for gold (GLD) and silver (SLV). The dollar is weakening again and the waxing of that hyperinflationary scenario has us considering a short play there.

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Activision Blizzard (ATVI) update #19—Activision to release Cataclysm 7 Dec 10

Posted by intelledgement on Tue, 05 Oct 10

Our game publisher Activision Blizzard (ATVI) announced yesterday that their third expansion module for their World of Warcraft (WoW) massively multiplayer online role-playing game will be released 7 December 2010. The module will be available on DVD-ROM for Windows(R) XP/Windows Vista(R)/Windows(R) 7 and Macintosh(R) as a digital download from the Blizzard Store for $40 or in retail stores. A “collector’s edition” that includes extra music, print material, and sundry other goodies will also be offered in stores for $80.

The previous two WoW expansion modules, The Burning Crusade and Wrath of the Lich King, each set new PC game sales records. With the WoW worldwide subscriber base now north of 11 million, most expect Cataclysm to set a new record.

Previous ATVI-related posts:

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