Macro Tsimmis

intelligently hedged investment

3Q11 Intelledgement Macro Strategy Investment Portfolio Report

Posted by intelledgement on Fri, 14 Oct 11

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

Position   Bought Shares Paid Cost Now Value Change YTD ROI CAGR
FXI 29 Dec-06 243 37.15 9,035.45 30.83 8,300.57 -25.19% -25.31% -8.13% -1.77%
IFN 29-Dec-06 196 45.90 9,004.40 22.94 8,533.64 -14.46% -21.85% -5.23% -1.12%
DBA 13-Mar-08 235 42.50 9,995.50 31.74 7,078.20 -6.43% -8.17% -29.19% -9.27%
EWZ 3-Aug-09 165 60.39 9,972.35 52.01 9,604.45 -26.83% -29.46% -3.69% -1.73%
GLD 21-May-10 95 115.22 10,953.90 158.06 15,020.64 8.95% 13.94% 37.13% 26.12%
SLV 21-May-10 636 17.29 11,004.44 28.91 18,419.83 -14.55% -4.20% 67.39% 46.02%
GDX 7-Apr-11 195 62.51 12,197.45 55.19 10,762.05 1.10% -10.22% -11.77% -22.88%
RWM 26-Aug-11 358 34.02 12,187.16 28.76 12,827.14 n/a 11.34% 5.25% 70.59%
SEF 06-Sep-11 250 43.48 10,878.00 43.75 10,937.50 n/a 19.34% 0.55% 8.66%
SH 23-Sep-11 237 46.58 11,047.46 46.10 10,925.70 n/a 5.16% -1.10% -43.91%
cash 4,856.95 6,364.93
Overall 31-Dec-06 100,000.00 118,774.85 -7.07% -7.24% 18.77% 3.69%
Macro HF 31-Dec-06 100,000.00 128,059.55 2.03% 0.92% 28.06% 5.35%
S&P 500 31-Dec-06 1,418.30 1,131.42 -14.33% -10.04% -20.23% -4.65%

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: Finally a quarter with some action! (After only two transactions in the previous six months.) Uncharacteristically, we even bought, sold (at a profit), and then bought back (at a lower price) the same equity—the Russell 2000 short ETF (RWM)—as the odds of a short-term catastrophic collapse in Europe appeared to gyrate notably.

Performance Review: A very tough quarter. We were down 7.1%, our third-worst quarter ever (out of 19). And while we avoided the fate of the S&P 500—which was down a bear-market-and-a-half at -14.3% for the quarter—the second-worst performance in the last 19 quarters—we spectacularly failed to keep pace with the macro hedge fund index (+2.0% for the quarter). Generally, most macro hedge funds were shorter sooner than us, with less exposure to emerging market long funds than we had this quarter. And indeed, our BRIC funds continued to plunge, with Brasil (EWZ) down 27%, China (FXI) down 26%, and India (IFN) down 14%. Precious metals weren’t much help: gold (GLD) was up 9% but silver (SLV) was down 15%. Caught in the middle, our small miner ETF (GDX) was up 1%. Our other commodity investment, agriculture products (DBA), was down 6%. Our short funds helped tad—the S&P 500 short fund (SH) was up 4% overall, the Russell 2000 short fund (RWM) was up 8% overall, and the banking/finance short fund (SEF) was up 1%. We probably should have been shorter, sooner.

Our transactions were a bright spot. We sold RSX, SH, RWM, and UDN all at a modest profit. We ended the quarter having reentered the SH (at a higher price) and RWM (at a lower price) positions; RSX closed on 30 Sep down 34% from where we sold it, so that was one bullet dodged. UDN was down 2% from where we sold it by the end of the quarter.

Overall we are now 39 points ahead of the market in terms of total return-on-investment: +19% for us and -20% for the S&P 500 in the 57 months since the inception of the IMSIP at the end of 2006. However, we are now behind our benchmark, the GAI Global Macro Hedge Fund Index, which is +28%. In terms of compounded annual growth rate, after just shy of five years the GAI hedgies are at +5.4%, IMSIP is +3.7%, and the S&P 500 is -4.7%.

There were some changes in the composition of the the portfolio’s composition this quarter. We are now 43% invested in commodities, up from 36% and 29% short, up from 17%, reflecting the addition of the Russell 2000 index short ETF (RWM) and financials short ETF (SEF) to the lineup, offset by the loss of the U.S. dollar short fund (UDN). Our BRICs investments are down to 22% from 36%, reflecting both the sale of our Russian ETF and the overall decline in valuation for the other BRIC ETFs. Despite all the transactions, our cash position ended the quarter pretty nearly the same: 5% of the port up from 4% at the end of 2Q11.

3Q11 Highlights: Here are some topical 3Q11 links reprised from our Intelledgement tweet stream, organized by subject:

BRICs

  • Mark MacKinnon: As China squeezes supply of crucial rare earths minerals, Japan discovers massive deposit in Pacific seabed. http://bbc.in/mhWoyv
  • NY Times Global Edition: Roger Cohen on “Brazil’s Giddy Convergence.” http://nyti.ms/mlxKt6
  • The Economist: Why China may worry about North Korea just as much as America does http://econ.st/jhlnRW
  • The Oil Drum: Peak Coal and China http://bit.ly/kIQkce
  • Business Insider: The Latest On The Wage Inflation Mess Breaking Out All Over China http://read.bi/o2BKkY
  • Edward Harrison: China’s bad debts a cause for concern  http://on.ft.com/pjAQ2Z
  • Intelledgement: Russia nepotism—who needs an official nobility/Party stealing from everyone else; an unofficial elite works just fine! on.ft.com/mWj8Bp
  • StrategyPage: Pressure From Above To Make Things Happen In Russia http://bit.ly/p3sSfb
  • Business Insider: Proof Of A Big Chinese Housing Bubble As Far Back As 2008 http://read.bi/oDb0Px
  • Bloomberg News: China…built up on a bedrock of bad bonds?  http://bloom.bg/ppuE9Y
  • Intelledgement: Bad sign in Russia: young entrepreneurs appear to be emigrating in large numbers.  ti.me/qTQP90
  • Mark MacKinnon: China makes another multibillion-dollar investment in Canada’s controversial oil sands. http://tgam.ca/CgxL
  • Jonathan Chevreau: Is China heading for a banking crisis? natpo.st/oHkMvO
  • Intelledgement: Repercussions of the “one-child” policy in China long-lasting.  bit.ly/nLiEbM
  • Intelledgement: Balancing development and environmental protection in India.  aje.me/qznwHo
  • Wired: China has been buying missiles. Lots and lots of missiles. t.co/4Ax8VEi
  • Global Gains: An interesting take from the otherside—why to not invest in China. bit.ly/mutfF3
  • Al Jazeera English: Opinion: India’s functioning anarchy aje.me/or5xVo
  • NY Times Global Edition: Back in the U.S.S.R.? After 20 Years, Many Russians Wish They Were: nyti.ms/pgIWtI
  • WikiLeaks: Leaked US cable—China has “vastly increased” risk of nuclear accident by building reactors on the cheap gu.com/p/3xema/tw
  • StrategyPage: SURFACE FORCES—India Shifts To The East bit.ly/pNPBRM
  • Edward Harrison: Brazil Surprise Rate Cut To Weigh On BRL bit.ly/qBryfH
  • Foreign Policy: Why the world should embrace, not fear, China’s economic rise bit.ly/o47R8y
  • China News Daily: Fitch warns of downgrades for China, Japan sns.mx/fOeWy3
  • The Economist: Two trends have contributed to a meaningful shift in China’s terms of trade econ.st/om03Hd
  • NY Times Global Edition: In India, Nurturing the Next Generation of Entrepreneurs nyti.ms/omU7XG
  • NY Times Global Edition: China’s Economic Engine Shows Signs of Slowing nyti.ms/pE369h
  • citizen lab: Russia prepares UN ban on anti-government propaganda on Internet bit.ly/rfBIhD
  • The Economist: The yuan is still a long way from being a reserve currency, but its rise is overdue econ.st/po2py4

Deep Capture

  • Charles Hugh Smith: The Shape of Things To Come—The unstable double-bind of rule by Financial Plutocracy goo.gl/GR1ML
  • Intelledgement: Outgoing FDIC head Sheila Bair’s exit interview—2008 bank bailout was a mistake and we must not repeat it. nyti.ms/pZU3Rt
  • Edward Harrison: The Federal Reserve is a political organization http://bit.ly/qsWfsl
  • Brad Hessel: We-Have-Met-the-Enemy-and-He-Is-Us Dept. New book “Reckless Endangerment” explicates roots of the financial crisis. natpo.st/ol3XIf
  • Charles Hugh Smith: Complexity and Collapse—complexity offers a facsimile of “reform” to serve self-preservation goo.gl/Dowg7
  • Intelledgement: Heads—Wall Sreet wins…tails—Main Street loses. Case study: Escanaba, Michigan paper plant.  bit.ly/n8Iivz
  • The Oil Drum: Charles Eisenstein’s “Peak Oil, Peak Debt, and the Concentration of Power” bit.ly/pfossr #peakoil

Eurozone

  • Edward Harrison: How Belgian debt, Italian anarchy and Greek profligacy lead to economic chaos in Europe http://bit.ly/cWxsZH
  • Yves Smith: Eurozone Leaders Fiddling as Rome Starts to Burn? Worries about the Eurozone have heretofore been depicted as a… http://bit.ly/qN45PN
  • Edward Harrison: Core bank exposure to Italian debt an order of magnitude larger than periphery combined http://bit.ly/ndpf7B
  • Yves Smith: Satyajit Das on “Progress” of the European Debt Crisis http://bit.ly/p9mnfG
  • Edward Harrison: Here’s why the sovereign debt crisis will deteriorate further http://bit.ly/pjMK8z
  • Charles Hugh Smith: Why the Eurozone Fix Will Fail—the Eurozone endgame  goo.gl/mn1bU
  • The Economist: Saving Greece will be harder than Latin American rescues in the 1980s http://econ.st/nyL8Tm
  • Minyanville Media: Satyajit Das on European Banks—The Real Stress Test mvil.me/mVfHnL
  • zerohedge: Why The ECB’s Monetization Is Doomed In One Simple Chart http://is.gd/hDD7H7
  • Edward Harrison: The European Sovereign Debt Crisis is a solvency crisis bit.ly/ndXJHK
  • Chris Martenson: The Fatal Flaws in the Eurozone and What They Mean for You bit.ly/pg3Pab

Macro Analysis

  • Bloomberg: Jeffrey Goldberg says Israel is more likely to attack Iran because Dagan warned not to. http://bloom.bg/iGF2Qm
  • Business Insider: Are Corporate Profit Margins About To Grind Lower For Another 10 Years Or More? http://read.bi/jChvrk
  • Al Arabiya English: Mara Hvistendahl: How did more than 160 million women go missing from Asia? goo.gl/J7b7Q
  • Yves Smith: William Rees on the dangerous disconnect between economics and ecology. http://bit.ly/o08D19
  • The Economist: Rich world countries have had a disappointing economic recovery. The process of deleveraging has barely begun http://econ.st/o7Lute
  • The Oil Drum: The Link Between Peak Oil and Peak Debt – Part 1 http://bit.ly/nVdeP1
  • Business Insider: Orszag says this economy is MUCH weaker than it appears.  http://read.bi/plxB0m
  • Business Insider: The 10 Countries Sitting On A Huge Fortune Of Natural Gas http://read.bi/qSHXAA
  • Brian Whitaker: The unstoppable revolution: “This is one big revolution for all the Arabs” bit.ly/p0PQXK
  • Al Jazeera English: Is climate change a global security threat? http://aje.me/q07Y3P
  • StrategyPage: Pakistan Piles On The Plutonium http://bit.ly/oaJuwV
  • Business Insider: A Look At Gold Over The Really Long Run http://read.bi/r9criI
  • freakonomics: Will U.S. Shale Gas Rebalance Global Politics? Russia set to lose nat. gas market share in Europe. http://ow.ly/5Ox7S
  • The Economist: The mass resignation of Turkey’s military leadership captured a dramatic shift of power nine years in the making http://econ.st/oLDrxI
  • Intelledgement: Why the Pakistani Army wins most of the battles but never the war against terrorists. (Hint: it’s not incompetence.) bit.ly/otEX7j
  • NY Times Global Edition: An Index for Ocean Health: nyti.ms/p4psMQ
  • The Economist: Women are rejecting marriage in Asia. The social implications are serious econ.st/nSfhIx
  • zerohedge: Joel Salatin—How to Prepare for A Future Increasingly Defined By Localized Food & Energy bit.ly/ovyKSP
  • Edward Harrison: Asian Manufacturing PMIs suggest slowing economic growth bit.ly/n1g1UA
  • Charles Hugh Smith: Currency Wars, Trade and the Consuming Crisis of Capitalism—why the swiss peg and the Euro will both fail bit.ly/qIWuba
  • Brad Hessel: Atatürk-vs.-bin Laden Dept. The Arab Spring signifies a triumph of Islamic modernity over Caliphate restorationists. bit.ly/qk9Pzh
  • Gregor Macdonald: Coal’s Terrible Forecast: gregor.us/idyfi
  • David Jolly: Vast reserves of shale gas revealed in UK bit.ly/qB2q2X
  • Barry Ritholtz: Derivative Size & Concentration Threaten Global Economy dlvr.it/n2kN1

Monetary and Fiscal Policy

  • zerohedge: Gold Special Report: Erste Group Says Foundation Of A Return To Sound Money Has Been Laid, Expects Gold To Hit $2,300 http://is.gd/WfwY0K
  • zerohedge: Mike Krieger Explains Why QE 3 Will Merely Keep The Lights On http://is.gd/ptjJ7e
  • Edward Harrison: Why aren’t we using monetary policy to stimulate aggregate demand? http://bit.ly/d8y4yk
  • Intelledgement: Increasing debt to stimulate the economy—e.g., QE3—is a bad idea, argue Ken Rogoff and Carmen Reinhart.  buswk.co/omoQbi
  • Business Insider: Bill Gross says this debt deal does nothing, and we still have an “unfathomable” $66 Trillion in liabilities to cope with http://read.bi/rkG5Ei
  • Business Insider: Doug Kass outlines the four potential outcomes of our ailing economy read.bi/pGwHce

Analysis: A relatively large portion of excrement hit the rotary air recirculation device this quarter, but in our view, sorry to say, we ain’t seen nuttin’ yet.

The overall risk of systemic failure—for which we feel the market has not adequately accounted—is clearly elevated here. While the problems associated with the housing bubble collapse of 2007-08 linger—zombie banks stuffed toxic assets mis-valued thanks to the connivance of regulators so as to maintain the pretense of solvency, millions of homeowners “under water” owing more on their mortgages than the market value of their property, continuing bailout distributions of taxpayer wealth mostly in the form of sweetheart below-market interest loans, no meaningful reform of the derivatives market, no serious attempt to address the Federal budget deficit (as we expected, the August debt limit raise deal constituted another inconsequential “pay-you-Tuesday-for-a-hamburger-today/kick-the-can-down-the-road” maneuver)—we now have the added pressure of multiple sovereign debt crises in Europe. The specter of default has caused interest rates on bond offerings by Greece and Italy to surge to levels so high as to call into question those countries’ ability to service their debt. A default would be doubly dangerous because [a] while most bondholders have purchased credit default swap (CDS) insurance on their bond holdings, no one knows if the unregulated CDS equities will or can be honored by the issuers in the event of a default—and if they are not honored, many weaker banks (not just in Europe) may not be capable of absorbing the consequent bond losses—and [b] once any one Eurozone country defaults, all the others will be considered more risky and borrowing costs will go up.

Our best bet is that The Powers That Be (TPTB) will ultimately cobble together yet one more saving throw to stave off the crash for another year or so. They can probably get some mileage out of a mechanism whereby the European Central Bank—either directly or indirectly through another entity—steps forward as the lender-of-last-resort (LOLR) for Greece-Italy-Spain-et al, printing Euros as needed to fund bond purchases. The problem with this solution is that printing Euros out of thin air would be inflationary and is opposed by Germany, the strongest country in the Eurozone. Oh, yeah and also that it is essentially fighting fire (too much debt) with gasoline (affording the deadbeat still more credit)…not a viable long-term solution.

And while concerns about the European sovereign debt crisis are now paramount, we have the looming U.S. Super Committee debt reduction plan deadline (next month)—there could be another credit rating downgrade if a serious plan is not agreed to but that is a long shot prospect at best now that the 2012 election cycle is well underway. Plus the continuing unrest in the Arab world—currently most worrisomely, Syria—the threat of a double-dip recession in the USA, an apparent slowdown in China along with continued concern about their real estate bubble and weak banks with bad loans outstanding, or any number of other potential “black swans.”

Conclusion: What has to happen really isn’t all that complicated: there is a whole mess of bad—we would say, “fraudulent”—debt out there that has to be forgiven. The problem is that admitting that all those mortgages and related securities (in the USA) and sovereign debt (in the Eurozone) are worthless would tank most of the major banks, disenfranchise a lot of very wealthy (in theory) and very powerful (in practice) individuals, and cause a major economic disruption whilst we rebooted our financial system…most probably with some safeguards and limitations that TPTB are loathe to contemplate, and in any event with few of those miscreants ending up back in charge of anything important.

So, since 2008 the USA has harbored numerous “zombie” banks that are essentially insolvent but allowed by captive regulators to continue to operate, using various and sundry accounting gimmicks—most prominently, the hamstringing of the mark-to-market rule—to disguise their discorporation. And now, we are seeing similar entities tolerated in the Eurozone…only these are not just banks, but entire nations.

In theory, the justification for this strategy of “extend-and-pretend” is that [a] an honest but sudden writedown of the toxic bad debt assets would be too disruptive and [b] if we kick the can down the road long enough, it will give us time to kick-start economic growth again which will both increase the value of some of the marginal assets and enable us to liquidate the hopeless ones more gradually.

Well, there is no denying that a liquidation of the zombie banks back in 2008 would have been very disruptive. And if we bit the bullet now, it would be worse, seeing as we are three years deeper in debt and the ranks of the unemployed have swollen in the interim…and the longer we wait, the bigger the size of the hole we will have to climb out of, and the weaker we will be for the effort required. Because the notion that we can kick-start growth and somehow reach a better place without clearing out the bad debt sludge is utter fantasy…there is no light at the end of this tunnel TPTB have us marching through…just a deeper, hotter pit.

For the time being, we continue to hold long emerging market ETFs for three of the four BRIC nations in the portfolio: Brasil (EWX), India (IFN), and China (FXI) (having liquidated our position in Russia, as mentioned above). The higher risk attendant to the Eurozone crisis has made these investments more risky, partly because the danger of a collapse is greater and partly because the threat to the Euro has perversely strengthened the dollar, and exacerbated a decline in the relative valuations of BRICs assets. Never-the-less, we are not prepared to go totally short because we believe TPTB can still stave off disaster for a spell by some variation of the Quantitative Easing maneuver the central banks pulled after 2008 in order to constitute a well-heeled LOLR for the zombie countries (the PIIGS plus whoever else needs it). Of course, in the long run, loaning more money to deadbeats is not a winning formula, but in the short run, it would have an inflationary effect which coupled with the euphoria that disaster has apparently been averted again could drive a significant market rally. If this happens, we will likely repurchase our Russia position (which is a lot cheaper now than when we sold it).

We also retain our four long commodity plays: the agriculture ETF (DBA), the precious metals ETFs for gold (GLD) and silver (SLV), and the mining ETF (GDX). Commodities remain relatively more attractive stores of value (although as the mining ETF is only a proxy for commodities and the short- and medium-term outlooks are so uncertain for companies, we may cash out those funds and redeploy them into a purer commodity play). Most definitely, if you don’t have some of your own wealth allocated to precious metals, you should reconsider.

We now have three short positions, although—as reported above—we dropped our dollar short ETF when the Euro started seriously tanking. We are still short the S&P 500 index (SH), and have added a banking sector short ETF (SEF) as well as a Russell 2000 short ETF (RWM) as insurance against a black swan event such as a near-term default.

The investing weather remains very turbulent. In times of heightened uncertainty, valuations can fluctuate wildly and the preservation of capital takes precedence over meeting any target ROI. In the long run, these problems will get worked out and on the other side there will be great growth opportunities. In the medium term, things look black and we probably need to be totally short. In the short term, the future, as they say, is cloudy. Stay tuned.

Leave a Reply

Please log in using one of these methods to post your comment:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

 
%d bloggers like this: