Macro Tsimmis

intelligently hedged investment

Posts Tagged ‘sh’

4Q11 Volatility Declines but to a Still-High Level

Posted by intelledgement on Mon, 23 Jan 12

The combined wisdom of all market traders and investors appears to be that risk declined last quarter, after a scary 3Q11…at least, the market was up and volatility was down…but we are not out of the woods yet. For the full story, check out “Nerve Racking: Q4 2011 Volatility Declines, But Only To Still-Elevated Levels,” published at Seeking Alpha.

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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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Market Volatility Spikes in 3Q11

Posted by intelledgement on Thu, 13 Oct 11

2008 initially looked a lot like 1929…but in the Great Depression, the stock market gyrated and sank for the following three years while this time around, the markets have been calm and healthy…until this last quarter, that is. For the full story, check out “Just When You Thought It Was Safe to Go Back in the Water: An Update on Market Volatility,” published on The Motley Fool website.

Previous volatility-related articles:

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BUY ProShares Short S&P 500 (SH)

Posted by intelledgement on Fri, 23 Sep 11

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

Previous SH-related posts:

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BUY ProShares Short Russell 2000 (RWM)—Again

Posted by intelledgement on Fri, 26 Aug 11

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

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

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

Previous index short-related posts:

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SELL ProShares Short Russell 2000 (RWM)

Posted by intelledgement on Tue, 23 Aug 11

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

We expect to be back again by early September.

Previous index short-related posts:

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BUY ProShares Short Russell 2000 (RWM)

Posted by intelledgement on Tue, 16 Aug 11

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

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

Previous index short-related posts:

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SELL ProShares Short S&P 500 (SH)

Posted by intelledgement on Fri, 12 Aug 11

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

Previous SH-related posts:

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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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Another Boring Quarter of Below-Average Volatility…or Was It?

Posted by intelledgement on Mon, 11 Jul 11

The Intelledgement Macro Strategy Investment Portfolio is managed, obviously, using a macro-analysis approach. We look (primarily) at economic, political, social, and environmental factors to assess the likelihood of various potential events—e.g., Middle East conflict affecting oil supply, real estate bubble burst in China affecting oil demand, a sovereign debt default in Europe affecting all sorts of things, etcetera—and position the portfolio to avert the most likely bad consequences, if not actually benefit thereby.

So saying, generally speaking, we have little use for so-called “technical analysis”—methods of predicting stock price movements by analyzing historical data. Not to say that hedge funds that follow mechanistic, mathematical-based trading schema cannot be profitable…there are plenty that are. (Although most of those focus on sundry arbitrage opportunities that take systematic advantage of inefficiencies in the market such as the yen carry trade—and not, technically speaking, genuine technical analysis.)

Be that as it may, we do track one technical indicator here: market volatility. We do that because it’s a reasonably reliable gauge of perceived risk levels. Roughly 73% of the time, when volatility in the S&P 500 goes up—when the average annual daily change in the price of the index (up or down) is greater than it was in the prior year—market performance for that year declines compared to the prior year.

And based on volatility levels, the perception of risk has been remarkably low for the past two years, and is continuing to decline. The second quarter of 2011 marked another non-event, volatility-wise. Market volatility declined, quarter-over-quarter, from slightly below average in 1Q11 (daily change of ±0.58%) to notably below average (±0.54%)—from inception in 1957 to now (30 Jun 11), the all-time daily average change in the S&P 500 index has averaged ±0.62%. In fact, for the first time since the 2008 crash, volatility for the trailing twelve months (±0.59%) has dipped below the all-time average.

Volatility hit an all-time high in Q4 2008—breaking the record set in 1929 (by the DJIA)—with mind-boggling peak average daily change of ±3.27%. (That’s a whopping 427% above the average.) For 2008 overall, it was a record ±1.71%, or 176% above average. But since then, it has been dropping steadily: ±1.19% in 2009 (92% higher than average) and ±0.74% last year (19% above average). Now, through the first half of 2011, volatility is ±0.56% (10% below average). The following chart tracks the annual average daily volatility for the S&P 500 index from 1950 to 2011. (Note that while the index was implemented in 1957, in order to get the most meaningful/largest feasible data set, we include retrospective data back to 1950.)

The following chart shows the quarterly fluctuations in volatility levels for the S&P 500 (red line) from a year before the crash—the fourth quarter of 2007—to the present, compared to volatility measurements of the Dow Jones Industrial Average (blue line) from a year before the 1929 crash. (We use Dow volatility data for the 1929 crash because the S&P 500 was not around back then.) Also shown in the chart is the average daily volatility level for the S&P 500 (±0.62%, as mentioned previously).

Of course, the fourth quarter of 1929 was just the beginning of an extended period of market decline that persisted for years. Consistent with our research into the relationship of market volatility and performance, volatility levels in the 1930s continued to surge well above normal. Thus, it is encouraging that the trendlines have been diverging for the past two years.

But even if the volatility levels for this past quarter were boring, the macro situation was anything but. With the USA failing to come convincingly out of recession, now involved in three wars, and no solution to structural entitlements obligations or the growing national debt in sight, with the BRIC countries apparently slowing their growth rates, with Europe barely having dodged one sovereign debt bullet with Greece and facing several more (Portugual, Ireland, Italy, and Spain, at least), with unrest in the Middle East spreading…well, in the Intelledgement Macro Strategy Investment Portfolio, we are currently short the dollar and the S&P 500 index, and contemplating adding more short positions. A couple of years’ worth of denial on the part of the market as to how serious things are does not—in our view—obviate the need for investors to maintain some insurance against a sudden and severe downturn, should some bad combination of these various exigencies come to fruition.

Previous volatility-related articles:

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