Macro Tsimmis

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Archive for April, 2011

1Q11 Intelledgement Macro Strategy Investment Portfolio Report

Posted by intelledgement on Sat, 30 Apr 11

Summary of Intelledgement’s model macro strategy model investment portfolio performance as of 31 March 2011:

Position   Bought   Shares Paid Cost Now Value Change YTD ROI CAGR
FXI 29 Dec-06 243 37.15 9,035.45 44.91 11,555.31 3.98% 3.98% 27.89% 5.96%
IFN 29-Dec-06 196 45.90 9,004.40 32.95 10,495.80 -3.88% -3.88% 16.56% 3.67%
DBA 13-Mar-08 235 42.50 9,995.50 34.23 8,149.80 5.73% 5.73% -18.47% -6.48%
EWZ 3-Aug-09 165 60.39 9,972.35 77.51 13,633.09 0.13% 0.13% 36.71% 20.78%
GLD 21-May-10 95 115.22 10,953.90 139.86 13,291.64 0.82% 0.82% 21.34% 25.23%
SLV 21-May-10 636 17.29 11,004.44 36.77 23,418.79 21.80% 21.80% 112.81% 140.73%
UDN 21-Oct-10 399 27.54 10,996.46 28.14 11,227.86 3.84% 3.84% 2.10% 4.84%
RSX 31-Dec-10 316 37.91 11,987.56 41.63 13,155.08 9.81% 9.81% 9.74% 45.82%
cash 17,049.94 29,246.10
Overall 31-Dec-06 100,000.00 134,173.47 4.78% 4.78% 34.17% 7.17%
Macro HF 31-Dec-06 100,000.00 126,147.49 -0.58% -0.58% 26.15% 5.62%
S&P 500 31-Dec-06 1,418.30 1,325.83 5.42% 5.42% -6.52% -1.58%

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 virtual money Intelledgement Macro Strategy Investment Portfolio (IMSIP) is the Greenwich Alternative Investments Global Macro Hedge Fund Index, which historically (1988 to 2010 inclusively) provides a CAGR of around 13.8%. For comparison’s sake, we also show the S&P 500 index, which since January 1950 has produced a CAGR of around 7.4%. 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 reduced each quarter by a management fee (annual rate of 1% of the principal under management). More information about how the IMSIP is managed can be found here.

Transactions: After all that action at the end of 2010, we had an extremely quiet quarter: no transactions whatsoever for the first time since 2009.

Performance Review: Yet another modest gain which—for the third consecutive quarter—failed to keep pace with the market. We were up 4.8%, which normally is good, but we still narrowly lost to the S&P 500 index (+5.4%). We did handily outdistance the macro hedge fund index (-0.6%), primarily because most macro funds have maintained more short positions than we have.

The star performer of the quarter was silver (SLV), up 22%, way outdistancing our other commodity plays, including our corn-wheat-soybeans-sugar ETF (DBA, up 6%) and gold (GLD up 1%). On a semi-related note, our one remaining short position is the U.S. dollar (UDN, +4% as the decline in the dollar of the value continued). Our BRIC funds were mixed, with Russia (RSX) up 10%, China (FXI) up 4%, Brazil (EWZ) flat, and India (IFN) down 4%.

Overall we are now 41 points ahead of the market in terms of total return-on-investment: +34% for us and -7% for the S&P 500 in the 51 months since the inception of the IMSIP at the end of 2006. We are slightly ahead of our benchmark, the GAI Global Macro Hedge Fund Index, which is +26%. In terms of compounded annual growth rate, after four-plus years IMSIP is +7.2%, the GAI hedgies are at +5.6%, and the S&P 500 is -1.6%.

1Q11 Highlights: Here are some topical 1Q11 links reprised from our Intelledgement tweet stream, organized by subject:

BRICs

Deep Capture

  • The proposed Bank of America settlement: another taxpayer rip-off. http://bit.ly/grWtHl
  • Dylan Ratigan: “In Goldman Sachs we trust.” http://bit.ly/eCdbZo
  • Will the Massachusetts Ibanez case unravel widespread residential real estate irregularities? http://dlvr.it/D62n7
  • naked capitalism: Bankster-enabling Dems unveil latest scheme to fleece Main Street sheeples. http://bit.ly/fJjlGo
  • “Creative accounting” makes Fed insolvency impossible. http://is.gd/4Pk3sB
  • Dylan Ratigan: How Fed policies facilitated USA exports to China: exports of jobs, that is. http://bit.ly/fwgwwM
  • NYT: New Keybridge report deriding derivative market regulations apparently a put-up job. http://nyti.ms/euARqZ
  • Why the US government is facilitating theft instead of prosecuting it. http://bit.ly/fnUsP3
  • Sleaze Watch—NY Fed Official Responsible for AIG Loans Joins AIG As AIG Pushes Sweetheart Repurchase to NY Fed. http://bit.ly/gL4pBe
  • Satyajit Das: Controlling sovereign CDS trading—the dysfunctional debate. http://bit.ly/gNDyMR
  • Bill Black: Why we need regulatory cops on the beat, even if they make bankers unhappy. http://bit.ly/fCg29l
  • Jim Quinn: “Extend-and-pretend” is Wall Street’s friend. http://is.gd/0vZsve

Eurozone

Macro Analysis

  • TMF: For market volatility, no news is good news. http://bit.ly/gNCP2z
  • The rise of the consumer in Africa…some interesting data from WSJ. http://fb.me/OQX30gLx
  • Macro hedge funds: A lack of clear long-term investment trends may lead managers to stomach more risk. http://econ.st/fkE6yc
  • Energy consumption per unit of GDP across the globe varies widely but likely to converge by 2030. http://econ.st/gWg55W
  • Bundeswehr draft study evaluates peak oil scenarios: warns of potential for chaos, need to cozy up to energy producers. http://bit.ly/bPaxp3
  • The Economist: The rise and fall of the dollar—lessons of history. http://econ.st/dQrANr
  • The Atlantic: Economic underpinnings of the uprising in Egypt. http://yhoo.it/gDrDF8
  • Rick Backstaber: Why are we “irrational”—the path from Neoclassical to Behavioral Economics 2.0. http://bit.ly/exaORJ
  • Mike Grieger: The death of globalization, the death of currency, and the death spiral. http://is.gd/fZ6Sx1
  • Is the current rise in commodity prices part of a long-term trend caused by rising demand in emerging markets? http://econ.st/fkAJgK
  • Peak Oil, the Saudis and the Middle East protests. http://bit.ly/giMsSb
  • Egypt: population and food import needs growing while arable land is maxed out and oil exports in decline…uh oh. http://bit.ly/h8Uvfm
  • Urban life: Are cities “our species’ greatest invention”? Do they make us more inventive and more productive? http://econ.st/i16jEV
  • oftwominds.com: The deflationary depression scenario is still in play here. http://goo.gl/XN8ss
  • Marc Chandler: “March Madness”—policy risks for global investors. http://bit.ly/h7sS8T
  • The Economist: Plagued by Politics—feeding the world…biofuels are an example of what not to do. http://econ.st/hOWOPL
  • The Big Picture: The coming war between generations. http://dlvr.it/HyHWv
  • Mideast revolution—people lose, Oil wins. http://shar.es/3iIzd
  • The Economist: The nuclear family—the world’s largest nuclear-energy producers. http://econ.st/h1gIKJ
  • In 2000, every $1 of state/local revs supported $1.07 of muni debt…today it’s between $1.70 and $2.85. http://bit.ly/eU5D47
  • The Economist: How will the disaster affect Japan economically? http://econ.st/f35Kdr
  • The Economist: What is behind the decline in living standards? http://econ.st/gmVayI
  • The Economist: An encouraging model suggests urban Asia’s water problems could be easily fixed. http://econ.st/eLIk1P

Monetary and Fiscal Policy

Analysis: Well, unsurprisingly given that we had no transactions changing any of our positions, the portfolio’s composition—36% emerging markets, 33% commodities, 8% short the dollar, and 22% cash—is not much changed from last quarter…we have proportionately less cash and more invested in commodities, but that is mostly attributable to the +22% burst in silver prices.

So, what’s going on with silver? Well, back when silver and gold were commonly used as money, the ratio of their values tended to be about 15:1 (that is, the value of 15 ounces of silver was equivalent to the value of one ounce of gold). But as fiat money became predominant in the 19th and especially the 20th centuries, the ratio has widened and the average in the 1900s was closer to 50:1, and for most of the first ten years of this century, 60:1. Essentially, silver—which, of course, is much more common than gold—lost currency (if you will pardon the expression) as a store of value, and was priced based on demand for industrial use (which has declined in recent decades with the near-death of analog photography as mucho silver was consumed in the development process). But with the financial crisis that started with banks in 2008 morphing to sovereign debt in 2010, fiat currencies are looking shaky, and silver is making a strong comeback, spurred on by the existence—or, at least, rumors of the existence—of a large short position which presumably will have to be covered if prices continue to rise. Check out this chart of the silver:gold ratio since the inception of the IMSIP:

Overall, the market continued bullish in 1Q10. We remain concerned about the overall risk of systemic failure, for which we feel the market has not adequately accounted. 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. While these actions can be effective in postponing our day of reckoning—indeed, the “QE2” $600B round of quantitative easing by the Fed has clearly succeeding in kicking the can further down the road—they ultimately result primarily in digging us into a deeper hole. For now, massive injections of liquidity and restrictive interest rate policies that artificially deflate the return on investment of “safe” savings accounts and short-term bonds have pushed investment funds into the stock market, floating it higher, but we do not expect the “good news” concerning economic recovery to survive the pending reduction in government stimulus when the QE2 program ends in June and remain prepared to move to a short bias when that happens to preserve capital. And it could happen sooner if the wheels come off with respect to the European sovereign debt crisis, the continuing unrest in the Arab world, serious municipal bond defaults or a defaults-driven residential real estate crisis in the USA, a slowdown in China, or any number of other potential “black swans.” In the meantime, however, we are swimming with the tide and remain long.

Conclusion: We remain in the eye of the storm with most everyone  sipping the QE2 Kool-Aid and singing Kum-Ba-Ya. Accordingly, it is time to make love, not war…but we remain prepared for both.

We hold long emerging market ETFs for all four BRIC nations in the portfolio: Brasil (EWX), Russia (RSX), India (IFN), and China (FXI). We believe that in a deleveraging environment, the economies that are still growing strongly will fare better than those that are not and we expect non-dollar-denominated assets to do better than those tied to the greenback. Never-the-less, when things get really dicey, those nations’ economies will suffer also—the Russian RSX ETF declined 70% in the wake of the 2008 crisis and we will not want to be long any of these when the winds of chaos pick up again.

We also still have three long commodity plays: the agriculture ETF (DBA) and precious metals ETFs for gold (GLD) and silver (SLV). With the dollar, the Euro, and the Yen all under pressure here for various and sundry reasons, any currency is risky at best, and thus commodities are relatively more attractive stores of value. And we are actually short the dollar (UDN), although it has held up remarkably well in the face of the USA’s deteriorating monetary and fiscal situation, thanks presumably to the relative unattractiveness of the other major currencies…except the Yuan, but the Chinese government restricts it’s appreciation.

Although we are mostly long now in congruence with the prevailing love fest, we remain vigilant as to a potential turning of the tide. In times of heightened uncertainty, valuations can fluctuate wildly and the preservation of capital takes precedence over meeting any target ROI. To that end, when the phantasmic prospect of sustained economic growth sans serious deleveraging fades—that is, when the Kool-Aid runs out—we will be prepared to unload our long positions, possibly excepting the commodities, and short the indices again. However, we also cognizant of the prospect that, with another election cycle approaching, the U.S. government is likely to attempt to maintain low interest rates and resume big-time quantitative easing at the first unconcealable sign of a “downturn.” So long as that combination of policies conspires to weaken the dollar and push up nominal equity valuations, it will be too early to go short. Stay tuned.

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Judging by Market Volatility, All is Well

Posted by intelledgement on Mon, 11 Apr 11

The first quarter of 2011 marked another non-event, volatility-wise. Market volatility did tick up, quarter-over-quarter, from the extraordinarily low 4Q10 reading—the lowest level of volatility in three-and-a-half years—but remained 6% below average. For six of the last seven quarters now, the S&P 500 index has experienced an average daily change of close to the all-time (since inception in 1957) average daily change of ±0.62%.

Volatility hit an all-time high in Q4 2008—breaking the record set in 1929—with mind-boggling peak average daily change of ±3.27%. (That’s a whopping 427% above the average.) For 2008 overall, it was a record ±1.71%, or 176% above average. But since then, it has been dropping steadily: ±1.19% in 2009 (92% higher than average) and ±0.74% last year (19% above average). The following chart tracks the annual average daily volatility for the S&P 500 index from 1950 to 2011. (Note that while the index was implemented in 1957, in order to get the most meaningful/largest feasible data set, we include retrospective data back to 1950.)

We track market volatility because it’s a reasonably reliable gauge of risk levels. Roughly 73% of the time, when volatility in the S&P 500 goes up—when the average annual daily change in the price of the index (up or down) is greater than it was in the prior year—market performance for that year declines compared to the prior year. And when volatility declines year over year, market performance improves 55% of the time.

The following chart shows the quarterly fluctuations in volatility levels for the S&P 500 (red line) from a year before the crash—the fourth quarter of 2007—to the present, compared to volatility measurements of the Dow Jones Industrial Average (blue line) from a year before the 1929 crash. (We use Dow volatility data for the 1929 crash because the S&P 500 was not around back then.) Also shown in the chart is the average daily volatility level for the S&P 500 (±0.62%)

Of course, the fourth quarter of 1929 was just the beginning of an extended period of market decline that persisted for years. Consistent with our research into the relationship of market volatility and performance, volatility levels in the 1930s continued to surge well above normal. Thus, it is encouraging that the trendlines have been diverging for the past two years.

Having said that, it’s important to keep in mind that volatility is not a leading indicator; black swan events engender volatility, not the other way around. Should Italy or Spain default, should Iran attack or be attacked by another country, should rising sea temperatures set off a major extinction event—or any equivalent event occur—then all bets are off.

But for what it’s worth, the current consensus of U.S. investors continues to be that the worst is behind us, and that risk levels going forward are no longer elevated.

Previous volatility-related articles:

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BUY Market Vectors Gold Miners ETF (GDX)

Posted by intelledgement on Thu, 07 Apr 11

We have been long gold via the SPDR Gold ETF (GLD) for all but a few months since the inception of the portfolio in January 2007. We believe the prices of commodities in general and gold in particular are headed north as the effect of the massive government spending inevitably leads to inflation and perhaps even risks the integrity of the dollar.

The price of gold has not moved much so far in 2011, even as other commodity prices have continued to surge. We expect this interregnum to end soon, and therefore consider this a relatively good time to buy gold. But as we already own GLD, we have decided to increase our exposure here by going long on the Market Vectors Gold Miners ETF (GDX).

In theory, as the price of gold climbs—all things being equal—the rising profits of gold miners can afford one a better return on investment than owning gold. This is because given a fixed cost to get an ounce of gold out of the ground, the profit margin of a mining company is “leveraged.” Let’s say gold is going for $1000/ounce and it costs a mining company $900 to produce that ounce of gold. They are making a profit of $100 on every ounce. Now if you buy gold here, and the price goes to $1100, you have a profit of 10%. But if you buy the mining company instead, their profits are up from $100/ounce  to $200/ounce—a 100% increase. Their stock probably won’t double, but it is likely to go up considerably more than 10%.

Of course, all things are not equal. For one thing, mining is a capricious activity, fraught with risks—accidents, bad exploration results, the country you’re operating in has an unstable government, your ore is of poorer quality than expected and requires expensive and technically difficult processing, etcetera, etcetera. For another thing, all things are not equal—in an inflationary environment, your costs of production are going to rise, too, cutting into that leverage effect.

However, we believe that as the dollar, the euro, and the yen become shakier, the relative demand for gold as a safe storehouse of value will increase and thus the price rise will outstrip the pace of inflation…and consequently, gold mining companies in general should prosper. And of course the way to avoid the risks attendant to any particular miner is to spread that risk over many miners…which brings us to GDX.

This fund has been around for nearly five years, and is up 70% in that time (compounded annual growth rate of 12%) compared to +6% for the S&P 500 (CAGR of +1%). It is liquid, with over nine million shares traded each day on average, and a market cap of $6.9B. The Gold Miners ETF seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the NYSE Arca Gold Miners Index. The Index provides exposure to publicly traded companies worldwide involved primarily in the mining for gold, representing a diversified blend of small-, mid- and large-capitalization stocks. For more info, including details on expenses, dividend and price history, performance versus the index, and holdings of the fund, check out Van Eck Global’s website.

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