Macro Tsimmis

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Posts Tagged ‘LQD’

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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SELL iShares Investment Grade Corporate Bonds ETF (LQD)

Posted by intelledgement on Mon, 20 Dec 10

We were hoping to hold onto this long play on bonds for longer, but the deal between President Obama and the GOP Congressional leadership on taxes that was consummated over the weekend—significant cuts in revenue with no accompanying cuts in spending—has tipped the balance in favor of inflation and higher interest rates. Consequently, the value of bonds is falling faster than the payout from the interest rate we are being paid on our investment is filling our coffers, and we need to hit the eject button here now.

Previous LQD-related posts:

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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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BUY iShares Investment Grade Corporate Bonds ETF (LQD)

Posted by intelledgement on Wed, 11 Aug 10

Once again, we are darting in here against the macros, this time to go long corporate bonds. This is consistent with our recent sale of the ETF that shorted long-term treasuries (TBT). While in the fullness of time, we anticipate a collapse of the dollar and U.S. treasuries, in the short term, there is a strong flight-to-safety out of (stock) equities and into bonds, whose promise to return your principal whole plus pay you interest in the meantime looks really, really good in comparison to volatile stocks valuations.

And the iShares Investment Grade Corporate Bonds ETF (LQD) is not only paying a decent 5% annualized dividend (paid monthly) but as the Fed has continued to push interest rates down, the valuation of the LQD ETF has appreciated 9% year-to-date. Roll that up together and you have a compounded annual growth rate in excess of 20%.

Of course, if there is even a whiff of a rise in interest rates, then LQD’s valuation will plunge right quick, and in that event, the yield likely won’t save us from a loss. But we do not anticipate that happening anytime soon: not until the market loses faith in the dollar and U.S. government debt. As poorly as the financial crisis in general is being managed, we remain in a deflationary environment in the aftermath of a burst credit bubble, and given that circumstance, we still feel a trigger event for a serious crisis in confidence for the dollar and U.S.-denominated debt is most likely a ways off. So long as the high pressure system remains stationary, all the storm clouds are diverted around it.

Besides, the alternatives for storing wealth—aside from gold which of course we are long—just look so much worse.

So, our plan is simple: the sun is still shining here and we are going to make hay while it lasts.

The LQD ETF is managed to obtain results that correspond generally to the price and yield performance of the iBoxx $ Liquid Investment Grade index. The fund typically invests at least 90% of assets in the bonds of the underlying index, and at least 95% of assets in investment-grade corporate bonds. Generally, no single investment exceeds 1% of the funds assets and the expense ratio is low (0.15%).

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