Macro Tsimmis

intelligently hedged investment

2Q11 Intelledgement Macro Strategy Investment Portfolio Report

Posted by intelledgement on Mon, 25 Jul 11

Summary of Intelledgement’s model macro strategy model investment portfolio performance as of 30 June 2011:

Position   Bought Shares Paid Cost Now Value Change YTD ROI CAGR
FXI 29 Dec-06 243 37.15 9,035.45 42.95 11,245.73 -2.68% 1.19% 27.46% 4.98%
IFN 29-Dec-06 196 45.90 9,004.40 30.30 9,976.40 -4.95% -8.63% 10.79% 2.30%
DBA 13-Mar-08 235 42.50 9,995.50 31.74 7,564.65 -7.18% -1.86% -24.32% -8.11%
EWZ 3-Aug-09 165 60.39 9,972.35 73.35 13,125.55 -3.72% -3.59% 31.62% 15.51%
GLD 21-May-10 95 115.22 10,953.90 145.07 13,786.59 3.72% 4.58% 25.86% 23.05%
SLV 21-May-10 636 17.29 11,004.44 33.84 21,555.31 -7.96% 12.11% 95.88% 83.37%
UDN 21-Oct-10 399 27.54 10,996.46 28.76 11,475.24 2.20% 6.13% 4.35% 6.37%
RSX 31-Dec-10 316 37.91 11,987.56 38.54 12,178.64 -7.42% 1.66% 1.59% 3.24%
GDX 7-Apr-11 195 62.51 12,197.45 54.59 10,645.05 n/a -11.19% -12.73% -44.67%
SH 16-Jun-11 280 42.77 11,983.60 40.91 11,454.80 n/a -33.45% -4.41% -69.19%
cash -7,131.11 4,802.73
Overall 31-Dec-06 100,000.00 127,810.69 -4.74% -0.19% 27.81% 5.61%
Macro HF 31-Dec-06 100,000.00 125,258.88 -0.93% -1.28% 25.26% 5.14%
S&P 500 31-Dec-06 1,418.30 1,320.64 -0.39% 5.01% -6.89% -1.57%

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. The “cash” line for the “Cost” column is negative because the total cost of the securities presently in the fund exceeds the starting value of the fund by $7,000 (as profits from the sales of previously held positions have been reinvested; this is a good thing). Finally, the “cash” line for the “Value” 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: A subdued quarter in terms of transactions.

Performance Review: Not much worked right for us in the second quarter. We were down 4.7%, effectively wiping out our 1Q11 gains, and we lost to both the S&P 500 index (down 0.4%), and the macro hedge fund index (down 0.9%). Our BRIC funds were unanimously negative, with Russia (RSX) down 7%, India (IFN) down 5%, Brazil (EWZ) down 4%, and China (FXI) down 3%. Precious metals weren’t much better: gold (GLD) was up 4%, but the miner ETF (GDX) was down 13% and silver (SLV) was down 8%. Our other commodity investment, agriculture products (DBA), was down 7%. Our short funds were a wash with the U.S. dollar short ETF (UDN), +4% and the S&P 500 short fund -4%.

Overall we are now 35 points ahead of the market in terms of total return-on-investment: +28% for us and -7% for the S&P 500 in the 54 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 +25%. In terms of compounded annual growth rate, after four-plus years IMSIP is +5.6%, the GAI hedgies are at +5.1%, and the S&P 500 is -1.6%.

There were some changes in the composition of the the portfolio’s composition this quarter. We are now 36% invested in commodities, up from 33%—reflecting the addition of the miner ETF (GDX) offset partially by an overall decline in the value of our commodity positions—and 17% short, up from 8%, reflecting the addition of the S&P 500 index short ETF (SH) to the lineup. Our cash position is down from 22% of the port to 4%, reflecting the cost of adding these two new positions. The 36% investment in emerging markets remained stable.

2Q11 Highlights: Here are some topical 2Q11 links reprised from our Intelledgement tweet stream, organized by subject:

BRICs

  • The Economist: Why analysts are more bullish on India’s long-term prospects relative to China’s. http://econ.st/fEekS5
  • TMF Global Gains: Goldman’s Jim O’Neill on Charlie Rose. Worth it if you have any interest in EM investing. http://fb.me/G0U1H3Jk
  • NY Times Global Edition: Fast Growth and Inflation Threaten to Overheat Chinese Economy. http://nyti.ms/gSLCWf
  • The Economist: Why China’s currency appreciation will continue, and perhaps accelerate. http://econ.st/lOV45y
  • NY Times Global Edition: India Raises Interest Rates to Battle Inflation http://nyti.ms/msXxj
  • Jim Cramer: Brazil and China http://ow.ly/4OERF
  • zerohedge: Vladimir Putin (Re) Launches Bid For Russian Presidency Even As Medvedev Warns “Monopolizing Power Leads To Civil War” http://is.gd/a43Bnl
  • Shikha Sood Dalmia: What Chinese think of India. http://casi.ssc.upenn.edu/iit/pei
  • The Economist: Financial tightening is hitting the Chinese economy with real force. http://econ.st/lM0XGm
  • NY Times Global Edition: China Faces “Very Grave” Environmental Situation, Officials Say http://nyti.ms/lNzFH
  • Lincoln Ellis: China’s shadow banking system looks like the USA’s subprime/Alt-A markets prior to our r/e bubble burst. http://t.co/ddtz7S5
  • Business Insider: The Speed At Which China’s Local Governments Are Taking On Debt Is “Terrifying” http://read.bi/kpucIv

Deep Capture

  • 60 Minutes: Mortgage Securitization Document Lapses and Foreclosure Fraud  http://bit.ly/gLRBbA
  • The Motley Fool: This is America! We don’t bail out big business! Except for that time in 1970. And 1974. And 1980. And… http://mot.ly/ekspqE
  • G. William Domhoff: Who rules America? Wealth, income, and power in the USA. http://bit.ly/11TnJU
  • NY Times Global Edition: In Financial Crisis, a Dearth of Prosecutions Raises Alarms http://nyti.ms/g5Vjj3
  • Barry Ritholtz: Matt Taibbi wipes the floor with Megan McArdle re: Goldman Sachs criminality (unarmed in a battle of wits) http://bit.ly/l2vfh0
  • RebelCapitalist: 5 Mega-Banks May Have Defrauded Homeowners—Will the Justice Department Actually Prosecute? http://bit.ly/kjGnL5
  • Glenn Greenwald: So revealing who is now going to extreme lengths to ensure *reform-free* extension of the Patriot Act, and who isn’t. http://is.gd/wyfeJj
  • New York Post:  Why Wall Street is “crying wolf” about the prospect of failing to raise the debt ceiling. http://nyp.st/gId02G
  • zerohedge: Goldman’s Disinformation Campaign—Drilling Down Into The Documents http://is.gd/SnfOzu
  • Charles Hugh Smith: The U.S. Is a Kleptocracy, Too—Four Reasons Why goo.gl/YFhpr
  • Barry Ritholtz: FRBKC Pres Hoenig Warns “Big Banks Put Capitalism at Risk” http://dlvr.it/Y81VC

Eurozone

  • Edward Harrison: Even under a stressed scenario Spain’s debt levels are considerably lower than Greece, Ireland and Portugal. http://on.ft.com/h3EOWg
  • zerohedge: Complacent Europe must realise Spain will be next. http://is.gd/QiOgmI
  • Edward Harrison: S&P reckons 50-70% haircut for Greek debt restructuring, weakening euro. http://bit.ly/evYkkJ
  • The Economist: There is a model for how to restructure Greece’s debts. http://econ.st/hRCrBs
  • NY Times Global Edition: The Inevitability of a Greek Default http://nyti.ms/iHxTDd
  • Business Insider: Another Big Spain Problem—Mountains Of Hidden Debt Are About To Be Revealed http://read.bi/lBJUvN
  • Edward Harrison: The Hidden Cost of Saving the Euro—ECB’s Balance Sheet Contains Massive Risks http://bit.ly/jsWL65
  • Edward Harrison: What has led Ireland to the brink of collapse? http://bit.ly/l20gP9
  • Charles Hugh Smith: Why the Eurozone and the Euro Are Both Doomed goo.gl/BLInY
  • Jonathan Chevreau: Greek woes may eclipse Lehman. http://natpo.st/iSyBwi
  • Charles Hugh Smith: Greece is a kleptocracy—ruled by thieves. goo.gl/ZDSof

Macro Analysis

  • Barry Ritholtz: Anticipating the next black swan. http://wapo.st/eFQB3n
  • Charles Hugh Smith: The Grand Failure of Conventional Economics http://goo.gl/xKXAH
  • Charles Hugh Smith: The Devolution of the Consumer Economy (demand and debt self-destruct) http://goo.gl/98e70
  • Edward Harrison: Stiglitz proposes new reserve currency http://bit.ly/hzDviq
  • Barry Ritholtz: It’s Not Just Alternative Energy Versus Fossil Fuels or Nuclear—Energy Has to Become DECENTRALIZED. http://dlvr.it/PDX75
  • William Andrew Albano: What happens when China stops buying bonds?  http://bit.ly/gsUDGP
  • Al Jazeera English: US credit rating at risk—A downgrade would erode status as the world’s most powerful economy and the dollar. http://aje.me/hxKWyX
  • zerohedge: A Contrarian View On Commodity “Speculation.” http://is.gd/guXay8
  • The Economist: According to figures from the IMF and World Bank, gross external debt has exceeded 100% of GDP in many rich nations. http://econ.st/fAnnm6
  • Steve Case: America’s Post-Ownership Future—“Triumph of a sharing economy…own less, rent the rest.” http://bit.ly/gsu2nO
  • Al Arabiya English: $30 billion in capital flight out of the Arab region in three months. http://goo.gl/Ie7eJ
  • The Economist: Where are the world’s gold reserves kept? Economist Daily Chart April 27th http://econ.st/myopAh
  • The Oil Drum: Time to Wake Up—Days of Abundant Resources and Falling Prices Are Over Forever. http://bit.ly/mfL3Lu
  • Edward Harrison: Japan’s Economy Fights For Air http://bit.ly/lVKmk3
  • Business Insider: JPMorgan’s Black-Swan Risk That Could Clobber The Commodity Market http://read.bi/jV66Hn
  • Chris Martenson: Fukushima Update—A Very Bad Situation http://bit.ly/k2h2f5
  • Foreign Policy: Brazen Taliban raid on Karachi naval base renews concerns about the security of Pakistani nukes. http://bit.ly/ljHLcX
  • NY Times: Pakistan offers China Persian Gulf naval base. http://nyti.ms/milWBQ
  • Business Insider: Dire Report Predicts Doubling Of Food Prices, And Billions Living With A Shortage Of Water http://read.bi/jkfU0w
  • Blake Hounshell: Extremely pessimistic take on Egyptian economy. http://t.co/Hd0q7or
  • Business Insider: The Collapse In U.S. Homeownership Is Much Greater Than Reported In The Media http://read.bi/jOEaIQ
  • zerohedge: A global scenario risk/probability matrix. http://is.gd/Q6d1qi
  • Al Jazeera English: Turkey is trying hard to again become the superpower it once was.http://bit.ly/l88gnY
  • George Soros: “Financial System Remains Extremely Vulnerable… We Are On The Verge Of An Economic Collapse” http://is.gd/vgRAkq
  • Foreign Policy: Should we be afraid of China’s new aircraft carrier? http://bit.ly/lShYxV
  • Al Jazeera English: Water wars—21st century conflicts? http://aje.me/mDeHQA

Monetary and Fiscal Policy

  • Financial Times: How Fed quantitative easing pushes money into risk assets. http://on.ft.com/ihwMuI
  • zerohedge: Ex-PBOC Official Wakes Up From The Acid Trip: “U.S. Treasury Market Is A Giant Ponzi Scheme” http://is.gd/jxz9IX
  • Charles Hugh Smith: The Fed’s Most Dangerous Game: either destroy the dollar or the stock rally implodes http://goo.gl/CxT57
  • Edward Harrison: The Scylla and Charybdis of anchoring inflation expectations. http://bit.ly/h282IK
  • Satyajit Das: Deflating Inflation/Inflating Deflation http://bit.ly/ifRjIZ
  • Edward Harrison: QE3—A plan to stabilize the global monetary system. http://bit.ly/cx6rre
  • Barry Ritholtz: The value of the dollar—five factors for investors. http://t.co/12T2nUV
  • zerohedge: Pimco’s Observations As The US “Reaches The Keynesian Endpoint”—The QE2 Ponzi Is “Nothing But A Profit Illusion” http://bit.ly/flmKQZ
  • zerohedge: 20 Questions For Ben Bernanke. http://bit.ly/dLIt00
  • New Deal 2.0: QE2—The Slogan Masquarading as a Serious Policy http://bit.ly/k8uE5R
  • Edward Harrison: Is it time for the US to disengage the world from the dollar? http://bit.ly/jW6vc0
  • Bill Gross: Constant Bearing Decreasing Range—Fed policies on collision course with equity values. http://bit.ly/kqi8rD
  • Business Insider: Why An American Debt Default Is Inevitable http://read.bi/kz16UF
  • Al Arabiya English: UN sees risk of crisis of confidence in dollar http://goo.gl/DLjot
  • Charles Hugh Smith: The Death of Demand—The Post-Consumer Debt Economy…Dark Side of Keynesian Debt goo.gl/KwVUM

Analysis: The market closed nearly flat in 2Q11, but that masks a notable intra-quarter decline as it appeared likely that Greece would default, and the subsequent recovery almost back to even when Eurozone authorities came up with yet another rescue plan and the Greek government implemented putatively stronger austerity measures.

In the long term, 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 succeed primarily in digging us into a deeper hole.

For the medium term, however, 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. Combined with the exigencies of the USA election cycle which incentivizes government and government supporters to make an extra effort to gussie up our own pig—e.g., release crude oil from the strategic reserve to ensure that gasoline prices moderate going into the 2012 election—it is reasonably likely that a meltdown can be averted for up to another 18 months. However, we do not expect the “good news” concerning economic recovery to survive the reduction in government stimulus concomitant with the end of the QE2 program last month and remain prepared to move to a short bias to preserve capital if bad economic data tank the market. And while concerns about the European sovereign debt crisis have abated for now with the latest Greece rescue, the Euro PIIGS (Portugal-Ireland-Italy-Greece-Spain), could ensue squealing again at any moment. Plus we have the looming U.S. debt limit deadline (2 August according to the latest official announcement although the real date is probably later), 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.”

Conclusion: Although we doubled our short exposure this quarter from 8% to 17% of the portfolio, we are still reasonably optimistic that in the medium term, the-powers-that-be will pull out all the stops to continue to sell the fiction that all is well and the economy is slowly but steadily recovering from the 2008 shock. On this side of the pond, just as the banksters and their political trained seals hoodwinked and bullied us into bailing out the “too big to fail” institutions in 2008 with their predictions of Armageddon, we expect a repeat performance this time around. At the end of the day, we will probably end up with perhaps two trillion dollars or so reduction of the $14+ trillion debt spread out over the next decade that will enable everyone to say that they extracted a pound of flesh but in the end will not seriously impact military spending or entitlements…nor effectively address our long-term problems. In Europe, we eventually expect that the bad Greek paper will be called in and replaced with (much) longer-term bonds for the same face value. A scheme such as this should enable the banks and credit rating agencies to maintain the pretense that all is copacetic while providing Greece with a light at the end of the tunnel. These dual “extend-and-pretend” approaches to our economic problems will not serve indefinitely. But predicting exactly when the fecal matter will hit the air accelerator mechanism is akin to predicting when a coin flipped once every minute that has come up “heads” ten time running will finally show “tails”…one expects it any minute now, but is quite probable it might not happen yet for several minutes…and theoretically possible it will never happen, although that is a virtual impossibility.

In the event, we continue to 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 relatively 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 now have four long commodity plays: the agriculture ETF (DBA), the precious metals ETFs for gold (GLD) and silver (SLV), and the mining ETF (GDX). 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. If you don’t have some of your own wealth allocated to precious metals, you should reconsider.

We now also have two short positions. We continue to be short the dollar (UDN), which at this point appears to be a no-brainer, and we are also short the S&P 500 index (SH) as a hedge against a black swan event such as a near-term default.

Although we are remain biased toward the long positions now, 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 increase our exposure to index shorts again. However, we remain wary 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.” The recent surprise release of oil from the Strategic Petroleum Reserve—referenced above—is evidence of The Powers That Be’s willingness to pull out all the stops to maintain the fiction that the 2008 bailout is working. So long as these policies succeed in weakening the dollar and pushing up nominal equity valuations, it will be too early to go completely short. Stay tuned.

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