Macro Tsimmis

intelligently hedged investment

Posts Tagged ‘tbt’

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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SELL ProShares UltraShort 20+ Year Treasury (TBT)

Posted by intelledgement on Fri, 06 Aug 10

We still like the macro analysis behind this play: as the supply of US debt increases, eventually, demand will dampen, and the incentive to buy long-term treasuries will have to rise to sustain enough sales to finance the government’s operations (not to mention interest payments on previous borrowings). This will depress the value of long-term treasury bonds, and thus cause the value of shares in this 2x inverse exchange-traded fund to increase.

However, timing is everything. We have pretty much been waiting—patiently but fruitlessly—for 18 months for this scenario to unfold. While for sure this means we are 18 months closer to a payoff here, we are up against a powerful flight-to-safety dynamic which, ironically, has ensured ever-increasing demand for long-term treasuries. No matter how many times we ask ourselves “Who would be nuts enough to loan the U.S. government money for twenty or thirty years?” the answer most days for the past 18 months has been “just about everyone.” When the alternative is an equity market where the value of even blue chips is unreliable (Citigroup down from $23 in 2009 to $1 in 2009 to $4 now; WAL-MART down from $63 in 2008 to $46 in 2009 to $52 now; Best Buy $47-$17-$34; Intel $25-$12-$20; etcetera) the guaranteed principal and ROI (albeit paltry) of treasuries looks like a veritable port in the storm.

And even though the long-term debt issues besetting the USA sans structural reform are as challenging as anything facing Spain or Italy today, the immediacy of the sovereign debt problems in Europe have only enhanced, relatively speaking, the shininess of U.S. treasuries.

Add to that the exigencies of deflationary pressures engendered by the side effects of deleveraging—viz., tight credit, continued pressure on real estate prices, and reduced consumer spending—which conspire to compel central banks to keep interest rates low. This does not per se guarantee low interest rates on treasuries, but it sure creates a headwind that pushes in that direction.

So we’ve got the best damn duck blind on the pond here, no doubt. But it’s been 18 months and all the ducks keep eschewing this pond in favor of neighboring ones. We will doubtless be back here, but in the meantime, we are cutting our losses (about 15%) and moving somewhere else with a better chance of bagging some dinner now.

Previous TBT-related posts:

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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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Motley Fool CAPS Roundtable: Inflation, Deflation, and Your Portfolio

Posted by intelledgement on Wed, 14 Oct 09

We got to participate in a discussion about this topic with another CAPS member and the results—posted on The Motley Fool website—were pretty interesting (in our unbiased opinion LOL).

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3Q09 Intelledgement Macro Strategy Investment Portfolio Report

Posted by intelledgement on Wed, 14 Oct 09

Summary of Intelledgement’s model macro strategy model investment portfolio performance as of 30 September 2009:

Position   Bought   Shares Paid Cost Now Value   Change   YTD     ROI     CAGR
FXI 03-Jan-07 243 37.15 9,035.45 40.92 10,379.12 6.35% 39.78% 14.87% 5.16%
GLD 03-Jan-07 142 63.21 8,983.82 98.85 14,036.70 8.41% 14.25% 56.24% 17.59%
IFN 03-Jan-07 196 45.90 9,004.40 29.05 8,561.28 -4.50% 32.65% -4.92% -1.82%
SLV 03-Jan-07 700 12.86 9,012.80 16.38 11,466.00 22.42% 46.25% 32.94% 10.89%
DBA 13-Mar-08 235 42.50 9,995.50 25.46 5,983.10 0.04% -2.75% -40.14% -28.19%
TBT 21-Jan-09 233 42.84 9,989.72 43.96 10,242.68 -13.67% 16.51% 2.53% 3.69%
EWM 21-Jul-09 1,062 9.41 10,001.42 10.14 10,768.68 n/a 40.83% 7.67% 46.26%
EWZ 3-Aug-09 165 60.39 9,972.35 67.67 11,165.55 n/a 93.40% 11.97% 103.75%
IYW 29-Sep-09 208 51.86 10,794.88 51.95 10,805.60 n/a 47.75% 0.10% 43.70%
cash 13,597.46 26,096.42
Overall 31-Dec-06 100,000.00 119,505.13 2.04% 13.05% 19.51% 6.70%
Macro HF 31-Dec-06 100,000.00 116,830.85 3.16% 8.91% 16.83% 5.82%
S&P 500 31-Dec-06 1,418.30 1,057.08 14.98% 17.03% -25.47% -10.14%

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 2008 inclusively) provides a CAGR of around 14.3%. 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.

Transactions: A moderately busy quarter, with three in and three out:

Performance Review: Another adequate quarter for us, as we were up 2%, and now +13% YTD. For the second consecutive quarter we were beaten out by both the macro hedgies—who were up 3%—and by the S&P 500—who recorded a second consecutive great +15% quarter. YTD, the S&P 500 is up 17%, we are up 13%, and the hedgies are up 9%.

Tactically, with the market moving inexorably northwards, we unloaded three of our last four short positions early this quarter—only our short on 20+ year treasury bonds remains—and added three long ETFs (Malaysia, Brasil, and high tech).

Overall, we are now 45 points ahead of the market in terms of total return-on-investment: +20% for us and -25% for the S&P 500 in the 33 months since the inception of the IMSIP at the end of 2006. In terms of compounded annual growth rate, we are edging out the GAI Global Macro Hedge Fund Index over the same time spans, +7% to +6%.

Analysis: The conventional wisdom now is that we suffered a sharp recession in 2007-09, but it is now over and the main question is how sharp and fast the recovery will be. Accordingly, the market in 3Q09 was less volatile and continued to move up dramatically. Two consecutive quarters of +15% ROI is pretty impressive; in an average year, the S&P 500 index is ±16%, so we have had two years worth of movement in the last six months. (Volatility has remained low because the pace of the increase has been steady and—from day-to-day—moderately paced, with no big corrections.)

As we have said before, 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. To the extent these actions succeed in postponing our day of reckoning, they ultimately succeed primarily in digging us into a deeper hole.

However, it is clear that the massive tidal wave of liquidity that the central banks—especially the Fed—have loosed on the world has succeeded in buying a significant stay of execution, albeit at the cost of alarmingly increasing the rate of decline in the value of the dollar. Accordingly, we are (as always) long commodities and also long emerging market plays, as we agree with the market perception that those economies will fare better than ours in the near- and medium-term future, although we still anticipate a significant economic disruption that will interrupt their growth…at which point we plan to have our capital elsewhere.

But for now, the sun is shining, so we are making hay. Being short here would, we expect, prove out to be the right stance in the medium term, but right now, we believe the opportunity for long gains outweighs the risk of not being able to shift gears quickly enough when the market turns.

Conclusion: We still believe things will almost certainly get worse…but given the prevalent bullish psychology, we don’t expect the market to perceive the serious problems we see for at least three-to-six months, and possibly up to 24 months with a lot of luck. (Whether it would be good luck or bad for the true nature of our problems not to become evident for another two years is left to the reader to consider as a useful thought exercise.) As of 1 October, we have 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). We have three long commodity plays which are hedges against the decline of the dollar: gold (GLD), silver (SLV), and agriculture (DBA). And we remain short long-term Treasury bonds ETF (TBT), as we expect 20+ year treasure bonds to decline in value as interest rates inevitably rise in order to entice buyers of the copious outpourings of US debt. We have enough cash to undertake two more positions and currently are considering shorting the dollar and a “buy-what-China-needs” play such as going long energy or Canada or Australia.

Finally, the spectre of systemic risk still lurks, and while we do not anticipate it will surface unbidden in the near future, a disruptive macro event (e.g., an Israeli attack on Iran’s nuclear facilities) could roil the waters at any time. Consequently we remain prepared to reconfigure the IMSIP to be more congruent with our medium-term macro analysis.

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2Q09 Intelledgement Macro Strategy Investment Portfolio Report

Posted by intelledgement on Tue, 14 Jul 09

Summary of Intelledgement’s Model Macro Strategy Investment Portfolio performance as of 30 June 2009:

Position   Bought   Shares Paid Cost Now Value Change     YTD         ROI       CAGR  
FXI 03-Jan-07 243 37.15 9,035.45 38.37 9,759.47 33.89% 31.89% 8.01% 3.13%
GLD 03-Jan-07 142 63.21 8,983.82 91.18 12,947.56 1.00% 5.39% 44.12% 15.73%
IFN 03-Jan-07 196 45.90 9,004.40 31.11 8,965.04 44.9%3 38.90% -0.44% -0.17%
SLV 03-Jan-07 700 12.86 9,012.80 13.38 9,366.00 4.61% 19.46% 3.92% 1.55%
DBA 13-Mar-08 235 42.50 9,995.50 25.45 5,980.75 3.92% -2.79% -40.17% -32.68%
TBT 21-Jan-09 233 42.84 9,989.72 50.92 11,864.36 16.68% 34.96% 18.77% 48.08%
DOG 21-May-09 146 68.23 9,969.58 66.50 9,709.00 n/a -2.99% -2.61% -21.48%
PSQ 21-May-09 163 61.29 9,998.27 56.35 9,185.05 n/a -22.84% -8.13% -53.91%
SH 21-May-09 146 68.44 10,000.24 65.71 9,593.66 n/a -8.76% -4.07% -31.55%
cash 14,010.22 29,745.37
Overall 31-Dec-06 100,000.00 117,116.26 3.30% 10.79% 17.12% 6.53%
Macro HF 31-Dec-06 100,000.00 113,249.73 5.09% 5.57% 13.25% 5.11%
S&P 500 31-Dec-06 1,418.30 919.32 15.22% 1.78% -35.18% -15.94%

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 = 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 this account is the Greenwich Alternative Investments Global Macro Hedge Fund Index, which historically (1988 to 2008 inclusively) provides a CAGR of around 14.3%. For comparison’s sake, we also show the S&P 500 index, which since January 1950 has produced a CAGR of around 8.0% (although only +6.4% since 1988). 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 busiest quarter in the two-and-a-half year history of the portfolio, with five purchases and four sales:

Performance Review: An adequate quarter for us in absolute terms, as we were up 3%, although in relative terms we were outshone by the macro hedgies—who were up 5%—and were lapped four times by the S&P 500—who recorded a spectacular +15% quarter, easily their best since the inception of the IMSIP two-and-a-half years ago.

Tactically, it’s hard to tell if we are coming or going. We started the quarter with two long positions (China and India), three inflation-hedge commodity positions (gold, silver, and agriculture), and three short positions (consumer goods, consumer services, and treasuries), down from six short positions earlier in 1Q09. With the market rally gathering stream, we sold off the two consumer short funds at the start of the quarter, and then in May, briefly got longer with a Brazil and energy ETF. But the market rally fizzled and as our strategic bias remains negative, we jettisoned those positions after just a week, and then took positions in index short funds for the DOW, S&P 500, and NASDAQ. So at the end of the quarter, the overall lineup includes the same two long positions (China and India), the same three inflation-hedge commodity positions (gold, silver, and agriculture), and now four short positions (treasuries plus the three index shorts).

Overall, we are now 52 points ahead of the market: +17% for us and -35% for the S&P 500 in the two-and-a-half years since the inception of the model at the end of 2006. And we are still ahead of the GAI Global Macro Hedge Fund Index, +17% to +13% (as we have been every quarter since inception except 4Q08).

Analysis: Our strategy is to look for long term investment opportunities congruent with macro trends, such as the rise of the Chinese, Indian, and Brazilian economies while tactically hedging against risks such as the collapse of fiat money in general and the dollar in particular with commodity plays. However, the systemic risk we have experienced over the last year has engendered extraordinary volatility—both down and up—as the market has struggled to process and integrate extreme eventualities into valuations. The intrusion of politics into economic decision-making has exacerbated this volatility. As a result, it is difficult to implement any static long-term strategy without risking significant short-term capital losses.

The good news is we have now had two consecutive quarters of relatively calmer trading. In 1Q09 we backed off of the surreal level of volatility experienced in 4Q08…which is to say, instead of nearly 6x normal volatility, we “only” had 3.5x normal—2.00% average daily change, down from 3.27%. And the sequential decline in the direction of normalcy (0.58%) continued in 2Q09, when the average daily change in the S&P 500 was “only” 2.2x normal (1.27%).Should this calming trend continue, the obvious implication would be that in the collective wisdom of the market, there is less uncertainty as to the valuation of equities. Such a development would be bullish, as the uncertainty is much more defined by the spectre of systemic risk than it is by the fear that we are grossly undervaluing GOOG or GE or C here. In other words, if the market is materially misvalued, it is much more likely that it is overvalued here than undervalued. Thus as the likelihood that the market is misvalued declines, the risk of a near-term market collapse is perceived to decline along with it. This is not quite the same thing as saying that the actual risk of a sudden sharp drop has declined—given all the shoes of Damocles hanging up there that could drop at any moment—but if investors and traders believe the risk has declined, they are more likely to bid prices north until such time that someone in plain view gets beaned with a dropping shoe.

As we have said before, we got into this mess by overspending, borrowing beyond our means, and speculating on bubble-valued assets. And we still don’t believe the economy has bottomed out. The negative feedback loop of less demand-more unemployment-less demand is still chugging along. There are many more residential foreclosures looming, which will continue to devalue housing prices, which also inhibits demand (as consumers are less wealthy). And more credit card defaults, which dry up credit, which also inhibits demand. We’ve barely begun to scratch the surface of commercial real estate foreclosures, and the concomitant bad loans, and the ramifications for the lenders.

We believe that 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. To the extent these actions succeed in postponing our day of reckoning—manifestly, they have done so for at least a year now—they ultimately succeed primarily in digging us into a deeper hole. No matter how brilliantly one conducts a retreat down a blind alley, in the end, there’s nowhere to go—and by then, the long-lasting damage to our financial institutions and to our confidence in our own ability to manage our affairs will be greater, and our resources and capacity to retrace our steps and chart a new path will be much reduced.

And speaking of reduced resources, the Obama administration seems hellbent on making things worse, with plans to fritter away our scant remaining funds on a myriad of grandiose mandates such as providing subsidized health care and promoting production of uneconomic energy. They can’t even come up with a stimulus package without vectoring the majority of the funds to exisiting Federal, state, and local government programs rather than allocating them to new job-creating infrastructure work, as they originally promised.

Of course, it is in the interests of both government policy makers and financial institutions to make a silk purse out of a sow’s ear with respect to these dubious policies. If folks stop believing that government policies have a reasonable chance of succeeding here, all sorts of unpredictable behavior could ensue. Therefore, we are likely to continue to hear the message that things are getting better, no matter what the reality.

Consequently, we continue to forecast heavy weather ahead, with a risk of unaccountable bouts of sunshine. Those are more likely than not eyes in the storm; conducting picnics during them is not advised.

Conclusion: Things will almost certainly get worse…but when, and how much worse? As of 1 July, we have four inverse ETFs in the portfolio…three short index funds covering the DJIA (DOG), S&P 500 (SH), and NASDAQ (PSQ) respectively—these go up if the market goes down and vice versa—as well as the short long-term Treasury bonds ETF (TBT), as we expect 20+ year treasure bonds to decline in value as interest rates inevitably rise in order to entice buyers of the copious outpourings of US debt. We still expect the cumulative effect of the liquidity injections and increased need for borrowing by the USA to eventually degrade the dollar’s value, and consequently remain long our commodity plays (GLD, SLV, and DBA). And finally as a hedge against a quicker-than-anticipated recovery, we still retain our China and India emerging market funds (FXI and IFN)—as we expect those economies to lead the recovery. Indeed, if we perceive increased risk of a sharp rally similar to the ones that started in November 2008 and March 2009, we may again lighten up on the shorts and temporarily go long energy or Brazil as we did in 2Q09.

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1Q09 Intelledgement Macro Strategy Investment Portfolio Report

Posted by intelledgement on Mon, 13 Apr 09

Summary of Intelledgement’s Model Macro Strategy Investment Portfolio performance as of 31 Mar 2009:

Position   Bought   Shares Paid Cost Now Value Change YTD     ROI     CAGR
FXI 03-Jan-07 243 37.15 9,035.45 28.53 7,289.13 -1.83% -1.83% -19.33% -9.09%
GLD 03-Jan-07 142 63.21 8,983.82 90.28 12,819.76 4.35% 4.35% 42.70% 17.09%
IFN 03-Jan-07 196 45.90 9,004.40 16.93 6,185.76 -4.16% -4.16% -31.30% -15.35%
SLV 03-Jan-07 700 12.86 9,012.80 12.79 8,953.00 14.20% 14.20% -0.66% -0.30%
DBA 13-Mar-08 235 42.50 9,995.50 24.49 5,755.15 -6.46% -6.46% -42.42% -40.93%
SCC 16-Sep-08 112 86.23 9,665.76 85.80 13,437.11 0.86% 0.86% 39.02% 84.76%
SZK 16-Sep-08 145 68.25 9,904.25 87.20 15,417.18 14.17% 14.17% 55.66% 128.11%
TBT 21-Jan-09 233 42.84 9,989.72 43.64 10,168.12 n/a 15.66 1.79% 9.82%
cash 24,408.30 33,282.42
Overall 31-Dec-06 100,000.00 113,307.62 7.20% 7.20% 13.31% 5.73%
Macro HF 31-Dec-06 100,000.00 107,769.25 0.46% 0.46% 7.77% 3.38%
S&P 500 31-Dec-06 1,418.30 797.87 -11.67% -11.67% -43.74% -22.58%

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 (blank for positions new since last report)
YTD = 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 this account is the Greenwich Alternative Investments Global Macro Hedge Fund Index, which historically (1988 to 2008 inclusively) provides a CAGR of around 14.3%. For comparison’s sake, we also show the S&P 500 index, which historically provides a CAGR of around 10.5% (although only +6.37% since 1988). Note that 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: Three purchases and three sales—two of which canceled each other out:

Performance Review: An excellent quarter for us, as we were up 7%, beat the macro hedgies—who were flat—handily, and buried the S&P 500—who lost 12%.

Tactically, it was a quarter of gyrations. In mid-February, as the initial “obtimism” that the new administration would solve all our problems dissipated, we manuevered the portfolio sharply to the short side, with a peak of six out of our 11 total equities—SCC, SZK, SDS, TBT, PSQ, and DOG—positioned to rise as the market headed south. But barely a month later, the risk of another sharp bear-market rally—like the one that raged last Nov-Dec—waxed notably, and we cashed in half of the inverse ETF positions, booking a healthy short-term profit.

Overall, we are now 57 points ahead of the market: +13% for us and -44% for the S&P 500 in the 27 months since the inception of the model at the end of 2006. We are also beating the GAI Global Macro Hedge Fund Index over the same time span, +13% to +8%.

Analysis: As we discussed last quarter, the watchword continues to be volatility.

Our strategy is to look for long term investment opportunities congruent with macro trends, such as the rise of the Chinese, Indian, and Brazilian economies while tactically hedging against risks such as the collapse of fiat money in general and the dollar in particular with commodity plays. However, the systemic risk we have experienced over the last nine months has engendered extraordinary volatility—both down and up—as the market has struggled to process and integrate extreme eventualities into valuations. The intrusion of politics into economic decision-making has exacerbated this volatility. Consider: under normal circumstances—let’s say, from March 1950 through June 2007—the average daily change in the value of the S&P 500 index is 0.57% (up or down)…but since then, here are the number of days in each quarter categorized by the daily move up or down rounded to the nearest percentage, and the overall average:

Year 0% Days 1% Days 2% Days 3% Days 4% Days 5% Days 6% Days 7-9% Days 10%+ Days Average Daily Change
3Q07 27 23 10 3 0 0 0 0 0 0.83%
4Q07 23 27 8 6 0 0 0 0 0 0.97%
1Q08 10 33 13 4 2 0 0 0 0 1.27%
2Q08 33 18 10 2 1 0 0 0 0 0.75%
3Q08 17 21 15 4 3 3 0 1 0 1.53%
4Q08 4 19 6 9 9 5 5 5 2 3.27%
1Q09 11 17 14 9 4 4 1 1 0 2.00%

Thankfully, in 1Q09 we backed off of the surreal level of volatility experienced in 4Q08…which is to say, instead of nearly 6x normal volatility, we “only” had 3.5x normal. But the point is, when we are experiencing single days when the market moves as much as it normally moves in an entire year, one’s perspective as to what constitutes a “long term investment” is subject to being telescoped.

There’s trouble, right here in River City. In living beyond our means, we’ve been digging our own grave for years, and the new U.S. administration’s main plan to fix the problem seems to be borrowing (more) money to afford everyone the latest and greatest new shovels. As we have said before, we got into this mess by overspending, borrowing beyond our means, and speculating on bubble-valued assets. Any “solution” that involves lowering interest rates, increasing our debt levels, and easing credit/issuing more money is, essentially, attempting to put out a fire by dousing it with gasoline. The government does not have the resources to “rescue” all the zombie banks whose obligations exceed their assets, not to mention all the homeowners whose mortgage obligations now exceed the value of their properties, not to mention all the industrial companies whose profligate and short-sighted management have left them vulnerable to the economic tsunami we are experiencing…etcetera, etcetera. Yet it appears this is to be our plan of action…along with providing universal health care, switching to more expensive energy, building highspeed rail systems…etcetera, etcetera…all with (more) borrowed funds.

And we don’t believe the economy has bottomed out. The negative feedback loop of less demand-more unemployment-less demand is still intact. There are many more residential foreclosures looming, which will continue to devalue housing prices, which also inhibits demand (as consumers are less wealthy). And more credit card defaults, which dry up credit, which also inhibits demand. We’ve barely begun to scratch the surface of commercial real estate foreclosures, and the concomitant bad loans, and the ramifications for the lenders.

So we believe things are headed south. And yet, in March we sold half our short ETFs (that go up when the market declines). Why? Because this market is so volatile, that we felt it was risky to stay short in the face of “obtimism” that the new administration would somehow work a miracle. We held our short positions last November in the teeth of a post-election rally…and saw the value of the portfolio decline 29% in six weeks. Once burned, twice cautious. But, unfortunately, we do expect to be going short again, this quarter or next.

Conclusion: Things will almost certainly get worse; the real question is, how much worse? As of 1 April, we retained three inverse ETFs in the portfolio…covering the consumer goods (SZK) and services (SCC) sectors as well as long-term Treasury bonds (TBT), which we expect to decline in value as interest rates inevitably rise in order to entice buyers of the copious outpourings of US debt. We still expect the cumulative effect of the liquidity injections and increased need for borrowing by the USA to eventually degrade the dollar’s value, and consequently remain long our commodity plays (GLD, SLV, and DBA). And finally as a hedge against a quicker-than-anticipated recovery, we still retain our China and India emerging market funds (FXI and IFN)—as we expect those economies to lead the recovery. If the rally that ensued in March persists, we may further lighten up on the shorts and temporarily go long energy or Brazil.

But batten down the hatches. Upgrade your vegetable patch, make sure your emergency supplies of batteries, dried food, and water are current, check the ammo for your shotgun, and touch base with the neighbors to encourage them to be prepared, too. The odds still favor things not getting that bad…but those odds are not as good as they were three months ago.

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