Macro Tsimmis

intelligently hedged investment

Posts Tagged ‘BAC’

BUY ProShares Short Financials ETF (SEF)

Posted by intelledgement on Mon, 25 Jan 10

For a year now, we have been complaining that the Obama administration has totally failed to deliver “change we can believe in” with respect to the most important issue affecting the USA—managing the economy.

The G. W. Bush administration presided over the terminal phase of a real estate bubble that was exacerbated by lax and irresponsible regulation (to be fair, the real estate bubble was stoked by the Clinton administration and easy money policies go back further than that). When it finally blew up in our faces in 2008, instead of working to fix the problems—letting the overextended companies go bankrupt, working to reduce deficit spending and strengthening the dollar, and putting in place regulatory reform to address dark markets, overleveraging, and naked short selling—we instead attempted to paper over the problems: prop up all the troubled companies with toxic assets, extend artificially low easy credit, inject massive amounts of liquidity thus further weakening the dollar.

Enter the Obama administration, whose leader had decried the policies of his successor. But ironically—and to our dismay—when it came to managing the economy, it’s been hard to tell that there’s been an election and change in control of the government. Here it is a year later, and we are still propping up the companies that had failed and should have gone bankrupt (AIG, Fannie and Freddie, Citibank, GM et al), still maintaining 0% interest rates, our debt levels are up since January 2009, the dollar is down 9% year-over-year, and we still await meaningful regulatory reform. Only the names have been changed to protect the…oh, wait…nevermind…Obama even has the same folks in charge of the economy that G. W. Bush did.

Until—perhaps—last week.

Last Thursday, Obama announced proposals to restrict banks with Federally-insured deposits from conducting proprietary trading and from owning or investing in private equity funds or hedge funds. While the details remain to be spelled out, it appears that this is an attempt to transform savings bank/mortgage writing activities into a utility-style of business—heavily regulated, with limited profitability and insulated from more aggressive financial activities. Given that we have consistently criticised Obama (and previous presidents) for essentially taking their cues from the same guys that got us into this mess, it is bracing to finally see a policy proposal from him that did not have a stamp of approval from Goldman Sachs sputniks Larry Summers and Timothy Geithner.

Now, we don’t actually think much of these particular proposals. Had they been in effect in 2008, they would have applied to Citibank and JP Morgan Chase, but not to Bear Stearns or Lehman Brothers or AIG or Fannie or Freddie. And of course they would have done nothing to address the policies of easy money and easy credit that stoked the real estate bubble. And nothing to regulate the dark markets through which these bad loans were securitized and distributed. On the margins, it’s not a bad idea to insulate savings banks from what amounts to financial chicanery, but if on the other hand the government is still encouraging such chicanery…well, we can’t seriously expect to get healthier with this course of treatment; about the best we can hope for is to get sicker more slowly.

But when the car is going the wrong direction and you change drivers but keep going in the wrong direction, finally changing the navigator is a good sign.

So if this is (potentially) good news, why are we shorting the financials here?

Well, as much as we enjoyed watching Geithner squirm as he pretended to agree with these proposals, in the final analysis, we do not expect the Obama administration to substantively reverse course here. To truly put things right—reduce deficit spending, support the dollar, cease propping up zombie banks, enforce already-existing regulations limiting leverage, naked short selling, and other financial shenanigans which have largely been winked at for decades—would be painful. Painful in the short term for everyone, and in the longer term, for a lot of powerful folks from New York to Washington to London to Beijing. If Obama were of a mind to tackle that Sisyphean task, he should have started a year ago, when he could clearly have blamed everything on G.W. Bush and might have had a chance to make enough progress by 2012 to be re-elected. Now he has followed the same path as G.W. Bush for a year and we are a year further down the wrong road—whose fault is that? Even if he wants to reverse course, he lacks the moral authority and time to succeed.

So what is driving this conniption? We think it’s the loss of the Senate seat held by Ted Kennedy to the long-shot Republican challenger Scott Brown last week that has clearly energized the Obama administration to position themselves as less friendly to “Wall Street.” And folks, this is not positive energy we’re talking about here. The reality is that we have a capitalist system that is debilitated and the spectacle of the government vilifying the banks for no end other than political expediency is most definitely not a step towards healing. Politicians fighting for their (political) lives are not likely to make statesmanlike decisions and exhibit restraint; things are apt to get ugly. That is to say, more ugly.

And if we have misjudged Obama, and he truly does make an attempt to change direction here, then we will really see some economic and political turbulence.

Actually we think Bush-Obama troops have done a decent job, considering the size of the problems we have, sweeping them under the rug once again. Thus we could well get a continued overall market rally so long as job losses continue to slow and consumer spending does not decline further. But we don’t believe the financial sector is likely to lead such a rally. Thus it is a logical choice to short here, as insurance against a downturn sooner than we expect.

Thus we are buying the ProShares Short Financials ETF (SEF) here. This ETF is managed with the intent of obtaining a return of -100% of the Dow Jones U. S. Financials Index each single day. Thus the value of each share of the ETF should go up when the index declines, and vice versa. We have shorted the financials twice previously, both times utilizing the Proshares Ultrashort Financials ETF (SKF; this fund seeks a return of -200% of the Dow Jones U. S. Financials Index each day)—we made compounded annual growth rate profits of 45% and 5% respectively on those trades, but in light of our analysis that leveraged ETFs don’t perform well over time, we are going with the SEF this time around.

Previous SEF-related posts:

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Dec 08 Intelledgement Speculative Opportunity Portfolio Report

Posted by intelledgement on Tue, 13 Jan 09

Position Purchased Shares Paid Cost Now Value Change YTD ROI CAGR
VRTX 18-Apr-07 57 31.65 1,812.05 30.38 1,731.66 23.55% 30.78% -4.44% -2.63%
NBIX 22-May-07 158 11.33 1,798.14 3.20 505.60 2.89% -29.52% -71.88% -54.47%
GSS 19-Jul-07 451 4.19 1,897.69 1.00 329.23 36.99% -68.35% -76.23% -62.78%
GSS 24-Aug-07 613 3.08 1,896.04 1.00 447.49 36.99% -68.35% -67.67% -56.53%
BBY 19-Sep-08 -58 41.49 -2,398.42 28.11 -1,638.50 35.73% -46.61% 31.68% 165.39%
MA 19-Sep-08 -11 225.18 -2,468.98 142.93 -1,573.88 -1.70% -33.58% 36.25% 199.51%
WMT 19-Sep-08 -40 59.70 -2,380.00 54.77 -2,200.32 -1.99% 15.23% 7.55% 29.45%
CAB 19-Sep-08 170 14.08 2,401.60 5.83 991.10 -6.72% -61.31% -58.73% -95.67%
APWR 18-Dec-08 422 6.14 2,599.08 4.30 1,814.60 n/a -67.79% -30.18% 100.00%
SOHU 18-Dec-08 58 45.13 2,625.54 47.34 2,745.72 n/a -13.17% 4.58% 251.66%
cash -189.22 19,669.50
ISOP 03-Jan-07 10,000.00 24,923.44 -2.21% 14.09% 149.23% 58.12%
Global HF 03-Jan-07 10,000.00 9,340.35 0.74% -15.95% -6.60% -3.37%
NASDAQ 03-Jan-07 2,415.29 1,577.03 2.70% -40.54 -34.71% -19.25%

Position = symbol of the security for each position
Purchased = date position acquired (for long positions) or sold (for short positions)
Shares = number of shares long or short in the portfolio
Paid = price per share
Cost = what portfolio paid (including commission); note for short sales, the portfolio gains cash
Now = price per share as of the date of the report
Value = what it is worth as of the date of the report (# shrs multiplied by price per share plus—or minus for short positions—the value of dividends)
Change = Change since last report (not applicable for positions new since last report)
Year-to-Date = Change since 31 Dec 07
Return on Investment = on a percentage basis, the performance of this security since purchase
Compounded Annual Growth Rate = annualized ROI for this position since purchase (to help compare apples to apples)

Notes: The benchmark for the ISOP is the Greenwich Alternative Investments Global Hedge Fund Index, which historically (1988 to 2008 inclusively) provides a CAGR of around 13.4%. For comparison’s sake, we also show the NASDAQ index, which over the same time frame has yielded a CAGR of around 9.6%. Note that for the portfolio, dividends are added back into the value of the pertinent security—or subtracted from the value of short positions—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.

Transactions: The market calmed down considerably in December, and—following three consecutive months of unmitigated disaster—closed up. With the immediate risk of a financial meltdown reduced and the probability of a post-election “Obtimism” rally increasing, we liquidated our four financials sector shorts as well as our real estate short.

News:

Comments: To quote our IMSIP 4Q08 report, “Let’s hope for the best. The incumbent crew was most definitely leading us deeper into the morass; the new crew recognizes we are in a big hole…perhaps they will be smart and brave enough to stop digging. We subscribe to the injunction to make love, not war, but we still believe in being prepared for both.” Accordingly, while we do not believe it is likely we can avoid a crash, it does appear likely that the herculean efforts of the powers-that-be to paper over the cracks in the system are taking hold (for now) and that, combined with optimism that the new regime might work miracles is likely to buoy markets in the short-to-medium term. This we are still short retailers—because we don’t believe the American consumer has any spare cash or credit to spend—but have covered our financial sector and real estate sector shorts for now. Plus in congruence with our long-term belief in the prospects of China, we have filled a gap in the port with two Chinese-market acquisitions.

At the end of the month, we were -2%, the hedgies were +1%, and the NASDAQ was +3%. For 2008 overall, we were +14% while the hedgies lost 16% but still handily beat the NASDAQ, which was -41% (worst year ever!). Overall after two years since inception, the ISOP is now +149% compared with -7% for the hedgies and -35% for the NASDAQ. Please note we generally consider the purchase of individual stock equities to be speculation, rather than investment, because of the high risk associated with owning a particular stock…and we recommend that the ratio of funds under management be about 10:1 in favor of investment over speculation—which is why this speculative portfolio started with $10,000 while our Intelledgement Macro Strategy Investment Portfolio started with $100,000 back at the beginning of 2007. (Of course, speculative risk can be mitigated by owning large numbers of stocks; this is why we recommend investing in exchange-traded funds, which typically do just that.) While this order of volatility is not unusual for speculative positions, the ROI we have attained here is unrealistically high. Over 40% of our net profits after two years still derive from trading one stock and associated options—DNDN—in the first few months of 2007. So, we’ve been lucky and good so far…but it could just as easily go the other way in 2009-10.

While there was lots of macro news—mostly desperate (and ill-considered) attempts by the government to fend off immediate collapse, it was a quiet month for our stocks. Our gold miner Golden Star (GSS) was up big (+37%) mostly on a rebound in the price of gold and possibly also on an unusual lack of bad company-specific news. Vertex (VRTX) recovered nicely (+24%) from last month’s overblown concerns that the new Obama administration would be anti-biotech. Neurocrine Biosciences (NBIX), our other biotech stock, was up 3%. Of our four retailers, two were flat (Mastercard/MA and Walmart/WMT) while Cabelas (CAB) which we are long was down 7% and Best Buy (BBY) which we are short was up 36%. And despite the fact that the price of oil declined in December by 18%, our double inverse oil ETF (DUG)—instead of being up 36% as we might have expected—was down another 20%. Clearly something is wrong there. Finally, our Chinese newcomers were a mixed bag: Sohu.com (SOHU) was up 5%, but A-Power (APWR) was blown down 30% on revised guidance.

The risk of a serious downturn remains but appears to be less immediate, and consequently we reduced our short positions. Unfortunately, it still appears that the new administration is angling to establish continuity with the old one with respect to the policy of material intervention in the market to prop up insolvent “too-big-to-fail” enterprises. While we feel these policies are long-term disastrous, there is some “upside risk” should the collective wisdom of the market come to think otherwise. Generally, new political leaders get some benefit of the doubt. So we will be prepared for a “melt-up” as well. With systemic risk on the loose, the variation in plausible valuations for almost anything is very wide and consequently the risk of volatility—which reached record levels in 2008—remains high.

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BUY TO COVER Bank of America (BAC), Goldman Sachs (GS), HSBC (HBC) & Wells Fargo (WFC)

Posted by intelledgement on Tue, 16 Dec 08

OK, as we stated in our IMSIP post announcing we are selling off the financials and real estate reverse ETFs, we still think the odds favor a long and deep recession and a secular decline here. But for now, we can’t fight city hall. The Fed and the Treasury are firing all the guns at once here, and the combination of today’s shock and awe decision to reduce the discount rate to 0%—free money for the banks!—and purchase mortgage-backed securities combined with the promise of a massive stimulus package to be named later by the incoming Obama administration has broken the gloom-and-doom psychology of the market. We will go up here so long as folks believe Obama can plug the holes in the dyke.

He can’t and he shouldn’t be trying, but he is and it could take a while for everyone to realize that resistance to the laws of economics is futile. Sooner or later, that will happen and when it does, we will go short again.

Previous banking company short-related posts:

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Nov 08 Intelledgement Speculative Opportunity Portfolio Report

Posted by intelledgement on Wed, 10 Dec 08

Position Purchased Shares Paid Cost Now Value Change YTD ROI CAGR
VRTX 18-Apr-07 57 31.65 1,812.05 24.59 1,401.63 -6.18% 5.85% -22.65% -14.70%
NBIX 22-May-07 158 11.33 1,798.14 3.11 491.38 -24.70% -31.50% -72.67% -57.35%
GSS 19-Jul-07 451 4.19 1,897.69 0.73 329.23 -17.05% -76.90% -82.65% -72.33%
GSS 24-Aug-07 613 3.08 1,896.04 0.73 447.49 -17.05% -76.90% -76.40% -68.07%
BZH 24-Mar-08 -214 10.99 -2,343.86 1.81 -387.34 -20.61% -95.61% 83.47% 143.57%
BAC 8-Sep-08 -69 34.73 -2,388.37 16.25 -1,121.25 -32.77% -60.62% 53.05% 581.57%
GS 8-Sep-08 -14 169.73 -2,368.22 78.99 -1,110.76 -14.61% -63.27% 53.10% 582.44%
HBC 8-Sep-08 -30 79.11 -2,365.30 54.37 -1,658.10 -7.85% -35.05% 29.90% 225.29%
DUG 10-Sep-08 56 42.83 2,406.48 30.40 1,814.51 -17.95% -15.51% -24.60% -72.89%
BBY 19-Sep-08 -58 41.49 -2,398.42 20.71 -1,209.30 -22.95% -60.66% 49.58% 717.44%
MA 19-Sep-08 -11 225.18 -2,468.98 145.40 -1,601.05 -1.64% -32.43% 35.15% 381.54%
WMT 19-Sep-08 -40 59.70 -2,380.00 55.88 -2,235.20 0.13% 17.57% 6.08% 36.09%
CAB 19-Sep-08 170 14.08 2,401.60 6.25 1,062.50 -21.38% -58.53% -55.76% -98.58%
WFC 09-Oct-08 -73 33.06 -2,405.38 28.89 -2,133.79 -15.15% -2.89% 11.29% 118.47%
cash 16,906.53 31,396.20
ISOP 03-Jan-07 10,000.00 25,486.15 2.70% 16.67% 154.86% 63.50%
Global HF 03-Jan-07 10,000.00 9,271.73 -1.67% -16.57% -7.28% -3.90%
NASDAQ 03-Jan-07 2,415.29 1,535.57 -10.77% -42.10% -36.42% -21.18%

Position = symbol of the security for each position
Purchased = date position acquired (for long positions) or sold (for short positions)
Shares = number of shares long or short in the portfolio
Paid = price per share
Cost = what portfolio paid (including commission); note for short sales, the portfolio gains cash
Now = price per share as of the date of the report
Value = what it is worth as of the date of the report (# shrs multiplied by price per share plus—or minus for short positions—the value of dividends)
Change = Change since last report (not applicable for positions new since last report)
Year-to-Date = Change since 31 Dec 07
Return on Investment = on a percentage basis, the performance of this security since purchase
Compounded Annual Growth Rate = annualized ROI for this position since purchase (to help compare apples to apples)

Notes: The benchmark for the ISOP is the Greenwich Alternative Investments Global Hedge Fund Index, which historically (1988 to 2007 inclusively) provides a CAGR of around 15.1%. For comparison’s sake, we also show the NASDAQ index, which over the same time frame has yielded a CAGR of around 10.1%. Note that for the portfolio, dividends are added back into the value of the pertinent security—or subtracted from the value of short positions—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 2% rate of interest on the listed cash balance.

Transactions: Another crazy month in which the ISOP was a haven of sanity. Volatility was extremely high—seven trading sessions in which the NASDAQ finished up or down between 5% and 7%—but it was a bit less wild than October (when there were two days the market moved 10% or more and a third day it moved 9%). Meanwhile we stood pat…hmmm…perhaps when everyone around you is frenetically dashing about like a chicken with it’s head cut off, standing pat is no longer a reliable indication of sanity.

  • 5 Nov—paid out WFC dividend of $0.34/shr
  • 19 Nov—paid out HBC dividend of $0.90/shr

News:

Comments: If anyone was still thinking that “change we can believe in” would be any different from frontrunning for the-powers-that-be, it only took Barack Obama 20 days to put that concern to rest. The appointment of Timothy Geithner—one of the architects of the bailout under Bush aegis—is a clear signal. The import is that the new administration will be working just as assiduously as the old one—di rigueur objections from right-wing zealots that the agenda is focused on promoting socialist/statist solutions notwithstanding—to commit taxpayer money in support of the cabal of financial services leaches who crashed the system. Instead of cutting those bad boys loose and blaming the consequent chaos on W—which would have meant taking a lot of immediate pain, but also purged of the poison, a swift and healthy recovery by the economy—the Obama folks have evidently decided to take the path of least resistance and continue the policies of papering over the cracks in the walls. We can look forward to more easy credit, more bailouts of “too-big-to-fail” companies, more Keynesian stimulus, and—if this “works”—a Potemkin-village “recovery” just in time to support Democrats in the 2010 election.

Although the odds are improving, it is still not clear if the man behind the curtain can pull off the illusion that all is well again here or not. Reflecting the consequent uncertainty, the level of volatility this month was again—as in October—extremely high: an average daily change of ±3.8% as compared with the normal index change (up or down) an average of about 0.5% each day.

At the end of the month, we were +3%, the hedgies were -2%, and the NASDAQ was -11%. Another great month for the good guys! Overall after 23 months of operations, the ISOP is now +155% compared with -7% for the hedgies and -36% for the NASDAQ.

It was another heavy news month. Of our four retailers, two were flat and two were down big. Unfortunately, while we are short three of the four, the one we are long, CAB, was one of the ones down big (-21%) after reporting good 3Q08 results but providing very guarded guidance going forward. We still think CAB will shine for us in the long run. BBY was down 23%, MA was down 2%, and WMT was +0.13%, the only stock in the port to be up on the month. All four of our financial services shorts obligingly tanked: BAC -33%, GS and WFC each -15%, and HBC -8%. We did have a pang of regret over WFC’s victory over Citigroup (C) in the bidding to acquire Wachovia (WB) last month; had C won the bid, we most likely would have shorted their stock instead (we had previously been short WB) and they were down 39% this month. Actually, they were down 72% on 21 November before being bailed out by Treasury in yet another egregious misappropriation of taxpayer money. The next day—as referenced above—the Fed committed another $800 billion to bail out Fannie (FNM) and Freddie (FRE).

None of our other long positions had a good month. Golden Star (GSS) reported their worst-ever gold production costs and our patience with management is growing very thin; the stock was down another 17%. Neurocrine Biosciences (NBIX) tried making no news and that worked even less well, with their stock down 24%. We still think we need to give their GnRH antagonist candidate drug for fighting endometriosis, elagolix, more time. Vertex (VRTX) went to the other extreme of issuing good news—fresh positive results for their telaprevir anti-hepatitis C drug candidate—but ultimately, it did not save them from a drubbing late in the month over fears the Obama administration will limit the prices of new drugs. These concerns may be justified in the fullness of time, but are unlikely to be an issue for telaprevir in any case, as curing many otherwise uncurable patients of hepatitis C is extremely cost-effective (in that the cost of treating advanced cases of hepatitis C far exceeds the cost of telaprevir).

Finally, our oil short ETF, DUG, continues to disappoint, down 18% on the month despite a decline in the price of oil.

The risk of a serious downturn continues to be significant here, and consequently we remain net short. However, it does appear that the new administration is angling to establish continuity with the old one with respect to the policy of material intervention in the market to prop up insolvent “too-big-to-fail” enterprises. While we feel these policies are long-term disastrous, there is some “upside risk” should the collective wisdom of the market come to think otherwise. Generally, new political leaders get some benefit of the doubt. So far the the market has not rallied in reaction to the election results (except for the five days leading into the election), but it could still happen.

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Goldman Sachs (GS) update #2—the fix is in

Posted by intelledgement on Mon, 24 Nov 08

Great news for Goldman Sachs (GS) today: President-elect Barack Obama announced his intention to nominate Timothy Geithner to be Secretary of the Treasury. While not a Goldman alumnus, Geithner was undersecretary as a protégé of then-Secretary of the Treasury—and former Goldman CEO—Robert Rubin. More to the point, as President of the New York Fed earlier this year, Geithner managed the demise/sale of Bear Stearns and was a key player—working with current Secretary of the Treasury (and former Goldman CEO) Hank Paulsen—in the decision to let Goldman competitor Lehman Brothers go bankrupt while orchestrating rescues of Merrill Lynch and Goldman debtor AIG.

The takeaway is that Geithner is not only committed to the bank bailout strategy, but a key architect of it. With this nomination—as well as the appointment of Larry Summers (for whom Geithner also worked when the former was Secretary of the Treasury) to head the National Economic Council, also announced today—Obama has effectively ended any hope that his economic policy might differ in any substantial way from that of the current administration. We will get more easy credit, more deficit spending, more easy money, more desperate attempts to paper over the cracks in the broken system rather than a serious attempt at reform.

We should probably cash in our financial company shorts here. GS was up 17% today, BAC was +24%, HBC was +4%, and WFC was +20%. But there is still substantial systemic risk in play—and in truth, most of these companies probably remain on thin ice (not to mention that in the long run, we’d be better off without them)—so we will hold on for now just to be sure an immediate collapse has actually been averted.

Previous banking company short-related posts:

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Bank of America (BAC) update #7—TARP bait and switch now official

Posted by intelledgement on Wed, 12 Nov 08

Outgoing Secretary of the Treasury Hank Paulson today made it official: the TARP funds he begged Congress for so as to purchase toxic assets in order to save the Republic will now be used for anything but that. With the outgoing administration pulling out all the stops to prop up the corrupt bankers who got us into this mess rather than actually address the underlying problems—and the incoming administration conniving right along—we may just end up skating by the thin ice one more time…unfortunately. But today’s action makes it clear that the powers-that-be are improvising, and that systemic risk is still on the table. Thus, we are holding our financial company shorts—Bank of America (BAC), Goldman Sachs (GS), HSBC Holdings (HBC), and Wells Fargo (WFC)—for the time being.

Previous banking company short-related posts:

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Oct 08 Intelledgement Speculative Opportunity Portfolio Report

Posted by intelledgement on Wed, 12 Nov 08

Position Purchased Shares Paid Cost Now Value Change YTD ROI CAGR
VRTX 18-Apr-07 57 31.65 1,812.05 26.21 1,493.97 -21.15% 12.83% -17.55% -11.79%
NBIX 22-May-07 158 11.33 1,798.14 4.13 652.54 -11.94% -9.03% -63.71% -50.40%
GSS 19-Jul-07 451 4.19 1,897.69 0.88 396.88 -42.11% -72.15% -79.09% -70.36%
GSS 24-Aug-07 613 3.08 1,896.04 0.88 539.44 -42.11% -72.15% -71.55% -65.28%
BZH 24-Mar-08 -214 10.99 -2,343.86 2.28 -487.92 -61.87% 69.31% 79.18% 162.20%
BAC 8-Sep-08 -69 34.73 -2,388.37 24.17 -1,667.73 -30.94% -41.42% 30.17% 515.49%
GS 8-Sep-08 -14 169.73 -2,368.22 92.50 -1,299.90 -27.73% -56.99% 45.11% 1201.23%
HBC 8-Sep-08 -30 79.11 -2,365.30 59.00 -1,770.00 -27.01% -29.52% 25.17% 369.76%
DUG 10-Sep-08 56 42.83 2,406.48 37.05 2,186.91 -4.63% 2.97% -9.12% -49.60%
BBY 19-Sep-08 -58 41.49 -2,398.42 26.88 -1,567.16 -28.32% -48.95% 34.66% 1230.08%
MA 19-Sep-08 -11 225.18 -2,468.98 147.82 -1,627.67 -16.64% -31.31% 34.08% 1180.79%
WMT 19-Sep-08 -40 59.70 -2,380.00 55.81 -2,232.40 -6.81% 17.42% 6.20% 68.75%
CAB 19-Sep-08 170 14.08 2,401.60 7.95 1,351.50 -34.19% -47.25% -43.73% -99.33%
WFC 09-Oct-08 -73 33.06 -2,405.38 34.05 -2,485.65 n/a 14.45% -3.34% -43.08%
cash 16,906.53 31,343.96
ISOP 03-Jan-07 10,000.00 24,826.77 7.70% 13.65% 148.27% 64.54%
Global HF 03-Jan-07 10,000.00 9,429.20 -6.01% -15.15% -5.71% -3.17%
NASDAQ 03-Jan-07 2,415.29 1,720.95 -17.73% -35.11% -28.75% -16.94%

Position = symbol of the security for each position
Purchased = date position acquired (for long positions) or sold (for short positions)
Shares = number of shares long or short in the portfolio
Paid = price per share
Cost = what portfolio paid (including commission); note for short sales, the portfolio gains cash
Now = price per share as of the date of the report
Value = what it is worth as of the date of the report (# shrs multiplied by price per share plus—or minus for short positions—the value of dividends)
Change = Change since last report (not applicable for positions new since last report)
Year-to-Date = Change since 31 Dec 07
Return on Investment = on a percentage basis, the performance of this security since purchase
Compounded Annual Growth Rate = annualized ROI for this position since purchase (to help compare apples to apples)

Notes: The benchmark for the ISOP is the Greenwich Alternative Investments Global Hedge Fund Index, which historically (1988 to 2007 inclusively) provides a CAGR of around 15.1%. For comparison’s sake, we also show the NASDAQ index, which over the same time frame has yielded a CAGR of around 10.1%. Note that for the portfolio, 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 2% rate of interest on the listed cash balance.

Transactions: The ISOP was a bedrock of stability this month; with the market going totally insane in terms of volatility, we felt constrained to make only one transaction…and that was essentially a move to bring the port more into congruence with the way it used to be, in that we replaced our Wachovia (WB) short position (covered last month) with a short position in the stock of the company that acquired WB, viz. Wells Fargo (WFC). A big contrast from last month, when we had a portfolio-record 14 transactions in moving to a net short stance. Speaking of our shorts, we did cheerfully pay out several dividends for our financial services and retailing stocks (when you are short a stock that pays a dividend, you have to pony it up).

  • 3 Oct—paid out BBY dividend of $0.14/shr
  • 8 Oct—paid out MA dividend of $0.15/shr
  • 9 Oct—Sold short 73 WFC for $33.06/shr
  • 23 Oct—paid out GS dividend of $0.35/shr

News:

Comments: LOL you might think that the amount of effort that goes into managing portfolios in a month with one transaction would be a lot less than the effort expended in a 14-transaction month…but when the market is going insane and repricing everything from day-to-day, just about the same degree of close attention is required, regardless of whether or not anything is being bought or sold. On average, the NASDAQ goes up about 10% a year…well there were two DAYS in October where the NASDAQ index was up 10%+…and this in a month were overall, the index was down 18%, the two gigantic up days notwithstanding.

The level of volatility this month was positively staggering. Normally, the index changes (up or down) an average of about 0.5% each day. The average daily change in October: ±3.7%…more than seven times normal!

Obviously, when the level of systemic risk is high, the potential variation in the value of any given company is extremely high, depending. For example, if the economy recovers, then Best Buy (BBY)—which we are short—is worth, say, $15+ billion. But if we fall into a depression where no one can afford to buy big flat screen TVs, then maybe they go out of business. Pretty big range in valuation! Add to that the complexities of the economy, and the impossibility of instantly and accurately calculating the impact of the latest government actions, the inevitable result is a wildly gyrating consensus.

Be that as it may, when the dust settled, we were +8%, the hedgies were -6%, and the NASDAQ was, as we said, -18%. A great month for the good guys! Overall after 22 months of operations, the ISOP is now +148% compared with -6% for the hedgies and -29% for the NASDAQ.

It was a bull market for news this month. On 3 October, W signed the bank bailout bill (after rejecting it last month, the House took another vote after some fig leaves were applied and enough Republicans changed their votes to “yes” to pass it). Also on 3 October, Wells Fargo (WFC) outbid Citigroup (C) for our former short, Wachovia (WB). On 6 October with the market tanking, the Fed announced an emergency $900 billion in short-term loans to banks (this is in addition to TARP funds). On 7 October with the market tanking still more, the Fed announced an emergency move to lend $1.3 trillion to non-financial services companies. On 8 October with the market still on the express elevator headed for the sub-basement, the Fed cut interest rates in a move coordinated with other prominent central banks including those of China, the ECB, the UK, and Switzerland. Overall, the S&P 500 dropped 18.2% for the week ending 10 October, its worst week ever. On 14 October, the US Treasury announced distribution of $250 billion of the TARP funds in the form of loans to several large banks, including our shorts Bank of America (BAC), Goldman Sachs (GS), and Wells Fargo (WFC) as well as C and others. On 21 October, the Fed announced another emergency short-term loan program, this time to money market mutual funds, which had stopped lending to banks in the wake of a huge wave of redemptions.

The fix is clearly in, with Democrats in Congress and working hand-in-glove with the Republican Secretary of the Treasury and Republican appointee Fed Chairman Ben Bernanke to “stablize” the current broken-down system. It appears that none of the broken financial services companies—not even AIG, Freddie Mac (FRE), or Fannie Mae (FNM), who are in the worst shape—will be allowed to fail so long as the Fed’s printing presses are still able to pump out funds to loan them to “tide them over.” W has practically turned invisible during the crisis but evidently has no objections (if any opinions whatsoever). Senator Barack Obama, the Democratic party nominee for President, has pretty carefully avoided saying much of anything, but on 1 October he voted for the bailout (as did his running mate, Senator Joe Biden). The GOP standard bearer, Senator John McCain, has been somewhat more vocal and way more incoherent; in the event, he, too, voted for the bailout on 1 October. We believe this approach is both morally wrong—bailing out wealthy bankers with taxpayer money—and shortsighted, in that it will only delay the day of reckoning and ensure both that the eventual nadir will be lower and the recovery therefrom harder and longer.

Speaking of hard, that it was for our portfolio, as ever single equity was down in October. (WFC, which we are short, was up between the day we bought it—9 October at the open—and the end of the month but we obviously sold it short too late because it was down overall for the month.) Fortunately, we are now short eight positions and long only six so on balance, a down market is a good thing for our portfolio. Among the long positions, our two biotech companies (VRTX down 21% and NBIX down 12%), our gold miner (GSS down 42%), and our relatively new retailer (CAB down 34%) were no help whatsover.

We also own DUG, which is an ETF that is supposed to move twice the inverse of the price of oil…well crude was down sharply in October, but on extremely volatile trading, and DUG somehow managed to lose 5%, declining more on the days that the price of oil increased sharply that it gained on the days oil declined. We need to keep this one on a short leash as it is evidently poorly designed and not behaving as we expected it to.

Aside from the aforementioned WFC, we were very happy with the performance of our shorts. Our real estate short (BZH) was down 62%! The other financials shorts were all down sharply (BAC -31%, GS -28%, and HBC -27%). All three retail-related shorts were down big (BBY -28%, MA -17% and WMT -7%).

Clearly, the risk of a serious downturn continues to be significant here, and consequently we remain net short.

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Bank of America (BAC) update #6—TARP funds distributed

Posted by intelledgement on Wed, 29 Oct 08

The Federal Reserve effected their $125 billion TARP fund preferred share purchases yesterday, and so as of now, with our short positions in Bank of America (BAC), Goldman Sachs (GS), HSBC Holdings (HBC), and Wells Fargo (WFC), we are officially betting directly against the Fed. (Well, actually with HBC, it is an unofficial bet as the Fed did not buy any stock in that one. And technically, we are not directly betting against the Fed because they have purchased preferred shares and we are short common shares.) So far, on that score it is Fed 1, ISOP 0, as yesterday saw another round of dramatic gains in share prices: BAC +12%, GS +1%, HBC +9%, WFC +12%.

But now the good news (which, of course, considering we are discussing short positions, is really bad news). Even with yesterday’s big share price gains (except for GS who are beset by concerns about their true level of toxic asset exposure), we are still ahead of where we were at the last spike, two weeks ago, as the price per share of all four stocks had dropped off since then. Systemic risk is still evident, and we believe the odds still favor opportunities to exit these positions at lower price levels…plus, of course, they continue to serve as insurance against a meltdown so long as we hold them.

Having said that, we do need to begin thinking about an exit strategy. None of these banks are likely to fail anytime soon with the Fed backing them up. For that to happen now, the Fed would essentially have to fail and that is not in the cards. With the outcome of the election next week pretty much a foregone conclusion, we are likely to have a spasm of optimism that the new administration will do better, and that could engender a stock market rally of unknowable duration.

Which raises a key question: will the Obama administration break with the disastrous Bush-Clinton policies of weak dollar-low interest-deficit spending-pro bubble that got us here? If so, it will require a lot of immediate pain—which can be blamed on W—and cutting loose a lot of deadweight banks…in the short run, bad news for the stock market in general and good news for our shorts in particular. (And potentially great news for the USA, as it means a reversal of our drive towards disaster.)

On the other hand, if the new administration does the expedient thing and decides (as has every administration since Nixon took us off the gold standard) to kick the can down the road again, then the Fed will elect to keep interest rates low to encourage lending and stave off deflation, and that should result in a boost for equities. In effect, we will be getting sugar pills for our illness, which will taste good, and may even make us feel better temporarily, but will do nothing for our illness. If this happens, however, we will probably need to cover our shorts.

Unfortunately for the USA (and our short positions), the odds favor the can-kicking scenario. Obama has made huge spending promises to his constituencies in the course of the campaign and the Democrats in Congress were more supportive of the Wall Street bailout than the Republicans. It will be elucidating to see whom he nominates/appoints to key financial posts in the coming weeks. Stay tuned.

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Bank of America (BAC) update #5—covered by the TARP

Posted by intelledgement on Tue, 14 Oct 08

Actually, this is a general update for all four banks we are short: Bank of America (BAC), Goldman Sachs (GS), HSBC Holdings (HBC), and Wells Fargo (WFC). The Federal Reserve announced today that they were using TARP funds to purchase preferred stock in three of these four—BAC, GS, and WFC—along with six other large banks. Theoretically, “[t]hese healthy institutions have voluntarily agreed to participate” in order to minimize any stigma that might be attached to taking TARP funds. In practice, the market is interpreting it to mean that while these nine big banks may be in trouble, the cavalry has now arrived and the day has been saved. The three participants were each up sharply—BAC +16%, GS +29%, WFC +10%—and even HBC was +2% in the general euphoria.

While we deplore this policy—because we think it is akin to sweeping dust under the rug rather than cleaning it up—we concede that the government has determined that these banks should not be allowed to fail, and we stipulate that there is a good chance that the Fed can throw enough money at the problem to keep them in business for now. However, we believe that neither the proximate problem—huge losses by the banks on toxic assets—nor the underlying issue—the bursting of the real estate bubble—have been addressed by this manna from helicopter Ben. It is indicative of the cluelessness of the authorities that the TARP funds, which were expressly earmarked for the purchase of toxic assets, are now being used for something else entirely. (As we predicted, buying the toxic assets is a non-starter because effecting such transactions would require the banks to revalue them at a fair market price, thus recognizing huge losses and potentially rendering many insolvent.)

Consequently, we are holding all four short positions here, despite today’s huge share price gains (which are losses for us). We are still substantially ahead on GS and BAC, and essentially even on HBC and WFC. We still like the odds that we can do better here.

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Sep 08 Intelledgement Speculative Opportunity Portfolio Report

Posted by intelledgement on Sun, 12 Oct 08

Position Purchased Shares Paid Cost Now Value Change YTD ROI CAGR
VRTX 18-Apr-07 57 31.65 1,812.05 33.24 1,894.68 23.75% 43.09% 4.56% 3.11%
NBIX 22-May-07 158 11.33 1,798.14 4.69 741.02 -9.28% 3.30% -58.79% -47.87%
GSS 19-Jul-07 451 4.19 1,897.69 1.52 685.52 -0.65% -51.90% -63.88% -57.14%
GSS 24-Aug-07 613 3.08 1,896.04 1.52 1,606.06 -0.65% -51.90% -50.86% -47.48%
BZH 24-Mar-08 -214 10.99 -2,343.86 5.98 -1,279.72 14.08% 19.52% 45.40% 105.36%
BAC 8-Sep-08 -69 34.73 -2,388.37 35.00 -2,415.00 n/a -15.17% -1.11% -16.99%
GS 8-Sep-08 -14 169.73 -2,368.22 128.00 -1,792.00 n/a -40.48 24.33% 3617.53%
HBC 8-Sep-08 -30 79.11 -2,365.30 80.83 -2,424.90 n/a -3.44% -2.52% -34.54%
DUG 10-Sep-08 56 42.83 2,406.48 38.85 2,287.71 n/a 7.98% -4.94% -60.32%
BBY 19-Sep-08 -58 41.49 -2,398.42 37.50 -2,175.00 n/a -28.77% 9.32% 1824.79%
MA 19-Sep-08 -11 225.18 -2,468.98 177.33 -1,950.63 n/a -17.60% 20.99% 55900.91%
WMT 19-Sep-08 -40 59.70 -2,380.00 59.89 -2,395.60 n/a 26.00% -0.66% -19.62%
CAB 19-Sep-08 170 14.08 2,401.60 12.08 2,053.60 n/a -19.84% -14.49% -99.45%
cash 14,501.15 28,890.43
ISOP 03-Jan-07 10,000.00 23,051.87 -6.22% 5.52% 130.52% 61.55%
Global HF 03-Jan-07 10,000.00 10,032.13 -5.76% -9.72% 0.32% 0.18%
NASDAQ 03-Jan-07 2,415.29 2,367.52 -11.64% -21.13% -13.39% -7.92%

Position = symbol of the security for each position
Purchased = date position acquired (for long positions) or sold (for short positions)
Shares = number of shares long or short in the portfolio
Paid = price per share
Cost = what portfolio paid (including commission); note for short sales, the portfolio gains cash
Now = price per share as of the date of the report
Value = what it is worth as of the date of the report (# shrs multiplied by price per share plus—or minus for short positions—the value of dividends)
Change = Change since last report (not applicable for positions new since last report)
Year-to-Date = Change since 31 Dec 07
Return on Investment = on a percentage basis, the performance of this security since purchase
Compounded Annual Growth Rate = annualized ROI for this position since purchase (to help compare apples to apples)

Notes: The benchmark for the ISOP is the Greenwich Alternative Investments Global Hedge Fund Index, which historically (1988 to 2007 inclusively) provides a CAGR of around 15.1%. For comparison’s sake, we also show the NASDAQ index, which over the same time frame has yielded a CAGR of around 10.1%. Note that for the portfolio, 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 2% rate of interest on the listed cash balance.

Transactions: Well, following three months of almost no activity transaction-wise, the market has been crazy, with valuations all over the place—but trending down, big time—and consequently we felt constrained to make major adjustments to the portfolio, mostly moving to the short side. First we shorted a bunch of financial company stocks. Then we sold all our oilers and our one mining stock and bought an ETF that goes up when the price of oil declines. Then we shorted a cohort of retail-related stocks, and—partly as a hedge—bought a fourth retailer. Finally, we covered the WB short. Not surprizingly, the month set a new portfolio record for the most transactions ever: fourteen (the previous record was five)!

News:

Comments: Sheesh…this month required an awful lot of work to produce a 6% loss! The silver lining was that the hedgies also lost 6% and the NASDAQ was down 12%, so it could have been worse. Overall after 21 months of operations, the ISOP is now +131% compared with ±0% for the hedgies and -13% for the NASDAQ.

So we did have a lot of company-specific news this month, but it was pretty much overshadowed by the macro-level proverbial excrement hitting the fan. We had the government takeover of Fannie Mae (FNM) and Freddie Mac (FRE) on 7 Sep. A week later we had the bankruptcy of Lehman Brothers (LEH) and the acquisition of Merrill Lynch (MER) by BAC. Then we had a run on the money market funds ($140 billion withdrawn in one week), and the emergency $85 billion loan by the Fed to AIG to avoid a bankruptcy there. To close out the month, you have the spectacle of Republican Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke begging the GOP-controlled House for a $700 billion emergency bailout fund to be used to purchase so-called “toxic” assets that have plummeted in value and threaten multiple financial institutions who own them with insolvency…and being turned down! (Oh, and we almost forgot, the arrangement for Citibank (C) to buy our own troubled asset, WB.)

Clearly chickens are coming home to roost here. As we keep saying, this economy has serious fundamental flaws—too much debt and entitlement obligations, too much energy devoted to unproductive-to-fraudulent financial transactions, an unsound currency, underfunding of infrastructure investment—and the cultural focus on taking the path of least resistance and maximizing the immediate return on investment is impeding us from addressing these long-term flaws. While it would be painful, a collapse of the current Ponzi-based financial system would clear the decks for the creation of a healthier, sounder approach, and the resultant crisis would be resolved a lot faster than is likely to be the case if we just kick the can down the road again here. So we were cheering when the House voted down the Troubled Assets Relief Program, even though the markets tanked on the news. (Of course, by then we were mostly short. LOL)

Speaking of which, the market was extremely volatile this month—it was ±3% on two days, ±4% on three days, ±5% on three days, and -9% on 29 Sep (the day the House voted down the $700 billion bailout bill). Ofttimes the market does not move as much as 9% in an entire year! In that light, it is not a shocker that we felt constrained to make a few moves…such as closing more than half the positions we started the month with and then opening up even more new ones. Among the few holdovers were our two biotech companies (VRTX up 24% and NBIX down 9%), our gold miner (GSS down 1%), and our housing industry short (BZH -14% by virtue of which we gained). As for the newcomers, two of our three financials short were up (BAC +1% and HBC +3%) but GS was down 24% in only three weeks. Two of our three retail-related shorts were down big (BBY -9% and MA -21%) in only two weeks while the other gained a point (WMT +1%). Our oil short ETF (DUG) was down 5% and the retailer we went long on (CAB) manifestly should have been a short as it was down 14%. You can help both yourself and the ISOP by going to their website and stocking up on ammo and fishhooks as insurance against a potential collapse of the system.

Clearly, the risk of a serious downturn is now greater than a month ago, and we are about as short as we are going to get. Fasten your seat belts; it’s going to be a bumpy night.

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