Macro Tsimmis

intelligently hedged investment

Posts Tagged ‘GS’

Dear Senator Burr: Audit the Fed!

Posted by intelledgement on Thu, 06 May 10

The Senate is currently considering financial reform. As we stated a couple of weeks ago, in discussing this topic:

We don’t much care for the concept of establishing a permanent mechanism to coddle “too-big-to-fail” companies, either. Management of these enterprises should not be operating with the presumption that they will be bailed out if they screw things up. Can you say “moral hazard”? In a world of transparent markets, stringent capital requirements, and firmly enforced rules against chicanery, it ought to be rare for management to run large enterprises into the ground…but when and if they do, let them fail! That is the way capitalism is supposed to work: if you succeed, you are rewarded; if you fail, smarter, more adaptable competitors will take advantage of the opportunity to win your former customers by serving their needs better. Propping up the failures is bad for everyone: bad for the customers who continue to get suboptimal service, bad for the competitors who are not rewarded for working harder and smarter, and bad for the failing organization’s personnel, who instead of moving on to something they can better succeed at are in effect bribed by government largess to persist to fail at something they are bad at.

Well, the cardinal mechanism for bailing out the “too-big-to-fail” institutions has been secret sweetheart deal loans of American citizen’s tax dollars via the Fed. It was taxpayer money loaned to AIG, for example, that enabled Goldman Sachs to collect 100 cents on the dollar to redeem the credit default swaps they had purchased from the insurer as a hedge against declines in the value of mortgage-backed securities, while other less well-politically-connected enterprises were getting 20 cents on the dollar for similar instruments from similarly compromised CDS sellers.

When the House passed their version of a regulatory reform bill (H.R. 3996), an amendment sponsored by Ron Paul (R-TX) and Alan Grayson (D-FL) was tacked on that would require the Fed to reveal these deals. That development has alarmed Ben Bernanke, Timothy Geithner, and the rest of the Goldman Sachs mafia, as they fear that revealing to the public how Americans are putting themselves and their children in hock to recompense incompetent bankers might make conducting such transactions problematic. Thus the Dodd bill as reported out of committee in the Senate lacked the Paul-Grayson amendment provisions.

Fortunately, several Senators have spoken out in support of auditing the Fed, and a vote on a parallel amendment to the Dodd bill is now imminent, despite continuing opposition from Bernanke, et al.

So, if you agree that adding to the public debt level of Americans (and their progeny) to make good the losses of Wall Street banks is a bad idea, you might consider so informing your Senator, which thanks to Alan Grayson, you can conveniently do here. And here is the letter that Richard Burr and Kay Hagan received from us:

I’m writing to urge you to cosponsor and vote for the Federal Reserve Transparency Amendment. This amendment will allow the American people to know to whom the Fed loaned trillions of dollars of our money. I am very concerned that the Fed is, in effect, obligating me and my children to cover the debts run up by irresponsible, antisocial Wall Street fat cats and foolhardy foreign bankers (and some credulous domestic bankers, too)! I don’t believe the American people would stand for bailing out these fools if the extent of what’s happening is made public. But if this amendment does not pass, the Fed can continue to make sweetheart loans to whomever it wants, without telling Congress or the American people.

There are a number of problems with the existing bill:

1) It does not allow audits of the mortgage backed security purchase program, a $1.25 trillion program that at this point comprises the bulk of the Fed’s balance sheet. This program includes Freddie and Fannie backed debt.

2) It does not allow audits of possible losses on foreign currency swap lines, of which there were more than $500 billion at the height of the crisis. This includes unlimited credit lines granted to central banks all over the world, solely through at the discretion of Federal Reserve and without the input of any elected official or the State Department.

3) It does not allow audits of open market operations, where there is ample room for errors, market manipulation, and insider trading violations.

4) It does not allow audits of possible losses on securities acquired through non-section 13(3) facilities. This includes looking for possible losses, seigniorage, political conflicts and costs to the Treasury.

In the existing bill, all audits must remain redacted. The GAO can’t even tell Congress to whom the Fed is lending money, the amounts it is lending, or any details about collateral or assets held in connection with any credit facility. The GAO can never release a full version of any audit unless the Federal Reserve first chooses to shut down the audited credit facility.

The Federal Reserve Transparency Amendment that I am urging you to support does the following:

1) Requires the non-partisan Government Accountability Office (GAO) to conduct an independent and comprehensive audit of the Federal Reserve within one year after the date of enactment of the financial reform bill;

2) Requires the GAO to submit a report to Congress detailing its findings and conclusion of their independent audit of the Fed within 3 months; and

3) Requires the Federal Reserve within one month after the date of enactment to disclose the names of the financial institutions and foreign central banks that received financial assistance from the Fed since the start of the recession, how much they received, and the exact terms of this taxpayer assistance.

4) Does not interfere with or dictate the monetary policies or decisions of the Federal Reserve.

As you know, the House passed a similar amendment to HR 3996. Now is your chance to act, and to make a positive difference in our lives and the lives of future Americans. I urge you to cosponsor and vote for the Federal Reserve Transparency Amendment.

Thank you for your time and consideration.

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Change we can believe in? U.S. gets serious about financial regulatory reform

Posted by intelledgement on Tue, 20 Apr 10

One of the most disheartening aspects of the extended financial crisis we are in is how poorly the US government has responded. Of course, it’s fair to ask why anyone should be disappointed, given the record of consistently bad choices the government has compiled:

But wait! Maybe—now that the health insurance legislation has finally been passed—we are expending some attention on regulatory reform to address systemic risk issues.

In our view, to be effective reforms must address five main points:

  1. Create an exchange for trading derivatives such as credit default swaps and collateralized debt obligations
  2. Ban ratings agencies from accepting remuneration from equity issuers aside from for subscriptions to ratings info
  3. Establish more stringent capital requirements for financial services companies doing business in the USA
  4. Clean house at the enforcement agencies to ensure that existing regulations—e.g., against naked short selling—are actually enforced
  5. Encourage improved corporate governance—e.g., for government contracts, prefer financial services providers who compensate top management more with stock and less with cash bonuses and high salaries

The first and second reforms are intended to increase transparency and create a more robust pricing mechanism for derivative securities. Having a market where everyone can bid on whatever is offered for sale applies the collective wisdom of the market to the complex problem of determining a fair price for these instruments. You can’t fool all of the people all of the time. And it is a blatant conflict-of-interest that most of the income for most ratings agencies is provided by the issuers of the securities being rated. Ridding ourselves of the bogus AAA ratings that were the predictable result of this incestuousness will go a long way towards unmuddying the waters.

The third reform is intended to reduce the level of risk it is kosher to undertake from the obscene, bet-the-farm-and-all-my-neighbors’-farms-too heights scaled in the recent crisis down to something manageable. The fourth and fifth reforms are intended to reward socially responsible behavior among market participants and better align the interests of management with not only shareholders, but all the stakeholders in their enterprise.

We are not too keen on the consumer protection agency concept currently being promoted the President. We believe that with the notable exceptions of the need for more stringent capital requirements and the need to corral derivatives trading into an exchange, there are already generally sufficient regulations in existence—but the problem is that they have not been effectively enforced. Adding a new agency to a broken SEC and a broken CFTC and a Fed with a schizophrenic mission is a recipe for spending a lot of money achieving not much besides a big turf war. We’d be a lot better off putting Harry Markopolos in charge of the SEC, Patrick Byrne in charge of the CFTC, and instructing Ben Bernanke and company to focus on controlling inflation and protecting the dollar.

We don’t much care for the concept of establishing a permanent mechanism to coddle “too-big-to-fail” companies, either. Management of these enterprises should not be operating with the presumption that they will be bailed out if they screw things up. Can you say “moral hazard”? In a world of transparent markets, stringent capital requirements, and firmly enforced rules against chicanery, it ought to be rare for management to run large enterprises into the ground…but when and if they do, let them fail! That is the way capitalism is supposed to work: if you succeed, you are rewarded; if you fail, smarter, more adaptable competitors will take advantage of the opportunity to win your former customers by serving their needs better. Propping up the failures is bad for everyone: bad for the customers who continue to get suboptimal service, bad for the competitors who are not rewarded for working harder and smarter, and bad for the failing organization’s personnel, who instead of moving on to something they can better succeed at are in effect bribed by government largess to persist to fail at something they are bad at.

OK, maybe it’s not bad for literally everyone—to the extent this sort of irrational behavior renders us less efficient, perhaps it is good for China.

But leaving aside the details, the combination of President Obama’s new focus on financial regulatory reform and the SEC’s filing of a civil suit against Goldman Sachs for fraud last week is very heartening. The timing may be coincidental, but it’s not a coincidence that the SEC’s decision to press charges comes now—after two years of investigations and negotiations with Goldman over the matter—just as Obama sent an e-mail to folks who had signed up to support his efforts in office on the subject of financial regulatory reform which stated, in part: “With so much at stake, it is not surprising that allies of the big banks and Wall Street lenders have already launched a multi-million-dollar ad campaign to fight these changes. Arm-twisting lobbyists are already storming Capitol Hill, seeking to undermine the strong bipartisan foundation of reform with loopholes and exemptions for the most egregious abusers of consumers. I won’t accept anything short of the full protection that our citizens deserve and our economy needs. It’s a fight worth having, and it is a fight we can win—if we stand up and speak out together.” Both actions clearly reflect a decision by the administration to make this a priority.

Cognizant of the U.S. government’s consistent record of getting this stuff wrong, we are not overly optimistic that this time will be different. But we do find it ironic that the stock market—which is up 70% in the last year on what seems to us scant evidence that we are out of the woods—reacted to Friday’s news of the SEC suit against Goldman with a sharp decline. LOL this is the most bullish development of 2010 so far! The Obama administration’s first major action was—continuing along the course set by W—to prop of the rotten financial system, which was a counter-productive thing to do, but they did it well (unfortunately). Their second major initiative was health insurance reform, which while a shockingly low priority given the problems that beset us had the potential of being a good thing to do, but they screwed it up (unfortunately). Now, at last, they are focusing on an important problem to which a good solution has the potential to make life appreciably better for most everyone.

This, potentially, is change we can believe in.

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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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