Macro Tsimmis

intelligently hedged investment

Archive for the ‘A.1 Investment Recs’ Category

BUY and SELL recommendations for the Intelledgement Macro Strategy Investment Portfolio (IMSIP). For ROI tracking purposes, we use the closing price on the day the rec is posted unless the market is closed (or the rec is posted in the last hour of the trading day), in which case we use the opening price on the next trading day.

SELL iShares Silver Trust ETF (SLV)

Posted by intelledgement on Fri, 29 Jun 12

The latest Eurozone rescue plan—stitched together in the wee hours this morning via tense negotiations between German Chancellor Angela Merkel on the one hand and Italian Prime Minister Mario Monti and Spanish Prime Minister Mariano Rajoy on the other—has the markets all atwitter today. The thinking is that Ms. Merkel’s unexpected concessions—to allow Italy and Spain easier access to European Stability Mechanism (ESF…the Eurozone bailout fund) monies and enable the ESF to provide direct aid to troubled banks—may kick the can far enough down the road that an economic recovery will rescue everyone’s bacon.

Of course, we agree with Jim Roger’s assessment: when faced with an unsustainable level of debt, you cannot resolve the problem by borrowing more. It is perverse that the market interprets the results of this summit as “good” news…but of course, in the short run, it means no banks will go bankrupt and no countries will default on their debt, so in that sense, it is good…even if the long-term problem—and likely the eventual collapse—are now have become more severe.

So, as we have been saying since 2006, this means that paper currencies will collapse and precious metals will become more…well…precious, being a relatively reliable store of value in a sea of uncertainty. Right? Well…yes…but…we do foresee an increased risk of a deflationary depression when Germany’s ability to bankroll the insolvent nations of the Eurozone gets stretched too thin, as it inevitably will. In 2008 when it looked as if many big banks might fail, the markets tanked and there was a run on US Treasury bonds which were perceived as a relatively safe haven. The dollar appreciated sharply against other currencies and gold and silver declined in dollar-denominated value. We believe there is an increased risk now that a similar scenario—this time sparked by a Eurozone collapse—may play out in 2012 or 2013. Consequently, we are reducing our exposure to precious metals by cashing in our silver position.

Of course in the long run, we expect the value of the U.S. dollar to plummet and we will want to convert our cash back into silver before then. Should the long run arrive faster than we expect, being out of silver would hurt us. And there are significant short-term risks, too, the cardinal one being a Middle East flareup—e.g., an Israeli attack on Iran’s nuclear facilities—that would send the prices of oil, gold, and silver soaring instantly.

But we now believe that a the risk of a deflationary event has increased enough to warrant getting out of SLV with a profit here with the expectation we are likely to have an opportunity to get back into silver at a materially lower price.

Previous SLV-related posts:

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SELL SPDR Gold Shares (GLD); BUY Sprott Physical Gold Trust (PHYS)

Posted by intelledgement on Fri, 30 Dec 11

Intelledgement’s model portfolio utilizes (mostly) exchange-traded funds to implement a macro-focused investment strategy. Consequently, we periodically review the funds relevant to any particular aspect of our overall strategy—e.g., all the funds that invest in India or agriculture, or short the dollar—to ensure that the particular fund we choose as our investment vehicle is the best choice (or at least a good one). In order to minimize potential liquidity issues, we generally eschew any fund that has less than one billion dollars under management, or trades fewer than one million shares per day on average. We occasionally make exceptions to this practice; for example when we feel strongly about the need to take a certain position and the fund choices to implement it are limited or when a fund with a large enough market cap has lower volume due to a high per-share price.

We have been satisfied investors in the SPDR Gold Shares ETF (GLD) more-or-less since the inception of the Intelledgement Macro Strategy Investment Portfolio at the beginning of 2007. (We sold our gold and silver funds in February of 2010 thinking the dollar would strengthen on flight-to-safety concerns…and got a sharp reminder that trying to outguess the market tactically is very hard to do as the price of both commodities soared. We got back in three months later, having missed a 10% rise in gold and a 17% rise in silver.) Since that time, GLD has reasonably faithfully tracked the price of gold, which has mostly gone up.

We still think gold is a good place to store some value as we explained in our original recommendation for GLD back in 2006. So we don’t want to pull any funds out of gold, but what we are doing is making a lateral move: selling the GLD ETF and rolling over all of the proceeds of that sale—our original investment plus the profits—into the Sprott Physical Gold Trust closed-end mutual fund (PHYS).

We are making this move for two reasons. First, being a closed-end mutual fund, the tax treatment for PHYS capital gains is more favorable for US investors: 15% on long-term PHYS gains compared to your ordinary income tax rate—probably 28%—for any GLD gains regardless of how long you have held the investment. Of course, this does not matter if you hold the shares in a retirement account, but for those investors working with a regular brokerage account, it is a material advantage. Secondly, so far—since the inception of the fund in February 2010—the PHYS fund has actually outperformed gold bullion by 2% as compared to the slight underperformance of GLD since its inception (November 2004). This may be a transitory effect, but there are some reasons why the market seems to prefer PHYS to GLD—for more on this see our Motley Fool weblog post—and insofar as that helps the former to outperform the latter, we are willing to let the effect work in our favor.

One of the reasons PHYS is preferred is that some investors consider that GLD is more vulnerable to systemic risk than PHYS. We believe that if the system genuinely collapses, no paper gold holdings are likely to avail one; at that point, you will need silver coins, tobacco, alcohol, and aspirin for purchasing any necessities of life that you cannot provide for yourself. The market also likes PHYS because it is the only fund that enables investors to redeem their shares for physical gold. But this is not a genuinely practical option, as you need to have about $400,000 invested in the fund to afford the tradein for a gold bar—they are not about to incur the hassle and expense of dividing up a bar for you. Anyone who seriously could afford to and wished to acquire that much gold could do so more cheaply buying from a dealer. But again, if the market bids the price of PHYS up relatively higher because of irrational beliefs that it is safer and easy to convert shares to bullion, as PHYS owners we will cheerfully accept all contributions to our share valuation.

Of course, with a marketcap of $2 billion and average trading volume of 1.5 million shares, PHYS exceeds our liquidity requirements (minimums of $1 billion marketcap and one million shares average daily volume). Sprott store all their bullion at the Royal Canadian Mint, who are responsible for auditing and issuing bar lists. Since the 2009 brouhaha over the $15 million of “missing” bullion that turned out not to be missing, the mint has tightened up their accounting procedures and now considered  one of the safest, if not the safest and most honest storehouses of gold bullion in the world. We also like the fact that—as with GLD—the gold is stored outside the USA, considering what happened in the 30s when the government confiscated everyone’s gold.

Previous gold-related posts:

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BUY ProShares Short S&P 500 (SH)

Posted by intelledgement on Fri, 23 Sep 11

We are increasing our short position here as a hedge against the increased risk of a major sovereign debt default—or potentially a series of defaults—in Europe that could negatively impact international banks (in Europe, the Americas, and Asia) and lead to a credit freeze similar to the one we experienced in 2008. As we have in the past, we are going with the Proshares Short S&P 500 (SH) ETF, which “seeks daily investment results, before fees and expenses, that correspond to the inverse (opposite) of the daily performance of the S&P500® Index.”

Previous SH-related posts:

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SELL PowerShares DB US Dollar Bearish ETF (UDN)

Posted by intelledgement on Fri, 09 Sep 11

OK, this move is going against the macros. Everything we said when we took this position back in October 2010 still applies, and then some. The US government continues to extend-and-pretend with a vengeance. Just last night, President Obama proposed another $450 billion amalgam of temporary, emergency salves for the sundry symptoms assailing our teetering economy, without the faintest hint of of any effort to cure the actual disease—systemic malinvestment driven by out-of-control banksters and corporatists whose incentives have become misaligned with the greater good of humankind. No surprise, as Obama’s biggest contributors have always been and still remain those very same guys.

So—among other bad effects coming sooner or later—the dollar is toast, given the compulsion of the government to keep printing more in their pathetic efforts to push on the stimulus/bailout string.

However, there is no chance of that happening this month. In contrast, that is, to the Euro, which could potentially be undone depending on how things play out with Greece, Italy, and Spain. If the Eurozone comes completely unglued and the Euro collapses, the dollar is likely to (temporarily) benefit as a (relatively) safe haven play. If that happens, we will have an opportunity to get back into UDN at a much lower price point.

Of course, it’s possible that the Eurozone could expel the troubled peripheral economies and we could end with a strengthened (temporarily) Euro. In which case, dumping UDN here will prove to be unnecessary, and possibly even cost us. But it is unlikely to cost us much to get back in under those circumstances—there is no immediate reason for the dollar to plummet in value—whereas if the Euro collapses—which appears to be the more likely scenario anyway—we could see substantial dollar strengthening.

Thus when the micros—in this case, the potential imminent collapse of the Euro and concomitant short-term effects —overwhelm the macros—long-term destruction of the dollar—stepping aside is the prudent play.

Previous dollar short-related post:

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BUY ProShares Short Financials (SEF)

Posted by intelledgement on Tue, 06 Sep 11

The bankster royalty are still parading down Main Street in the altogether—clothed with balance sheets crammed with chimerical toxic assets that their captured regulators allow them to carry at par when in reality they are worth next-to-nothing. The bought politicians insist that the clothes look great, and warn us that if we demur, it will be the end of the world. But more and more unruly little boys are insisting on the truth: the emperor has no clothes. It is only a matter of time before the crowd catches on.

It is the European banks that are the most exposed here. If you subtract from their mythical balance sheets the bad sovereign debts they have collected in the past few years and the bad mortgage-backed securities American banksters peddled to them in the last decade, there are several who would be insolvent. The central bank authorities are racing around handing out clouds of free money and distributing dark glasses to market participants, hoping to mask the naked truth a little longer, but any stray ray of sunlight at an indiscreet moment could reveal the truth and start a Lehman/Bear Stearns style bank run.

And of course, the US banks are integrated into the mess big time. If more than one or two Euro banks roll over, a cascade effect is likely. Even short of that, the risk levels are way up here. The stakes were raised considerably last Friday after the market close, when—in a surprise move—the U.S. Justice Department filed suit against 17 banks for fraud in the peddling of mortgage-backed securities.

Thus it is prudent to go short here. Our instrument of choice here is the Proshares Short Financials ETF (SEF), which utilizes short equity positions, futures contracts, options on futures contracts, securities and indices, forward contracts, swap agreements, and similar instruments in pursuit of “daily investment results, before fees and expenses, that correspond to the inverse (opposite) of the daily performance of the Dow Jones U.S. Financials Index.” That is, if the fund managers meet attain their objective, on a day the DJ average goes down 1%, this fund should go up 1%…and vice versa. This DJ index represents banks (about two-thirds) and general financial groups (one-third), and the positions of the ETF reflect that distribution.

Over time, because of the way the SEF ETF is designed (to match the daily performance of the index), it has an inherent negative bias, and therefore exhibits a significant tracking error. The problem is that on days the Dow Jones index moves up, the ETF tends to lose relatively more ground than it gains on the days the index moves down. The fund debuted in July 2008 and is down 39% since then…while the Dow Jones U.S. Financials Index over the same time frame is down 43%. As we would expect the SEF to be up 43%, this is a tracking error of a whopping 82 points over three years. Point being, this is not a fund to hold over the long term, because even if the Financials decline, your performance is not likely to reflect that. (Read more about inverse and leveraged fund tracking errors here.)

However, during periods when the financials declines sharply over a short time period, the performance of the SEF has reasonably closely met expectations. And we believe such conditions are likely here.

In the past we have used the ProShares Ultrashort ETF (SKF) to cover this base, but the tracking error of that fund—which is down 71% since inception in February 2007 while the DJ index is down 69%—is even worse at 140 points in four-and-a-half years. The SEF falls well below our preferred benchmark levels for liquidity—only $115 million in assets when we should prefer a minimum of $1B and only 188 thousand shares traded daily on average when we like to see a minimum of one million—but we are holding our noses here and diving in as a hedge against a financial sector meltdown.

Previous financials short-related posts:

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BUY ProShares Short Russell 2000 (RWM)—Again

Posted by intelledgement on Fri, 26 Aug 11

We got the Bernanke bump we were expecting—the market is up today, although looks to be a more modest advance than we had expected. It would have been fine just to stay short here, but we will probably end up a bit ahead when we come back in at the close today (that is, the price we buy RWM at today will likely be a few cents less than what we got for the shares we sold on Tuesday).

We still expect that the most likely scenario is that The Powers That Be will manipulate the smoke and mirrors to mask the seriousness of our financial problems long enough to conduct an orderly U. S. election in 2012. However, the cracks in the wall—Eurozone sovereign debt issues, U.S. no jobs “recovery” and structural debt/demographic issues, BRICs growth slowdown, Middle East unrest, etcetera—are proliferating faster than the metaphorical wall paper can be applied and thus it is prudent to go short here (again) as a risk management tool to limit the potential damage if things fall apart sooner than we expect.

We are again utilizing the ProShares Short Russell 2000 ETF (RWM) as our vehicle of choice. Our logic is that a slow growth scenario is likely to negatively impact smaller companies more than large companies (although both will be hurt). This ETF is low on assets—$400 million where normally we prefer a minimum of $1 billion—but the robust average daily shares traded (up to 1.9 million) ensures adequate liquidity.

Previous index short-related posts:

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SELL ProShares Short Russell 2000 (RWM)

Posted by intelledgement on Tue, 23 Aug 11

We are cashing in our insurance here with a 4% one-week profit because with Europe essentially closed for business through the end of August, we believe the need for short protection here is outweighed by the risk of a temporary market surge in the face of the combination of no fresh bad news and (false) reassurances likely coming from Ben Bernanke at the Jackson Hole confab by the end of this week.

We expect to be back again by early September.

Previous index short-related posts:

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BUY ProShares Short Russell 2000 (RWM)

Posted by intelledgement on Tue, 16 Aug 11

We still expect that the most likely scenario is that The Powers That Be will manipulate the smoke and mirrors to mask the seriousness of our financial problems long enough to conduct an orderly U. S. election in 2012. However, the cracks in the wall—Eurozone sovereign debt issues, U.S. no jobs “recovery” and structural debt/demographic issues, BRICs growth slowdown, Middle East unrest, etcetera—are proliferating faster than the metaphorical wall paper can be applied and thus it is prudent to go short here as a risk management tool to limit the potential damage if things fall apart sooner than we expect.

This time we are using the ProShares Short Russell 2000 ETF (RWM) as our vehicle of choice. Our logic is that a slow growth scenario is likely to negatively impact smaller companies more than large companies (although both will be hurt). This ETF is low on assets—$400 million where normally we prefer a minimum of $1 billion—but the robust average daily shares traded (1.1 million) ensures adequate liquidity.

Previous index short-related posts:

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SELL ProShares Short S&P 500 (SH)

Posted by intelledgement on Fri, 12 Aug 11

We are cashing in our short “insurance” here at a profit. We still believe it prudent to be short, and we are planning to short the Russell 2000 instead of the S&P 500 because we feel the cyclical growth slowdown that is occurring is likely to hurt smaller companies more than larger ones. However, we may wait a few days to see how the latest European can-kicking effort goes; if the market believes there is a good chance it will “succeed,” then we may have an opportunity to get in at a significantly lower price.

Previous SH-related posts:

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SELL Market Vectors Russia ETF (RSX)

Posted by intelledgement on Wed, 03 Aug 11

We are stepping aside here—basically at breakeven, maybe a miniscule profit—on increased risk of a significant slowdown. Russia is a close-to-pure growth play, based on their world-class exports of natural gas, oil, steel, et al. With the Chinese growth target now reduced to 7% over next five years, India and Brazil raising rates to fight inflation, the USA flirting with (at best) a double dip recession, and Europe juggling with lit firecrackers (the PIIGS plus others) any one (or more) of which could explode at any moment, we are banking our slight profit here and stepping to the sidelines to avoid the risk of a big decline. Russia, being more vulnerable to a slowdown than better integrated economies, is prone to decline more sharply under such conditions—their stock market was down 72% in 2008.

Of course that volatility works on the upside, too and when conditions improve, we expect to be back in here…likely at a lower level.

Previous RSX-related posts:

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