Macro Tsimmis

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Posts Tagged ‘IFN’

3Q11 Intelledgement Macro Strategy Investment Portfolio Report

Posted by intelledgement on Fri, 14 Oct 11

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

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

Position = security the portfolio owns
Bought = date position acquired
Shares = number of shares the portfolio owns
Paid = price per share when purchased
Cost = total paid (price per share multiplied by # shrs plus commission)
Now = price per share as of date of report
Value = what it is worth as of the date of report (price per share multiplied by # shrs plus value of dividends)
Change = on a percentage basis, change since last report (not applicable for positions new since last report)
YTD (Year-to-Date) = on a percentage basis, change since the previous year-end price
ROI (Return-on-Investment) = on a percentage basis, the performance of this security since purchase
CAGR (Compounded Annual Growth Rate) = annualized ROI for this position since purchase (to help compare apples to apples)

Notes: The benchmark for the virtual money Intelledgement Macro Strategy Investment Portfolio (IMSIP) is the Greenwich Alternative Investments Global Macro Hedge Fund Index, which historically (1988 to 2010 inclusively) provides a CAGR of around 13.8%. For comparison’s sake, we also show the S&P 500 index, which since January 1950 has produced a CAGR of around 7.4%. Note that for our portfolio’s positions, dividends are added back into the value of the pertinent security and not included in the “cash” total (this gives a more complete picture of the ROI for dividend-paying securities). Also, the “Cost” figures include a standard $8 commission and there is a 1% rate of interest on the listed cash balance. The “cash” line for the “Cost” column is negative because the total cost of the securities presently in the fund exceeds the starting value of the fund by $7,000 (as profits from the sales of previously held positions have been reinvested; this is a good thing). Finally, the “cash” line for the “Value” column is reduced each quarter by a management fee (annual rate of 1% of the principal under management). More information about how the IMSIP is managed can be found here.

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

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

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

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

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

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

BRICs

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

Deep Capture

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

Eurozone

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

Macro Analysis

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

Monetary and Fiscal Policy

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

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

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

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

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

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

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

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

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

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

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

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

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

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SELL Market Vectors Russia ETF (RSX)

Posted by intelledgement on Wed, 03 Aug 11

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

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

Previous RSX-related posts:

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2Q11 Intelledgement Macro Strategy Investment Portfolio Report

Posted by intelledgement on Mon, 25 Jul 11

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

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

Position = security the portfolio owns
Bought = date position acquired
Shares = number of shares the portfolio owns
Paid = price per share when purchased
Cost = total paid (price per share multiplied by # shrs plus commission)
Now = price per share as of date of report
Value = what it is worth as of the date of report (price per share multiplied by # shrs plus value of dividends)
Change = on a percentage basis, change since last report (not applicable for positions new since last report)
YTD (Year-to-Date) = on a percentage basis, change since the previous year-end price
ROI (Return-on-Investment) = on a percentage basis, the performance of this security since purchase
CAGR (Compounded Annual Growth Rate) = annualized ROI for this position since purchase (to help compare apples to apples)

Notes: The benchmark for the virtual money Intelledgement Macro Strategy Investment Portfolio (IMSIP) is the Greenwich Alternative Investments Global Macro Hedge Fund Index, which historically (1988 to 2010 inclusively) provides a CAGR of around 13.8%. For comparison’s sake, we also show the S&P 500 index, which since January 1950 has produced a CAGR of around 7.4%. Note that for our portfolio’s positions, dividends are added back into the value of the pertinent security and not included in the “cash” total (this gives a more complete picture of the ROI for dividend-paying securities). Also, the “Cost” figures include a standard $8 commission and there is a 1% rate of interest on the listed cash balance. The “cash” line for the “Cost” column is negative because the total cost of the securities presently in the fund exceeds the starting value of the fund by $7,000 (as profits from the sales of previously held positions have been reinvested; this is a good thing). Finally, the “cash” line for the “Value” column is reduced each quarter by a management fee (annual rate of 1% of the principal under management). More information about how the IMSIP is managed can be found here.

Transactions: A subdued quarter in terms of transactions.

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

Overall we are now 35 points ahead of the market in terms of total return-on-investment: +28% for us and -7% for the S&P 500 in the 54 months since the inception of the IMSIP at the end of 2006. We are slightly ahead of our benchmark, the GAI Global Macro Hedge Fund Index, which is +25%. In terms of compounded annual growth rate, after four-plus years IMSIP is +5.6%, the GAI hedgies are at +5.1%, and the S&P 500 is -1.6%.

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

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

BRICs

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

Deep Capture

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

Eurozone

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

Macro Analysis

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

Monetary and Fiscal Policy

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

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

In the long term, we remain concerned about the overall risk of systemic failure, for which we feel the market has not adequately accounted. We got into this situation by overspending, borrowing beyond our means, and speculating on bubble-valued assets. And the policies the Bush administration implemented—and the Obama administration has continued—of attempting to paper over the cracks in the system with bailouts of bad banks, bad real estate loans, bad credit default swaps, and bad industrial companies are neither the morally correct thing to do nor in our own long-term self interest. While these actions can be effective in postponing our day of reckoning—indeed, the “QE2” $600B round of quantitative easing by the Fed has clearly succeeding in kicking the can further down the road—they ultimately succeed primarily in digging us into a deeper hole.

For the medium term, however, massive injections of liquidity and restrictive interest rate policies that artificially deflate the return on investment of “safe” savings accounts and short-term bonds have pushed investment funds into the stock market, floating it higher. Combined with the exigencies of the USA election cycle which incentivizes government and government supporters to make an extra effort to gussie up our own pig—e.g., release crude oil from the strategic reserve to ensure that gasoline prices moderate going into the 2012 election—it is reasonably likely that a meltdown can be averted for up to another 18 months. However, we do not expect the “good news” concerning economic recovery to survive the reduction in government stimulus concomitant with the end of the QE2 program last month and remain prepared to move to a short bias to preserve capital if bad economic data tank the market. And while concerns about the European sovereign debt crisis have abated for now with the latest Greece rescue, the Euro PIIGS (Portugal-Ireland-Italy-Greece-Spain), could ensue squealing again at any moment. Plus we have the looming U.S. debt limit deadline (2 August according to the latest official announcement although the real date is probably later), the continuing unrest in the Arab world, serious municipal bond defaults or a defaults-driven residential real estate crisis in the USA, a slowdown in China, or any number of other potential “black swans.”

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

In the event, we continue to hold long emerging market ETFs for all four BRIC nations in the portfolio: Brasil (EWX), Russia (RSX), India (IFN), and China (FXI). We believe that in a deleveraging environment, the economies that are still growing relatively strongly will fare better than those that are not and we expect non-dollar-denominated assets to do better than those tied to the greenback. Never-the-less, when things get really dicey, those nations’ economies will suffer also—the Russian RSX ETF declined 70% in the wake of the 2008 crisis—and we will not want to be long any of these when the winds of chaos pick up again.

We now have four long commodity plays: the agriculture ETF (DBA), the precious metals ETFs for gold (GLD) and silver (SLV), and the mining ETF (GDX). With the dollar, the Euro, and the Yen all under pressure here for various and sundry reasons, any currency is risky at best, and thus commodities are relatively more attractive stores of value. If you don’t have some of your own wealth allocated to precious metals, you should reconsider.

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

Although we are remain biased toward the long positions now, we remain vigilant as to a potential turning of the tide. In times of heightened uncertainty, valuations can fluctuate wildly and the preservation of capital takes precedence over meeting any target ROI. To that end, when the phantasmic prospect of sustained economic growth sans serious deleveraging fades—that is, when the Kool-Aid runs out—we will be prepared to unload our long positions, possibly excepting the commodities, and increase our exposure to index shorts again. However, we remain wary that, with another election cycle approaching, the U.S. government is likely to attempt to maintain low interest rates and resume big-time quantitative easing at the first unconcealable sign of a “downturn.” The recent surprise release of oil from the Strategic Petroleum Reserve—referenced above—is evidence of The Powers That Be’s willingness to pull out all the stops to maintain the fiction that the 2008 bailout is working. So long as these policies succeed in weakening the dollar and pushing up nominal equity valuations, it will be too early to go completely short. Stay tuned.

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1Q11 Intelledgement Macro Strategy Investment Portfolio Report

Posted by intelledgement on Sat, 30 Apr 11

Summary of Intelledgement’s model macro strategy model investment portfolio performance as of 31 March 2011:

Position   Bought   Shares Paid Cost Now Value Change YTD ROI CAGR
FXI 29 Dec-06 243 37.15 9,035.45 44.91 11,555.31 3.98% 3.98% 27.89% 5.96%
IFN 29-Dec-06 196 45.90 9,004.40 32.95 10,495.80 -3.88% -3.88% 16.56% 3.67%
DBA 13-Mar-08 235 42.50 9,995.50 34.23 8,149.80 5.73% 5.73% -18.47% -6.48%
EWZ 3-Aug-09 165 60.39 9,972.35 77.51 13,633.09 0.13% 0.13% 36.71% 20.78%
GLD 21-May-10 95 115.22 10,953.90 139.86 13,291.64 0.82% 0.82% 21.34% 25.23%
SLV 21-May-10 636 17.29 11,004.44 36.77 23,418.79 21.80% 21.80% 112.81% 140.73%
UDN 21-Oct-10 399 27.54 10,996.46 28.14 11,227.86 3.84% 3.84% 2.10% 4.84%
RSX 31-Dec-10 316 37.91 11,987.56 41.63 13,155.08 9.81% 9.81% 9.74% 45.82%
cash 17,049.94 29,246.10
Overall 31-Dec-06 100,000.00 134,173.47 4.78% 4.78% 34.17% 7.17%
Macro HF 31-Dec-06 100,000.00 126,147.49 -0.58% -0.58% 26.15% 5.62%
S&P 500 31-Dec-06 1,418.30 1,325.83 5.42% 5.42% -6.52% -1.58%

Position = security the portfolio owns
Bought = date position acquired
Shares = number of shares the portfolio owns
Paid = price per share when purchased
Cost = total paid (price per share multiplied by # shrs plus commission)
Now = price per share as of date of report
Value = what it is worth as of the date of report (price per share multiplied by # shrs plus value of dividends)
Change = on a percentage basis, change since last report (not applicable for positions new since last report)
YTD (Year-to-Date) = on a percentage basis, change since the previous year-end price
ROI (Return-on-Investment) = on a percentage basis, the performance of this security since purchase
CAGR (Compounded Annual Growth Rate) = annualized ROI for this position since purchase (to help compare apples to apples)

Notes: The benchmark for the virtual money Intelledgement Macro Strategy Investment Portfolio (IMSIP) is the Greenwich Alternative Investments Global Macro Hedge Fund Index, which historically (1988 to 2010 inclusively) provides a CAGR of around 13.8%. For comparison’s sake, we also show the S&P 500 index, which since January 1950 has produced a CAGR of around 7.4%. Note that for our portfolio’s positions, dividends are added back into the value of the pertinent security and not included in the “cash” total (this gives a more complete picture of the ROI for dividend-paying securities). Also, the “Cost” figures include a standard $8 commission and there is a 1% rate of interest on the listed cash balance. Finally, the “cash” line for the “Cost” column is reduced each quarter by a management fee (annual rate of 1% of the principal under management). More information about how the IMSIP is managed can be found here.

Transactions: After all that action at the end of 2010, we had an extremely quiet quarter: no transactions whatsoever for the first time since 2009.

Performance Review: Yet another modest gain which—for the third consecutive quarter—failed to keep pace with the market. We were up 4.8%, which normally is good, but we still narrowly lost to the S&P 500 index (+5.4%). We did handily outdistance the macro hedge fund index (-0.6%), primarily because most macro funds have maintained more short positions than we have.

The star performer of the quarter was silver (SLV), up 22%, way outdistancing our other commodity plays, including our corn-wheat-soybeans-sugar ETF (DBA, up 6%) and gold (GLD up 1%). On a semi-related note, our one remaining short position is the U.S. dollar (UDN, +4% as the decline in the dollar of the value continued). Our BRIC funds were mixed, with Russia (RSX) up 10%, China (FXI) up 4%, Brazil (EWZ) flat, and India (IFN) down 4%.

Overall we are now 41 points ahead of the market in terms of total return-on-investment: +34% for us and -7% for the S&P 500 in the 51 months since the inception of the IMSIP at the end of 2006. We are slightly ahead of our benchmark, the GAI Global Macro Hedge Fund Index, which is +26%. In terms of compounded annual growth rate, after four-plus years IMSIP is +7.2%, the GAI hedgies are at +5.6%, and the S&P 500 is -1.6%.

1Q11 Highlights: Here are some topical 1Q11 links reprised from our Intelledgement tweet stream, organized by subject:

BRICs

Deep Capture

  • The proposed Bank of America settlement: another taxpayer rip-off. http://bit.ly/grWtHl
  • Dylan Ratigan: “In Goldman Sachs we trust.” http://bit.ly/eCdbZo
  • Will the Massachusetts Ibanez case unravel widespread residential real estate irregularities? http://dlvr.it/D62n7
  • naked capitalism: Bankster-enabling Dems unveil latest scheme to fleece Main Street sheeples. http://bit.ly/fJjlGo
  • “Creative accounting” makes Fed insolvency impossible. http://is.gd/4Pk3sB
  • Dylan Ratigan: How Fed policies facilitated USA exports to China: exports of jobs, that is. http://bit.ly/fwgwwM
  • NYT: New Keybridge report deriding derivative market regulations apparently a put-up job. http://nyti.ms/euARqZ
  • Why the US government is facilitating theft instead of prosecuting it. http://bit.ly/fnUsP3
  • Sleaze Watch—NY Fed Official Responsible for AIG Loans Joins AIG As AIG Pushes Sweetheart Repurchase to NY Fed. http://bit.ly/gL4pBe
  • Satyajit Das: Controlling sovereign CDS trading—the dysfunctional debate. http://bit.ly/gNDyMR
  • Bill Black: Why we need regulatory cops on the beat, even if they make bankers unhappy. http://bit.ly/fCg29l
  • Jim Quinn: “Extend-and-pretend” is Wall Street’s friend. http://is.gd/0vZsve

Eurozone

Macro Analysis

  • TMF: For market volatility, no news is good news. http://bit.ly/gNCP2z
  • The rise of the consumer in Africa…some interesting data from WSJ. http://fb.me/OQX30gLx
  • Macro hedge funds: A lack of clear long-term investment trends may lead managers to stomach more risk. http://econ.st/fkE6yc
  • Energy consumption per unit of GDP across the globe varies widely but likely to converge by 2030. http://econ.st/gWg55W
  • Bundeswehr draft study evaluates peak oil scenarios: warns of potential for chaos, need to cozy up to energy producers. http://bit.ly/bPaxp3
  • The Economist: The rise and fall of the dollar—lessons of history. http://econ.st/dQrANr
  • The Atlantic: Economic underpinnings of the uprising in Egypt. http://yhoo.it/gDrDF8
  • Rick Backstaber: Why are we “irrational”—the path from Neoclassical to Behavioral Economics 2.0. http://bit.ly/exaORJ
  • Mike Grieger: The death of globalization, the death of currency, and the death spiral. http://is.gd/fZ6Sx1
  • Is the current rise in commodity prices part of a long-term trend caused by rising demand in emerging markets? http://econ.st/fkAJgK
  • Peak Oil, the Saudis and the Middle East protests. http://bit.ly/giMsSb
  • Egypt: population and food import needs growing while arable land is maxed out and oil exports in decline…uh oh. http://bit.ly/h8Uvfm
  • Urban life: Are cities “our species’ greatest invention”? Do they make us more inventive and more productive? http://econ.st/i16jEV
  • oftwominds.com: The deflationary depression scenario is still in play here. http://goo.gl/XN8ss
  • Marc Chandler: “March Madness”—policy risks for global investors. http://bit.ly/h7sS8T
  • The Economist: Plagued by Politics—feeding the world…biofuels are an example of what not to do. http://econ.st/hOWOPL
  • The Big Picture: The coming war between generations. http://dlvr.it/HyHWv
  • Mideast revolution—people lose, Oil wins. http://shar.es/3iIzd
  • The Economist: The nuclear family—the world’s largest nuclear-energy producers. http://econ.st/h1gIKJ
  • In 2000, every $1 of state/local revs supported $1.07 of muni debt…today it’s between $1.70 and $2.85. http://bit.ly/eU5D47
  • The Economist: How will the disaster affect Japan economically? http://econ.st/f35Kdr
  • The Economist: What is behind the decline in living standards? http://econ.st/gmVayI
  • The Economist: An encouraging model suggests urban Asia’s water problems could be easily fixed. http://econ.st/eLIk1P

Monetary and Fiscal Policy

Analysis: Well, unsurprisingly given that we had no transactions changing any of our positions, the portfolio’s composition—36% emerging markets, 33% commodities, 8% short the dollar, and 22% cash—is not much changed from last quarter…we have proportionately less cash and more invested in commodities, but that is mostly attributable to the +22% burst in silver prices.

So, what’s going on with silver? Well, back when silver and gold were commonly used as money, the ratio of their values tended to be about 15:1 (that is, the value of 15 ounces of silver was equivalent to the value of one ounce of gold). But as fiat money became predominant in the 19th and especially the 20th centuries, the ratio has widened and the average in the 1900s was closer to 50:1, and for most of the first ten years of this century, 60:1. Essentially, silver—which, of course, is much more common than gold—lost currency (if you will pardon the expression) as a store of value, and was priced based on demand for industrial use (which has declined in recent decades with the near-death of analog photography as mucho silver was consumed in the development process). But with the financial crisis that started with banks in 2008 morphing to sovereign debt in 2010, fiat currencies are looking shaky, and silver is making a strong comeback, spurred on by the existence—or, at least, rumors of the existence—of a large short position which presumably will have to be covered if prices continue to rise. Check out this chart of the silver:gold ratio since the inception of the IMSIP:

Overall, the market continued bullish in 1Q10. We remain concerned about the overall risk of systemic failure, for which we feel the market has not adequately accounted. We got into this situation by overspending, borrowing beyond our means, and speculating on bubble-valued assets. And the policies the Bush administration implemented—and the Obama administration has continued—of attempting to paper over the cracks in the system with bailouts of bad banks, bad real estate loans, bad credit default swaps, and bad industrial companies are neither the morally correct thing to do nor in our own long-term self interest. While these actions can be effective in postponing our day of reckoning—indeed, the “QE2” $600B round of quantitative easing by the Fed has clearly succeeding in kicking the can further down the road—they ultimately result primarily in digging us into a deeper hole. For now, massive injections of liquidity and restrictive interest rate policies that artificially deflate the return on investment of “safe” savings accounts and short-term bonds have pushed investment funds into the stock market, floating it higher, but we do not expect the “good news” concerning economic recovery to survive the pending reduction in government stimulus when the QE2 program ends in June and remain prepared to move to a short bias when that happens to preserve capital. And it could happen sooner if the wheels come off with respect to the European sovereign debt crisis, the continuing unrest in the Arab world, serious municipal bond defaults or a defaults-driven residential real estate crisis in the USA, a slowdown in China, or any number of other potential “black swans.” In the meantime, however, we are swimming with the tide and remain long.

Conclusion: We remain in the eye of the storm with most everyone  sipping the QE2 Kool-Aid and singing Kum-Ba-Ya. Accordingly, it is time to make love, not war…but we remain prepared for both.

We hold long emerging market ETFs for all four BRIC nations in the portfolio: Brasil (EWX), Russia (RSX), India (IFN), and China (FXI). We believe that in a deleveraging environment, the economies that are still growing strongly will fare better than those that are not and we expect non-dollar-denominated assets to do better than those tied to the greenback. Never-the-less, when things get really dicey, those nations’ economies will suffer also—the Russian RSX ETF declined 70% in the wake of the 2008 crisis and we will not want to be long any of these when the winds of chaos pick up again.

We also still have three long commodity plays: the agriculture ETF (DBA) and precious metals ETFs for gold (GLD) and silver (SLV). With the dollar, the Euro, and the Yen all under pressure here for various and sundry reasons, any currency is risky at best, and thus commodities are relatively more attractive stores of value. And we are actually short the dollar (UDN), although it has held up remarkably well in the face of the USA’s deteriorating monetary and fiscal situation, thanks presumably to the relative unattractiveness of the other major currencies…except the Yuan, but the Chinese government restricts it’s appreciation.

Although we are mostly long now in congruence with the prevailing love fest, we remain vigilant as to a potential turning of the tide. In times of heightened uncertainty, valuations can fluctuate wildly and the preservation of capital takes precedence over meeting any target ROI. To that end, when the phantasmic prospect of sustained economic growth sans serious deleveraging fades—that is, when the Kool-Aid runs out—we will be prepared to unload our long positions, possibly excepting the commodities, and short the indices again. However, we also cognizant of the prospect that, with another election cycle approaching, the U.S. government is likely to attempt to maintain low interest rates and resume big-time quantitative easing at the first unconcealable sign of a “downturn.” So long as that combination of policies conspires to weaken the dollar and push up nominal equity valuations, it will be too early to go short. Stay tuned.

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4Q10 Intelledgement Macro Strategy Investment Portfolio Report

Posted by intelledgement on Fri, 14 Jan 11

Summary of Intelledgement’s model macro strategy model investment portfolio performance as of 31 December 2010:

Position Bought Shares Paid Cost Now Value Change YTD ROI CAGR
FXI 29 Dec-06 243 37.15 9,035.45 43.09 11,113.05 0.97% 3.29% 22.99% 5.30%
IFN 29-Dec-06 196 45.90 9,004.40 35.11 10,919.16 7.82% 21.11% 21.26% 4.93%
DBA 13-Mar-08 235 42.50 9,995.50 32.35 7,708.00 17.69% 24.05% -22.89% -8.86%
EWZ 3-Aug-09 165 60.39 9,972.35 77.40 13,614.94 3.75% 3.74% 36.53% 24.71%
GLD 21-May-10 95 115.22 10,953.90 138.72 13,183.34 8.45% 29.27% 20.35% 35.27%
SLV 21-May-10 636 17.29 11,004.44 30.18 19,227.55 41.52% 82.47% 74.73% 148.42%
UDN 21-Oct-10 399 27.54 10,996.46 27.10 10,812.90 n/a -1.60% -1.67% -8.30%
RSX 31-Dec-10 316 37.91 11,987.56 37.91 11,979.56 n/a 22.13% -0.07% n/a
cash 17,049.94 29,492.49
Overall 31-Dec-06 100,000.00 128,051.00 5.32% 3.96% 28.05% 6.38%
Macro HF 31-Dec-06 100,000.00 126,889.20 2.52% 8.10% 26.89% 6.13%
S&P 500 31-Dec-06 1,418.30 1,257.64 10.20% 12.78% -11.33% -2.96%

Position = security the portfolio owns
Bought = date position acquired
Shares = number of shares the portfolio owns
Paid = price per share when purchased
Cost = total paid (price per share multiplied by # shrs plus commission)
Now = price per share as of date of report
Value = what it is worth as of the date of report (price per share multiplied by # shrs plus value of dividends)
Change = on a percentage basis, change since last report (not applicable for positions new since last report)
YTD (Year-to-Date) = on a percentage basis, change since the previous year-end price
ROI (Return-on-Investment) = on a percentage basis, the performance of this security since purchase
CAGR (Compounded Annual Growth Rate) = annualized ROI for this position since purchase (to help compare apples to apples)

Notes: The benchmark for the virtual money Intelledgement Macro Strategy Investment Portfolio (IMSIP) is the Greenwich Alternative Investments Global Macro Hedge Fund Index, which historically (1988 to 2010 inclusively) provides a CAGR of around 13.8%. For comparison’s sake, we also show the S&P 500 index, which since January 1950 has produced a CAGR of around 7.4%. Note that for our portfolio’s positions, dividends are added back into the value of the pertinent security and not included in the “cash” total (this gives a more complete picture of the ROI for dividend-paying securities). Also, the “Cost” figures include a standard $8 commission and there is a 1% rate of interest on the listed cash balance. Finally, the “cash” line for the “Cost” column is reduced each quarter by a management fee (annual rate of 1% of the principal under management). More information about how the IMSIP is managed can be found here.

Transactions: OK, so much for the theory that less volatility invariably begets fewer transactions…when you are positioned for a potential apocalypse and instead everyone drinks the Fed’s Kool-Aid and starts singing kum-ba-ya, some significant maneuvers are called for.

Performance Review: Another modest gain which—for the second consecutive quarter—failed to keep pace with the market. We were up 5%, which normally is good, but we lost to the S&P 500 index (+10%) by five points. We did beat the macro hedge fund index (+3%) by two points.

Tactically, we ditched our index shorts for losses in November in the face of a second round of quantitative easing from the Fed. This $600 billion flood of money may not do much to heal the economy—in our view, it hurts us by propping up zombie too-big-to-fail financial institutions whose existence exacerbates structural problems and impedes recovery—but combined with continued low interest rates it is driving investment funds into the equities markets. Under those circumstances, being short the market may be philosophically appropriate but it sure generates a lot of red ink in a hurry. We also sold our high-grade corporate bond ETF (LQD, for a tiny loss) due to concern that QE2 will result in higher interest rates and took a short position on the dollar (UDN) due to concern QE2 will weaken the greenback.

As the year ended, we added the fourth BRIC component, Russia, to the portfolio for the first time via the Market Vectors Russia ETF (RSX). The other three BRIC ETFs overall were all up in the quarter, though all trailed the market: India (IFN, +8%), Brazil (EWZ, +4%), and China (FXI, +1%). The commodity ETFs outperformed on average, with SLV (silver) the star of the port at +42%, DBA (basket of agricultural commodities) +18%, and GLD (gold) +8%. The three index short ETFs had a tough quarter, of course: DOW (DOG) -11%, NASDAQ (PSQ) -14%, and S&P 500 (SH) -11%. Our newly acquired shot dollar fund (UDN) was down 2% in a month-and-a-half.

For 2010 overall, we trailed both both the macro hedge fund index and the S&P 500 index, +4% for us compared to +8% for the hedgies and +13% for the market. DBA was +24%, IFN +21%, EWZ +4%, and FXI +3% for the year. Although we only held them for part of the year, SLV was +75% for us and GLD was +20%.

We are now 39 points ahead of the market in terms of total return-on-investment: +28.1% for us and -11% for the S&P 500 in the four full years since the inception of the IMSIP at the end of 2006. This puts us just slightly ahead of our benchmark, the GAI Global Macro Hedge Fund Index, which is +26.9%. In terms of compounded annual growth rate, after four years IMSIP is +6.4%, the GAI hedgies are at +6.1%, and the S&P 500 is -3%.

4Q10 Reprise: Here are some topical 4Q10 links, organized by subject:

BRICs

Deep Capture

The Dollar

Eurozone

QE2

Analysis: Well our portfolio looks a bit different now (36% emerging markets, 31% commodities, 8% short the dollar, and 25% cash) than it did a quarter ago (27% emerging markets, 26% commodities, 9% bonds, 26% short the market, and 12% cash). Three months ago we were 26% short and now we are only 8% short…but that doesn’t mean we think things are looking up.

There is no arguing the fact that one thing is looking up, however: the market. Volatility—how much the market moves up or down—is a good measure of perceived risk: as investors perceive the market as more risky and uncertain and tend to sell, prices fall and volatility generally rises. But volatility has been declining sharply since the 2008 crash—as market values have risen—and in 4Q10, volatility for the S&P 500 fell below the 50-year average for the first time in over three years. Evidently, investors collectively believe that the risk of something bad happening has been reduced.

We demur.

We see giant multi-national banks that are still stuffed with toxic assets and riding for a fall, a USA real estate market with property values that are still overvalued, developed economy consumers who are still underemployed and overleveraged (especially in the USA), fast-growing emerging market economies that are by their very nature vulnerable to bubbles, and material sovereign debt risk. And, unfortunately, regardless of whether we put Republicans or Democrats in control of the government, our political leaders seem invariably intent on treating the symptoms of our illness, avoiding challenges to any entrenched elites, and hoping and praying they can muddle through with no ultimate crisis on their watch…even at the cost of leaving us with fewer resources to deal with our structural problems when we finally run out of effective delaying tactics.

Be that as it may, central banks in general are working in concert to hold down interest rates and expand liquidity in order to “stimulate” the economy. The Fed in particular is dispensing out $600 billion of financial Kool-Aid with their latest quantitative easing scheme (“QE2”), and funds are flowing into equities, driving market prices higher. Between the value distortions foisted on the market by the manipulations of the central banks and the machinations of the high frequency traders constantly threatening us with a flash crash or worse, the investing waters that appear so calm on the surface are actually quite roiled.

Conclusion: We are in the eye of the storm, and most everyone is sipping the QE2 Kool-Aid and singing Kum-Ba-Ya. Accordingly, it is time to make love, not war…but we remain prepared for both.

We now hold all long emerging market ETFs for all four BRIC nations in the portfolio: Brasil (EWX), Russia (RSX), India (IFN), and China (FXI). We believe that in a deleveraging environment, the economies that are still growing will fare far better than those that are not and we expect that non-dollar-denominated assets to do better than those tied to the greenback. Thus these emerging market long positions will be the last we will surrender if and when things get really dicey.

In the face of QE2 and the continued runup in the price of equities, we dumped our index shorts and—out of concern for possibly rising interest rates—our corporate bond fund. So far, the combination of continued slack consumer demand and Eurozone sovereign debt risk has kept the dollar strong, but against the likelihood that its decline will resume and even speedup, we added the short dollar ETF (UDN). We also still have three long commodity plays: the agriculture ETF (DBA) and precious metals ETFs for gold (GLD) and silver (SLV).

Although we are mostly long now in congruence with the prevailing love fest, we remain vigilant as to a potential turning of the tide. In times of heightened uncertainty, valuations can fluctuate wildly and the preservation of capital takes precedence over meeting any target ROI. To that end, when the phantasmic prospect of sustained economic growth sans serious deleveraging fades—that is, when the Kool-Aid runs out—we are prepared to unload our long positions, possibly excepting the precious metal funds, and short the indices again.

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BUY Market Vectors Russia ETF (RSX)

Posted by intelledgement on Fri, 31 Dec 10

“BRIC, BRIC, BRIC”—Brazil-Russia-India-China—has been a cardinal rally cry for macro analysts ever since Jim O’Neill’s landmark report a decade ago. Never-the-less, when we started the Intelledgement Macro Strategy Investment Portfolio (IMSIP) at the end of 2006, while we did invest in Brazil (EWZ), India (IFN), and China (FXI) we eschewed Russia, and have continued to avoid it ever since.

Until now.

There are many reasons to be cautious about investing in Russia. The main issue for us has been the weak rule of law and respect for private property exhibited by the government, as epitomized by the case of Mikhail Khodorkovsky, the former owner and CEO of Yukos. In 2003, Yukos was the biggest oil company in Russia, but after Khodorkovsky financed politicians opposed to then-president Vladimir Putin, he was arrested, tried, and jailed and his company destroyed. When the national government has no qualms about destroying a major company—and there are no institutional impediments to this sort of arbitrary action—clearly the risk for investors is heightened. And that is not the only yellow light.

Russia’s transition from communism to—as the CIA diplomatically phrases it—“a centralized semi-authoritarian state whose legitimacy is buttressed, in part, by carefully managed national elections” has been rough on the population. Generally speaking, the process of de-nationalizing government-owned enterprises favored the well-connected, and those with the most money and ruthlessness—so long as they do not oppose Putin—have thrived. But with the dissembling of the socialist welfare state and concomitant safety nets, the vast majority of the population has had tough times. Russia ranks dead last among developed nations in life expectancy (66 years compared to 78 for the USA), and 161st overall (the USA is  49th). The differential between men and women is unsettlingly high (60 years for men, 73 years for women). Russian life expectancy trails many developing nations—Brazil, China, India, Indonesia, and Malaysia among others—as well as most of the other former members of the Soviet Union. And conditions are evidently not confidence-inspiring: the country’s fertility rate (1.4 children born/woman) is 200th in the world and despite net plus immigration, the country’s population is declining (estimated -0.465% in 2010) and overall Russia ranks 222nd in the world in population growth (out of 233 countries).

Having said that, those Russians still alive are well-educated (99.4% literacy) and modernized (only 10% remain engaged in agriculture; 32% use the internet which is above average). Oligarch-domination notwithstanding, Russia’s Gini index rating (a measure of the degree of inequality in the distribution of income in a country) is 82nd in the world (the USA is 93rd).

Another factor to consider is Russia’s geopolitical weakness. Infrastructure spending has lagged in the past 20 years. And their military capacity is a pale shadow of its USSR heyday and consequently the nation remains under pressure to keep commodity-hungry—and neighboring—China well-satisfied. If the cost of buying what they need from Russia to keep their own economy humming—and maintain political stability—gets too expensive, the Chinese have the capacity to take as much of resource-rich and sparsely-populated Siberia as they desire (presuming no one besides the Russians oppose them). This, of course, would be a disaster for Russia.

The Russian economy is dominated by commodity exports—in 2009 Russia was the world’s largest exporter of natural gas, the second largest exporter of oil, and the third largest exporter of steel and primary aluminum—and thus is highly sensitive to the overall rate of economic growth. For example, the 2008 downturn hit Russia particularly hard, even though their banks had little direct exposure to toxic securities, because demand for commodities—and Russian exports—declined precipitously: the value of Russian exports fell from $472 billion in 2008 to $303 billion in 2009.

But on balance, given a world where the demand for commodities to feed the engines of growth is high, the Russians benefit from a sellers’ market. We are now ten years into the 21st Century, and stock market-wise, the big winner so far has been…Russia. The compounded annual growth rate of the RTSI Index over the last decade is +28%. Better, in other words, than India (+20%), Brazil (+16%), China (+3%), Germany (+1%), the USA (0%), or Japan (-3%). Better, in fact, than most hedge funds.

In 2007, we were concerned that in view of the difficult conditions in Russia, a downturn might  engender social and political unrest. However, the Russian regime survived the 2008 downturn intact and shows no sign of losing its grip. The government is fostering investment in high tech, which demonstrates they are cognizant of their economy’s over-reliance on commodity exports. The potential exists for bargaining with commodity-hungry customers to trade supply guarantees for investment in Russia’s infrastructure, which to the extent that it facilitates lower-cost mining/drilling/transportation of commodities, would benefit both parties.

In view of these considerations, we have decided that overall, the potential benefits outweigh the risks. And the investment vehicle we have selected is the Market Vectors Russia ETF (RSX). This ETF did not even exist when we started the IMSIP at the end of 2006, but since its inception (24 Apr 07), it has an IER of +231 (meaning it has outperformed the RTSI index on a CAGR basis by 2.31% since April 2007). When you are consistently outperforming an index that is up nearly 30% on average every year for ten years, that is hard to resist. The ETF currently has a market cap of $2.1 billion and average daily volume of 2.7 million shares, both of which exceed our minimum criteria ($1 billion market cap and volume of one million shares/day).

Last in, first out. Between the end of 2007 and 2008, the Russian stock market declined 72% under the pressure of the economic downturn. We are going in here because we believe that [a] Russia is in better shape now than it appeared to us to be in 2007 and [b] commodity demand in 2011 is likely to be high. But should Eurozone default risk, geopolitical unrest in the far east, near east, or middle east, or any other macro-scale development appear to threaten short-to-medium term growth, we will not stick around for another 70% decline.

On the other hand, should there be another 70% decline, now that we have seen Russia work through one of those, we would be more likely to look to get in sooner next time.

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3Q10 Intelledgement Macro Strategy Investment Portfolio Report

Posted by intelledgement on Wed, 13 Oct 10

Summary of Intelledgement’s model macro strategy model investment portfolio performance as of 30 September 2010:

Position   Bought   Shares Paid Cost Now Value   Change       YTD         ROI       CAGR  
FXI 03-Jan-07 243 37.15 9,035.45 42.82 11,006.30 8.87% 2.30% 21.81% 5.40%
IFN 03-Jan-07 196 45.90 9,004.40 36.37 10,127.32 13.44% 12.33% 12.47% 3.18%
DBA 13-Mar-08 235 42.50 9,995.50 27.87 6,549.45 16.17% 5.41% -34.48% -15.28%
EWZ 3-Aug-09 165 60.39 9,972.35 76,95 13,122.68 23.47% 3.13% 31.59% 26.75%
GLD 21-May-10 95 115.22 10,953.90 127.91 12,156.39 5.12% 19.20% 10.98% 33.40%
SLV 21-May-10 636 17.29 11,004.44 21.31 13,586.23 16.98% 28.84% 23.46% 79.17%
DOG 25-May-10 204 54.01 11,026.04 48.16 9,824.64 -10.83% -7.97% -10.90% -28.05%
PSQ 25-May-10 246 44.74 11,014.04 38.85 9,556.88 -14.16% -11.04% -13.23% -33.30%
SH 25-May-10 201 9.41 10,978.58 48.90 9,828.90 -11.11% 6.96% -10.47% -27.07%
LQD 11-Aug-10 99 110.60 10,957.40 113.09 11,237.89 n/a 11.83% 2.56% 20.28%
cash -3,942.10 19,027.59
Overall 31-Dec-06 100,000.00 126,024.27 4.23% -0.52% 26.02% 6.37%
Macro HF 31-Dec-06 100,000.00 121,336.09 0.95% 3.37% 21.34% 5.30%
S&P 500 31-Dec-06 1,418.30 1,141.20 10.72% 2.34% -19.54% -5.63%

Position = security the portfolio owns
Bought = date position acquired
Shares = number of shares the portfolio owns
Paid = price per share when purchased
Cost = total paid (price per share multiplied by # shrs plus commission)
Now = price per share as of date of report
Value = what it is worth as of the date of report (price per share multiplied by # shrs plus value of dividends)
Change = on a percentage basis, change since last report (not applicable for positions new since last report)
YTD (Year-to-Date) = on a percentage basis, change since the previous year-end price
ROI (Return-on-Investment) = on a percentage basis, the performance of this security since purchase
CAGR (Compounded Annual Growth Rate) = annualized ROI for this position since purchase (to help compare apples to apples)

Notes: The benchmark for the Intelledgement Macro Strategy Investment Portfolio (IMSIP) is the Greenwich Alternative Investments Global Macro Hedge Fund Index, which historically (1988 to 2009 inclusively) provides a CAGR of around 14.0%. For comparison’s sake, we also show the S&P 500 index, which since January 1950 has produced a CAGR of around 7.2%. Note that for our portfolio’s positions, dividends are added back into the value of the pertinent security and not included in the “cash” total (this gives a more complete picture of the ROI for dividend-paying securities). Also, the “Cost” figures include a standard $8 commission and there is a 1% rate of interest on the listed cash balance. Finally, The “cash” line for the “Cost” column is negative because the total cost of the positions the IMSIP presently hold exceeds the total cash we started with—which is, of course, a good thing—and profits from earlier sales have been reinvested into more recently acquired positions.

Transactions: Less volatility this quarter, and fewer transactions…could this be causal relationship? 🙂

Performance Review: Wow, a mirror image quarter! We were up 4%, which normally is good, but we lost to the market (+11%) by seven  points. This is an almost perfect reversal of the prior quarter, in which we lost 4% but beat the market (-12%) by eight points. The IMSIP is just a rock of stability, relatively speaking. We did beat the macro hedge fund index (+1%) by three points. Heck, those guys are even more stable than we are—they gained 1% in 2Q10, too.

Tactically, we ended the quarter still pretty neutral, with three BRIC country long ETFs balanced by three index  short ETFs, plus three commodity plays including two flight-to-safety/inflation insurance precious metal funds and our agriculture ETF plus our new high grade corporate bonds ETF, which is a bet on the Fed keeping interest rates low. Our BRIC ETFs overall were up—as one would expect in a +11% market: Brazil (EWZ, +23%), India (IFN, +13%), and China (FXI, +9%). The commodity ETFs also did well, with SLV +17%, DBA +16, and GLD +5%. The three index short ETFs had a tough quarter, of course: DOW (DOG) -11%, NASDAQ (PSQ) -14%, and S&P 500 (SH) -11%. Our newly acquired corporate bond fund (LQD) was up 3% in a month-and-a-half. We also made a profit on our sale of the high tech ETF (IYW), and took a loss unloading the treasuries short fund (TBT).

Overall, we are now 46 points ahead of the market in terms of total return-on-investment: +26% for us and -20% for the S&P 500 in the 45 months since the inception of the IMSIP at the end of 2006. We are five points ahead of our benchmark, the GAI Global Macro Hedge Fund Index, +26% to +21%. In terms of compounded annual growth rate, after three years IMSIP is +6%, the GAI hedgies are at +5%, and the S&P 500 is -6%.

Analysis: The fix is in.

We can argue about why this is happening. Some see dark bankster conspiracies aimed purposefully at destroying confidence in national governments and creating chaos in order to facilitate a world-wide takeover by the powerful elite. Some see an inherent flaw in the democratic process that makes it impossible for leaders to engage in long-term thinking, making the system vulnerable to situations where short-term pain is needed to avert long-term catastrophe…because the very design of the system ensures that short-term pain is always avoided at all costs. Some see nothing more remarkable than the inexorable rise and fall of empires at work here.

Leaving aside the theoretical explanations, as a practical matter, it is more and more clear that the central banks in the developed world are hell-bent on fending off the collapse of any “too big to fail” (TBTF) institutions at all costs. All the Sturm und Drang about the financial reform legislation that was supposed to end TBTF, all the jawboning about greedy bankers and unconscionable bonuses, all the expressions of piety with respect to the need for a strong dollar…all fade to insubstantial misdirection beside the solid reality of never-ending bailouts and so-called “quantitative easing.”

It was bad in the 50s and 60s when the USA financed both wars and increasingly expensive social programs via debt and the dollar began to weaken. It was worse in the 70s and 80s when we divorced the dollar from gold entirely, continued to run up debts, and accelerated the process of eschewing production and manufacturing in favor of financial “services” and ever-more arcane ways to manipulate money. In the 90s and the first decade of the 21st century, we engineered asset bubbles in real estate and stocks to inveigle folks to keep accumulating individual debt and eschew savings, even as a combination of irresponsible new entitlements obligations and an aging population worsened the debt situation of the government.

2008 was a watershed. Or, to borrow an analogy from South African finance minister Pravin Gordhan, a waterpipe—a broken one. Not a pipe we could see, because it was behind the wall, but we could hear the water dripping and see the stains on the wall. It was obvious to everyone that the proximate cause of the crash was the debt-funded asset bubbles. We could have chosen to own up to the errors of our ways, punished the guilty, sorted out the mess of the bursting bubbles, and applied our considerable energies to moving forward building a stabler, healthier financial system with safeguards against the abuses that brought us to this pass.

But instead, we chose to reinflate the bubbles! Rather than allowing housing prices to fall to sustainable levels, we bailed out homeowners who owed more than their properties were worth. Rather than allowing banks who had written bad loans to fail, we bailed them out, by artificially lowering interest rates and firing up the printing presses so they could borrow cheaply and reinvest the funds to make a profit and earn their way out of insolvency. Never mind that [a] it won’t work and [b] in trying to make it work we risk igniting a ruinous currency war. In effect, we threw good public money after bad private money, directly increasing the debt and indirectly—by weakening the dollar—reducing the wealth of all citizens (and their children).

Instead of fixing the broken pipe, we replastered the wall and painted over the water stains. The fix is in, not in the sense of repairing the damage, but in the sense that unscrupulous insiders have rigged it—while we are meant to believe that things are getting better, in fact what is happening is that those in the know have bet on the room being flooded, sooner or later.  The flood, of course, will not be water. It will be wheelbarrels full of worthless U.S. dollars.

Conclusion: We know that the foolhardy efforts of the central banks to save the corrupt and insolvent financial system are doomed. What we don’t know is how and when that doom will play out. For the past several months, we have been betting that things may fall apart sooner rather than later; hence our commodities and short positions. There are so many potential black swans flitting about—bad real estate loans, bad banks, insolvent local and state governments, sovereign debt, hyperinflation, potential social unrest in China, Iran and their nukes, North Korea and their nukes, Pakistan and their nukes, the threat of a major terrorist attack, a plague, global warming—that one or more could land at any moment.

In our best effort to avoid black swan excrement, as of 1 October, we continue to hold three long emerging market ETFs in the portfolio: China (FXI), India (IFN), and Brasil (EWX). We believe that in a deleveraging environment, the economies that are still growing will fare far better than those that are not; thus these long positions will be the last we will surrender if and when things get really dicey. Already, things are somewhat dicey…enough so that we hold three inverse index ETFs (that go up when whatever they are tied to goes down) to serve as insurance against a sudden worsening of the sovereign debt crisis: the short DOW index ETF (DOG), the short NASDAQ index ETF (PSQ), the short S&P 500 index ETF (SH). We are considering unloading some or all of these shorts because [a] the cost of holding them has risen along with the strong 3Q10 rally in the stock market and [b] our concern about hyperinflation in the face of a likely second round of quantitative easing by the Fed after election day is daunting. As it is, the overall performance of macro funds has been constrained by the prevalence of significant short positions,  in concert with the way the macros are pointing but—thanks at least in part to profligate quantitative easing and related shenanigans by the central banks—contrary to the way the markets are behaving.

We also still have three long commodity plays: the agriculture ETF (DBA) and precious metals ETFs for gold (GLD) and silver (SLV). The dollar is weakening again and the waxing of that hyperinflationary scenario has us considering a short play there.

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2Q10 Intelledgement Macro Strategy Investment Portfolio Report

Posted by intelledgement on Wed, 14 Jul 10

Summary of Intelledgement’s model macro strategy model investment portfolio performance as of 30 June 2010:

Position   Bought   Shares Paid Cost Now Value   Change       YTD         ROI       CAGR  
FXI 03-Jan-07 243 37.15 9,035.45 39.13 10,109.63 -5.69% -6.03% 11.89% 3.26%
IFN 03-Jan-07 196 45.90 9,004.40 30.25 8927.80 -2.75% -0.98% -0.85% -0.24%
DBA 13-Mar-08 235 42.50 9,995.50 23.99 5,637.65 -0.95% -9.27% -43.60% -22.07%
TBT 21-Jan-09 233 42.84 9,989.72 35.48 8,266.84 -27.13% -28.87% -17.25% -12.34%
EWZ 3-Aug-09 165 60.39 9,972.35 61.83 10,628.21 -15.19% -17.13% 6.58% 7.28%
IYW 29-Sep-09 208 51.86 10,794.88 51.60 10,771.70 -11.48% -10.32% -0.21% -0.29%
GLD 21-May-10 95 115.22 10,953.90 121.68 11,564.54 n/a 13.39% 5.57% 64.11%
SLV 21-May-10 636 17.29 11,004.44 18.21 11,614.63 n/a 10.10% 5.54% 63.69%
DOG 25-May-10 204 54.01 11,026.04 54.01 11,018.04 n/a 3.21% -0.07% -0.73%
PSQ 25-May-10 246 44.74 11,014.04 45.26 11,133.96 n/a 3.64% 1.09% 11.61%
SH 25-May-10 201 9.41 10,978.58 55.01 11,057.01 n/a 4.66% 0.71% 7.49%
cash -13,769.30 10,174.48
Overall 31-Dec-06 100,000.00 120,904.29 -4.01% -4.56% 20.90% 5.58%
Macro HF 31-Dec-06 100,000.00 120,194.43 0.70% 2.39% 20.19% 5.40%
S&P 500 31-Dec-06 1,418.30 1,030.71 -11.86% -7.57% -27.33% -10.09%

Position = security the portfolio owns
Bought = date position acquired
Shares = number of shares the portfolio owns
Paid = price per share when purchased
Cost = total paid (price per share multiplied by # shrs plus commission)
Now = price per share as of date of report
Value = what it is worth as of the date of report (price per share multiplied by # shrs plus value of dividends)
Change = on a percentage basis, change since last report (not applicable for positions new since last report)
YTD (Year-to-Date) = on a percentage basis, change since the previous year-end price
ROI (Return-on-Investment) = on a percentage basis, the performance of this security since purchase
CAGR (Compounded Annual Growth Rate) = annualized ROI for this position since purchase (to help compare apples to apples)

Notes: The benchmark for the Intelledgement Macro Strategy Investment Portfolio (IMSIP) is the Greenwich Alternative Investments Global Macro Hedge Fund Index, which historically (1988 to 2009 inclusively) provides a CAGR of around 14.0%. For comparison’s sake, we also show the S&P 500 index, which since January 1950 has produced a CAGR of around 7.3%. Note that for our portfolio’s positions, dividends are added back into the value of the pertinent security and not included in the “cash” total (this gives a more complete picture of the ROI for dividend-paying securities). Also, the “Cost” figures include a standard $8 commission and there is a 1% rate of interest on the listed cash balance.

Transactions: The sudden return of volatility in 2Q10 had us jumping through hoops with not only more transactions than usual but some hard zigging and zagging…but in the end, all profitable (at least the closed trades):

Performance Review: Normally you’d have no difficulty characterizing a 4% loss as a bad quarter, but when you still beat the market (-12%) by eight points, the waters get a bit muddy. We did lose to the hedgies (±0%) by five points. Tactically, reflecting the schizoid market we are close to neutral here, with our three BRIC country funds plus our high tech fund bullish, our four short funds bearish, plus three commodity plays including two flight-to-safety/inflation insurance precious metal funds. Our BRIC ETFs overall were down—as one would expect in a -12% market: India (IFN, -3%), China (FXI, -6%), and Brazil (EWZ, -15%); plus the emerging markets-oriented US Technology ETF (IWY) tracked the market (-11%, which BTW did edge out the NASDAQ for the quarter by one point, for those keeping score at home). Our repurchase of the precious metal EFTs looks good so far with GLD +13% and SLV +10%; the agriculture commodities ETF (DBA) held its own (-1%). Our UltraShort Lehman 20+Year Treasury ETF (TBT), which goes up when the value of long-term treasuries decline, as they tend to do when long-term interest rates rise, had a disastrous quarter (-27%), as the European sovereign debt crisis sparked a flight-to-safety run on US government bonds, and interest rates consequently plummeted. Some of those losses were offset by profits on the purchase and sale of the three index short ETFs for the DOW (DOG), NASDAQ (PSQ), and S&P 500 (SH) during the quarter; we purchased them again towards the end of the quarter and were slightly ahead. We also made a profit on our sale of the Malaysia ETF (EWM), although the sale price was a tad lower than the close at the end of last quarter.

Overall, we are now 48 points ahead of the market in terms of total return-on-investment: +21% for us and -27% for the S&P 500 in the three-and-a-half years since the inception of the IMSIP at the end of 2006. We are one point ahead of our benchmark, the GAI Global Macro Hedge Fund Index, +21% to +20%. In terms of compounded annual growth rate, after three years IMSIP is +6%, the GAI hedgies are at +5%, and the S&P 500 is -10%.

Analysis: After five straight quarters of declining volatility, things got interesting—as in, “may you live in interesting times”—in 2Q10. A combination of continued slower-than-expected economic growth and the specter of sovereign debt defaults among European countries combined to spook the markets big time. The potential threat of defaults by any of the PIIGS (Portugual-Ireland-Italy-Greece-Spain) is considered to be extremely serious because it could engender a cascade of bank collapses—all over Europe and beyond—similar to the danger in 2008 attendant to a collapse of AIG, Bear Stearns, Citibank, Freddie, Fannie, Merrill Lynch, and/or Wachovia (all of whom were eventually bailed out by the US government). The powers-that-be most definitely consider that this would be a catastrophic eventuality, to be avoided at all costs. Thus the likelihood that central banks will once again deploy taxpayer dollars to bailout the moneyed elites, this time for their fecklessness in loaning money to over-extended governments instead of for their foolishness being lured into ludicrous spectulative bets by Goldman Sachs and their ilk.

Our perspective is that this is yet another swerve in the extended oscillating skid which we have written of before. The combination of intrinsically short-sighted democratically elected—and, more to the point, re-elected—politicians and a culture that increasingly craves instant gratification has done us in. We got into this situation by overspending, borrowing beyond our means, and speculating on bubble-valued assets. The U. S. government’s attempts to address our problems have generally been short on addressing systemic issues and long on creating the temporary illusion that things are getting better.

The proper way to defeat an oscillating skid is to turn into it, thus affording your tires traction and enabling you to regain control. In our case, we could do this by allowing the insolvent financial institutions to go out of business, as they so richly deserve to. We could require more stringent capital requirements for both lenders and borrowers doing business in the USA. We could clean house at the regulatory agencies so they will actually enforce the rules already on the books (e.g., not allowing naked short selling). We could make it illegal for ratings agencies to accept payment from any company they rate. We could create an exchange for the trading of derivatives. We could encourage good corporate governance practices (e.g., favoring for government contracts companies that reward management with long-term stock options rather than instant cash bonuses so that corporate leaders’ interests were better aligned with the long-term interest of shareholders). We could reduce social welfare spending commitments to sustainable levels going forward.

But instead, we are fighting the skid at every turn. We are throwing good taxpayer money after bad propping up the “too big to fail” banks. We are debasing our currency in futile attempts to reinflate the housing and credit bubbles that got us into this latest fix in the first place. Instead of addressing the systemic problem of overcommitted government largesse, we are expanding the role of government and increasing our commitments.

Conclusion: There is no such thing as a free lunch. Someone always pays, sooner or later. For decades, we—through our elected leadership—have relentlessly whipped out our national credit card to, in effect, pass the debt on to future suckers. Well, if you have a mirror handy, you can meet one of those future suckers right now. The government is still flashing plastic, but now it is a debit card, and the account being charged is the one that’s comprised of your life savings.

In our best effort to avoid those charges, as of 1 July, we continue to hold four long emerging market ETFs in the portfolio: China (FXI), India (IFN), Brasil (EWX), and US high tech (IYW which we consider an emerging market play as some two-thirds of the revenue of the companies comprising the ETF are ex-USA derived). We believe that in a deleveraging environment, the economies that are still growing will fare far better than those that are not; thus these long positions will be the last we will surrender if and when things get really dicey. Already, things are somewhat dicey…enough so that we now have four inverse ETFs (that go up when whatever they are tied to goes down) to serve as insurance against a sudden worsening of the sovereign debt crisis (which could be either European- or domestic state/local government-based): the short DOW index ETF (DOG), the short NASDAQ index ETF (PSQ), the short S&P 500 index ETF (SH), and the inverse long-term Treasury bonds ETF (TBT). We are considering unloading this last because the (up-to-now) European sovereign debt crisis has engendered a perverse flight-to-safety that is driving U.S. bond rates down (and the values of the bonds up), even though in the long run the USA is no more solvent than Greece. We believe the value of those bonds will eventually plummet but we have held TBT for over a year now with no joy and it could be we can do better with the funds between now and a more opportune time to be short treasuries.

We also still have three long commodity plays: the agriculture ETF (DBA) and precious metals ETFs for gold (GLD) and silver (SLV). The dollar actually stronger again last quarter, the flight-to-safety reaction to the European sovereign debt crisis resulted in increased gold and silver prices anyway. In the longer run, we expect another massive round of central bank quantitative easing in response to the next crisis—or the one after that—and in the deluge of dollars that results, the commodities positions should provide some dry shelter for our assets.

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1Q10 Intelledgement Macro Strategy Investment Portfolio Report

Posted by intelledgement on Wed, 14 Apr 10

Summary of Intelledgement’s model macro strategy model investment portfolio performance as of 31 March 2010:

Position   Bought   Shares Paid Cost Now Value Change     YTD         ROI       CAGR  
FXI 03-Jan-07 243 37.15 9,035.45 42.10 10,719.81 -0.36% -0.36% 18.64% 5.40%
IFN 03-Jan-07 196 45.90 9,004.40 31.54 9,180.64 1.83% 1.83% 1.96% 0.60%
DBA 13-Mar-08 235 42.50 9,995.50 24.22 5,691.70 -8.40% -8.40% -43.06% -24.04%
TBT 21-Jan-09 233 42.84 9,989.72 48.69 11,344.77 -2.39% -2.39% 13.56% 11.30%
EWM 21-Jul-09 1,062 9.41 10,001.42 11.68 12,554.96 9.85% 9.85% 25.53% 38.86%
EWZ 3-Aug-09 165 60.39 9,972.35 73.64 12,531.42 -1.30% -1.30% 25.66% 41.57%
IYW 29-Sep-09 208 51.86 10,794.88 58.39 12,168.42 1.58% 1.48% 12.72% 27.00%
cash 31,206.28 51,763.29
Overall 31-Dec-06 100,000.00 125,955.00 -0.58% -0.58% 25.96% 7.37%
Macro HF 31-Dec-06 100,000.00 119,357.61 1.68% 1.68% 19.36% 5.60%
S&P 500 31-Dec-06 1,418.30 1,169.43 4.87% 4.87% -17.55% -5.77%

Position = security the portfolio owns
Bought = date position acquired
Shares = number of shares the portfolio owns
Paid = price per share when purchased
Cost = total paid (price per share multiplied by # shrs plus commission)
Now = price per share as of date of report
Value = what it is worth as of the date of report (price per share multiplied by # shrs plus value of dividends)
Change = on a percentage basis, change since last report (not applicable for positions new since last report)
YTD (Year-to-Date) = on a percentage basis, change since the previous year-end price
ROI (Return-on-Investment) = on a percentage basis, the performance of this security since purchase
CAGR (Compounded Annual Growth Rate) = annualized ROI for this position since purchase (to help compare apples to apples)

Notes: The benchmark for the Intelledgement Macro Strategy Investment Portfolio (IMSIP) is the Greenwich Alternative Investments Global Macro Hedge Fund Index, which historically (1988 to 2009 inclusively) provides a CAGR of around 14.0%. For comparison’s sake, we also show the S&P 500 index, which since January 1950 has produced a CAGR of around 7.3%. Note that for our portfolio’s positions, dividends are added back into the value of the pertinent security and not included in the “cash” total (this gives a more complete picture of the ROI for dividend-paying securities). Also, the “Cost” figures include a standard $8 commission and there is a 1% rate of interest on the listed cash balance.

Transactions: We had another quiet quarter, with only a couple of sales:

Performance Review: An indifferent quarter for IMSIP, as we were down 1%, while the S&P 500  was up 5% and the macro hedge funds up 2%.Tactically, despite our deep skepticism about the validity of the continued strong market rally, we remain mildly bullish here. Our emerging market ETFs overall were slightly up: Malaysia (EWM, +10%), India (IFN, +2%), and China (FXI, flat), and Brazil (EWZ, -1%). As mentioned previously, we sold our gold and silver commodity ETFs—prematurely in the event, as both ended the quarter higher than they were 9 Feb when we sold—but our remaining commodity play, agriculture, was down (DBA, -8%). The US Technology ETF (IYW) was up 1% for us; if it continues to lag the NASDAQ index—which was up 4% in the quarter—we will likely trade it in. Our one short position, the UltraShort Lehman 20+Year Treasury ETF (TBT), which goes up when the value of long-term treasuries decline, as they tend to do when long-term interest rates rise, was down 2% and rates remained stubbornly low during the quarter despite torrents of fresh debt offerings by the U.S. Treasury.

Overall, we are now 44 points ahead of the market in terms of total return-on-investment: +26% for us and -18% for the S&P 500 in the three years and three months since the inception of the IMSIP at the end of 2006. We are seven points ahead of our benchmark, the GAI Global Macro Hedge Fund Index, +26% to +19%. In terms of compounded annual growth rate, after three years IMSIP is +7%, the GAI hedgies are at +6%, and the S&P 500 is -6%.

Analysis: The market doggedly continues to accentuate the positive, up yet another 5% in the quarter, while volatility—a good fear indicator, which set a new all-time high in 4Q08—declined for the fifth straight quarter, actually reaching the historical average. While the U.S. unemployment rate remained unchanged at 9.7% in March—which was good compared to the steady increases in 2009—there was actually job growth (+162,000 non-farm jobs). Corporate profits were strong again in 1Q10 and consumer spending—evidently powered by the Energizer bunny—somehow continues to outstrip gains in personal income month-after-month:“Personal income increased $1.2 billion, or less than 0.1 percent, and…[p]ersonal consumption expenditures (PCE) increased $34.7 billion, or 0.3 percent,” in February, according to the latest Bureau of Economic Analysis data. Inflation and interest rates (except for credit card debt) remain low, and the stock market has now recovered 75% since the March 2009 low (S&P 500 666.79 on 6 Mar 09).

As we continue to point out, we got into this situation by overspending, borrowing beyond our means, and speculating on bubble-valued assets. In previous reports, we have lamented that the U. S. government’s attempts to solve our problems have generally made things worse, whilst creating the temporary illusion that things are getting better. We recently came across a presentation by Dylan Ratigan of MSNBC that does a good job illuminating this sad situation, which Mr. Ratigan ascribes to evil intent (presented below in two parts):

We expect there are some bad actors but in general, it is our belief that most of what has happened is due to ignorance and unintended consequences. Mr. Ratigan is spot on in lamenting that most members of Congress have no clue how our financial system functions…but in that lack, they well reflect the populace at large. Our political leaders surely intended well, for example, when they mandated that mortgage loans be made available to folks who previously did not qualify back in 1999, and the Fed fed the housing bubble in the 2000s by keeping interest rates low. Get more folks owning their own homes, stimulate the economy, what’s not to like? But the resulting poisonous stew of insidious incentives for everyone involved to act in their own short-term best interests—inveigling folks to overpay for properties they couldn’t afford in the first place with the expectation that with prices sure to keep rising, they could sell to the greater fool for a profit—then packaging the resultant mortgage-backed securities, mislabeling them a high-grade with the connivance of the ratings agencies and selling them to credible financial institutions, etcetera, etcetera. Just about everyone behaved short-sightedly with little if any regard for systemic risk; there is plenty of blame to go around.

Where we do agree with Mr. Ratigan is with respect to his criticism of what is happening—or, in some cases, not happening—now: the continued attempt to reflate values back up to tulip bulb mania levels, the continued assumption of the debts of so-called “too-big-to-fail” institutions by the government, the failure to pass meaningful reforms such as sundering the cozy relationship between ratings agencies and the institutions who create the equities to be rated—as insane as this sounds, currently the former are paid by the latter—and creating an exchange for credit default swaps and other esoteric financial instruments to ensure transparency and facilitate the self-governing influence of market forces—not to mention creating a mechanism for dismantling big failed financial institutions in an orderly way and holding their leadership personally accountable for their failures which would better align their interests with that of the owners and society as a whole.

For that matter, why are we bailing these failed institutions out by assuming their debts? And why are we undertaking additional obligations such as health care and dubious stimulus programs on top of the existing deficits plus the imminent demographic-driven shortfalls in entitlements funding? Why are we focused on heath insurance and cap-and-trade when the real threat to our way of life is our failure to understand and address our financial failings?

Conclusion: Sadly but surely, we remain confident that the worst is yet to come. However, we cheerfully admit we have no idea when. Perception is reality, and so long as the market perceives that things are hunky dory—as it manifestly does now—it is a greater risk to capital to fight it (go short) than to go with the flow.

Accordingly, as of 1 April, we continue to hold five long emerging market ETFs in the portfolio: China (FXI), India (IFN), Brasil (EWX), Malaysia (EWM), and US high tech (IYW which we consider an emerging market play as some two-thirds of the revenue of the companies comprising the ETF are ex-USA derived). Most of these would go—and be replaced by inverse index ETFs (that go up when the market goes down) if and when things get dicey again.

We also still have one long commodity play and a short on treasuries as hedges against the decline of the dollar: the agriculture ETF (DBA) and the inverse long-term Treasury bonds ETF (TBT). The dollar actually was stronger last quarter, and we sold our gold and silver ETFs in anticipation that a flight-to-safety reaction to the European sovereign debt crisis would buttress it even more, and deflate commodity prices. That did not happen and we are not likely to remain so unhedged against a dollar decline for a lengthy period because the longer we sit on a bench in the station, the greater that chance that train will leave without us.

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4Q09 Intelledgement Macro Strategy Investment Portfolio Report

Posted by intelledgement on Fri, 15 Jan 10

Summary of Intelledgement’s model macro strategy model investment portfolio performance as of 31 December 2009:

Position   Bought   Shares Paid Cost Now Value Change YTD     ROI       CAGR  
FXI 03-Jan-07 243 37.15 9,035.45 42.26 10,758.69 3.66% 44.89% 19.07% 5.98%
GLD 03-Jan-07 142 63.21 8,983.82 107.31 15,238.02 8.56% 24.03% 69.62% 19.22%
IFN 03-Jan-07 196 45.90 9,004.40 30.70 9,016.00 5.31% 39.69% 0.13% 0.04%
SLV 03-Jan-07 700 12.31 8,625.00 16.54 11,577.30 0.97% 47.67% 34.23% 10.29%
DBA 13-Mar-08 235 42.50 9,995.50 26.44 6,213.40 3.85% 0.99% -37.84% -23.20%
TBT 21-Jan-09 233 42.84 9,989.72 49.88 11,622.04 13.47% 32.20% 16.34% 17.43%
EWM 21-Jul-09 1,062 9.41 10,001.42 10.62 11,429.24 6.13% 47.50% 14.28% 34.86%
EWZ 3-Aug-09 165 60.39 9,972.35 74.61 12,691.47 13.67% 113.23% 27.27% 79.88%
IYW 29-Sep-09 208 51.86 10,794.88 57.54 11,979.14 10.86% 63.65% 10.97% 50.50%
cash 13,597.46 26,161.66
Overall 31-Dec-06 100,000.00 126,686.96 6.01% 19.84% 26.69% 8.20%
Macro HF 31-Dec-06 100,000.00 117,384.80 0.47% 9.43% 17.38% 5.49%
S&P 500 31-Dec-06 1,418.30 1,115.10 5.49% 23.45% -21.38% -7.70%

Position = security the portfolio owns
Bought = date position acquired
Shares = number of shares the portfolio owns
Paid = price per share when purchased
Cost = total paid (price per share multiplied by # shrs plus commission)
Now = price per share as of date of report
Value = what it is worth as of the date of report (price per share multiplied by # shrs plus value of dividends)
Change = on a percentage basis, change since last report (not applicable for positions new since last report)
YTD (Year-to-Date) = on a percentage basis, change since the previous year-end price
ROI (Return-on-Investment) = on a percentage basis, the performance of this security since purchase
CAGR (Compounded Annual Growth Rate) = annualized ROI for this position since purchase (to help compare apples to apples)

Notes: The benchmark for the Intelledgement Macro Strategy Investment Portfolio (IMSIP) is the Greenwich Alternative Investments Global Macro Hedge Fund Index, which historically (1988 to 2009 inclusively) provides a CAGR of around 14.0%. For comparison’s sake, we also show the S&P 500 index, which since January 1950 has produced a CAGR of around 7.3%. Note that for our portfolio’s positions, dividends are added back into the value of the pertinent security and not included in the “cash” total (this gives a more complete picture of the ROI for dividend-paying securities). Also, the “Cost” figures include a standard $8 commission and there is a 1% rate of interest on the listed cash balance.

Transactions: We had an uncharacteristically quiet quarter, with only some year-end coupon clipping to break the monotony.

  • 21 Dec – FXI dividend of $0.222/shr
  • 22 Dec – EWM dividend of $0.142/shr
  • 23 Dec – IYW dividend of $0.052/shr
  • 29 Dec – EWZ dividend of $0.111/shr

For the year overall, there were 16 buy and sell transactions, compared with 13 in 2008 and 15 in 2007.

Performance Review: A strong quarter for IMSIP, as we were up 6%, narrowly beating out the S&P 500 (up 5%) and whupping the macro hedge funds (flat). For 2009 overall, we were +20%, which trailed the +23% performance of the S&P 500 but came in far ahead of the hedgies (+9%).

Tactically, with the market strong again this quarter and the dollar weak, we let our emerging market and commodity long positions ride. Every single position was up in the quarter, including our one remaining short position, the UltraShort Lehman 20+Year Treasury ETF (TBT, +13%), which goes up when the value of long-term treasuries decline, as they tend to do when long-term interest rates rise. Also boosted by the weaker dollar, our commodity ETFs all advanced in price during 4Q09: gold (GLD +9%), agriculture (DBA, +3%), and silver (SLV, +1%). The emerging market ETFs also did well: Brazil (EWZ, +14%), Malaysia (EWM, +6%), India (IFN, +5%), and China (FXI, +4%). Finally, our economic recovery hedge, the US Technology ETF (IYW) was up 11% for us; despite it’s name, the ETF has considerable offshore exposure as many of the US companies the fund invests in have material revenues and profits outside the USA.

Overall, we are now 48 points ahead of the market in terms of total return-on-investment: +27% for us and -21% for the S&P 500 in the three years since the inception of the IMSIP at the end of 2006. We are nine points ahead of our benchmark, the GAI Global Macro Hedge Fund Index, +27% to +18%. In terms of compounded annual growth rate, after three years IMSIP is +8%, the GAI hedgies are at +5%, and the S&P 500 is -8%.

Analysis: The naked emperor is still marching grandly down main street, and the populace appear to see nothing amiss—at least not the S&P 500, who applauded to the tune of +5% in 4Q09, as volatility edged down closer yet to normal. What’s not to like? The increase in unemployment has slowed if not ceased, corporate profits have been strong and sales may be edging up again with inventories extremely lean, inflation and interest rates (except for credit card debt) remain low, and the stock market has recovered 60% since the March 2009 lows.

As we have said before, we got into this situation by overspending, borrowing beyond our means, and speculating on bubble-valued assets. In point of fact, the emperor is a very sick man—you will recall that scary visit to the emergency room in late 2008—and marching him around in the dead of winter with no clothes on does not rate up there with the smartest of moves the USA has made.

Speaking of late 2008, nearly every time he makes a speech about the economy, Barack Obama makes it a point to blame the previous administration for the mess “we inherited.” That’s good politics 101, most definitely—and W was indeed a disaster—but blaming him for wrecking the economy is a dangerous exaggeration. The economy was already on the brink of breakdown due to decades of short-term thinking and bad management by both government (deficit spending, neglect of the dollar, refusal to deal with structural issues such as entitlements and energy, nurturing of bubbles) and business (failure of manufacturing industries to innovate and adapt, failure of finance industry to manage risk). The economy was already desperately ill; W took us on a walk in the freezing rain with no coat and so we ended up in the emergency room.

Unfortunately, the current administration actually do appear to believe their own rhetoric—they genuinely do blame W for making us sick in the first place, rather than just facilitating a breakdown. As a logical extension of that thinking, the Obama administration are—just as W did at the end, ironically—pumping us full of decongestants and painkillers (loose money and low interest rates) in a frantic attempt to get us to feel better. LOL they are even consulting the same “doctors” (Bernenke, Geithner, and a cabal of Goldman Sachs graduates). They are treating a serious disease as if it were a bad cold. Plus, they are so clueless that they are making things worse by committing us to huge new entitlements and subsidies (e.g., health care and so-called “green” energy). Like the freezing emperor’s storied new clothes, these programs sound great in theory but with no money to fund them, there’s no there there.

This is why it is dangerous to blame W. Unless and until we recognize that we have long-term structural issues and begin to seriously address them, whether or not inflating the dollar, cash-for-clunkers, artificially low interest rates et al lure the stock market higher and make us feel better, the underlying health of our economy will continue to deteriorate.

Until, that is, it totally collapses. Because if we keep treating symptoms and ignoring the disease, we ain’t seen nuthin yet.

And speaking of symptoms, another big blip on the radar screen as 2010 ensues is the quality of sovereign debt. Not just the USA, that is. The bankruptcy of Iceland’s banks in late 2008 and the narrowly averted collapses in Greece and Dubai in late 2009 have exacerbated concerns that defaults on national debt are increasingly likely. Check out this WSJ interview with Harvard economics professor Ken Rogoff about how sovereign defaults may play out, and also this list of sovereign debts ranked as a percentage of annual gross domestic product. And while we’re on the subject of Prof. Rogoff, here is an article about his study concluding that (surprize!) high levels of debt as a percentage of GDP are strongly associated with slow-to-no economic growth. Specifically, growth drops off a cliff at around a 60% ratio of debt-to-GDP—where the USA is now—and pretty much disappears entirely around an 80% ratio or higher.

When you look at Japan, for example—not that Japan is on anyone’s list of countries in imminent danger of default—and see public debt that exceeds GDP by 70%, you have to scratch your head and wonder how they get out of that box. Up to now, the Japanese have been able to finance their debt at very favorable terms internally—over 90% of it, in contrast to the USA (we depend much more on foreign borrowers, including Japan). But Japan has virtually no immigration, and a falling birthrate; consequently, their citizens are, on average, getting older. Retirees are more likely to be selling government bonds than buying them. And there are relatively fewer younger workers to take up the slack. Of course, once Japan is constrained to go to the world markets to refinance their debt, they will presumably have to pay higher (market) interest rates…and we already know that a debt-to-GDP percentage of 170% is not conducive to economic growth so raising revenue to make ends meet is unlikely to serve.

Conclusion: While we are confident the stroll of the naked emporer will not end well, we have no earthly idea how far he will get before [a] everyone realizes his new clothes are a sham or [b] he collapses from exposure…or even which is more likely to happen first. We can say that so long as this parade of unbridled optimism ensues, it is a greater risk to capital to fight it (go short) than to go with the flow.

Accordingly, as of 1 January, we continue to hold five long emerging market ETFs in the portfolio: China (FXI), India (IFN), Brasil (EWX), Malaysia (EWM), and US high tech (IYW which we consider an emerging market play as some two-thirds of the revenue of the companies comprising the ETF are ex-USA derived). Most of these would go—and be replaced by inverse index ETFs (that go up when the market goes down) if and when things get dicey again.

We also still have three long commodity plays which are hedges against the decline of the dollar: gold (GLD), silver (SLV), and agriculture (DBA)…these are more likely to stay in the portfolio, although one risk we are concerned about is a short term “flight-to-safety” dollar rally in the event of an exogenous macro event such as Spain defaulting on their debt or Israel attacking Iran’s nuclear facilities. Such a development could also adversely affect our short long-term Treasury bonds ETF (TBT), at least in the short run.

So while we have made no changes in the lineup recently, we are prepared to make significant changes any time now. Well, actually, any time, period.

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