Macro Tsimmis

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Posts Tagged ‘UDN’

3Q11 Intelledgement Macro Strategy Investment Portfolio Report

Posted by intelledgement on Fri, 14 Oct 11

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

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

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

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

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

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

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

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

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

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

BRICs

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

Deep Capture

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

Eurozone

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

Macro Analysis

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

Monetary and Fiscal Policy

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

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

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

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

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

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

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

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

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

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

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

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

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

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SELL PowerShares DB US Dollar Bearish ETF (UDN)

Posted by intelledgement on Fri, 09 Sep 11

OK, this move is going against the macros. Everything we said when we took this position back in October 2010 still applies, and then some. The US government continues to extend-and-pretend with a vengeance. Just last night, President Obama proposed another $450 billion amalgam of temporary, emergency salves for the sundry symptoms assailing our teetering economy, without the faintest hint of of any effort to cure the actual disease—systemic malinvestment driven by out-of-control banksters and corporatists whose incentives have become misaligned with the greater good of humankind. No surprise, as Obama’s biggest contributors have always been and still remain those very same guys.

So—among other bad effects coming sooner or later—the dollar is toast, given the compulsion of the government to keep printing more in their pathetic efforts to push on the stimulus/bailout string.

However, there is no chance of that happening this month. In contrast, that is, to the Euro, which could potentially be undone depending on how things play out with Greece, Italy, and Spain. If the Eurozone comes completely unglued and the Euro collapses, the dollar is likely to (temporarily) benefit as a (relatively) safe haven play. If that happens, we will have an opportunity to get back into UDN at a much lower price point.

Of course, it’s possible that the Eurozone could expel the troubled peripheral economies and we could end with a strengthened (temporarily) Euro. In which case, dumping UDN here will prove to be unnecessary, and possibly even cost us. But it is unlikely to cost us much to get back in under those circumstances—there is no immediate reason for the dollar to plummet in value—whereas if the Euro collapses—which appears to be the more likely scenario anyway—we could see substantial dollar strengthening.

Thus when the micros—in this case, the potential imminent collapse of the Euro and concomitant short-term effects —overwhelm the macros—long-term destruction of the dollar—stepping aside is the prudent play.

Previous dollar short-related post:

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2Q11 Intelledgement Macro Strategy Investment Portfolio Report

Posted by intelledgement on Mon, 25 Jul 11

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

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

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

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

Transactions: A subdued quarter in terms of transactions.

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

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

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

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

BRICs

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

Deep Capture

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

Eurozone

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

Macro Analysis

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

Monetary and Fiscal Policy

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

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

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

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

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

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

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

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

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

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1Q11 Intelledgement Macro Strategy Investment Portfolio Report

Posted by intelledgement on Sat, 30 Apr 11

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

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

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

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

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

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

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

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

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

BRICs

Deep Capture

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

Eurozone

Macro Analysis

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

Monetary and Fiscal Policy

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

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

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

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

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

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

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

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4Q10 Intelledgement Macro Strategy Investment Portfolio Report

Posted by intelledgement on Fri, 14 Jan 11

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

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

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

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

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

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

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

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

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

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

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

BRICs

Deep Capture

The Dollar

Eurozone

QE2

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

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

We demur.

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

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

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

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

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

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

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BUY PowerShares DB US Dollar Bearish ETF (UDN)

Posted by intelledgement on Wed, 20 Oct 10

“Dollar devaluations will continue until purchasing power improves.”   —Tyler Durden

Well, in the sense that the dollar is down 40% since 1985, and down 20% since 2003, and down 10% since June, one could say we are late to this party. However, given the micro threat of QE2 layered on top of the macro trend of the weakening of fiat money since the end of Bretton Woods in 1971 (at least), we feel the need to take a position here, not so much seeking to profit from the fall of the dollar as merely insuring the value of our assets.

Governments have been debasing their currencies ever since (at least) a succession of Roman governments adulterated the denarius by decreasing it’s silver content. Of course nowadays, human technology has advanced to the point where the U.S. government can achieve the same end with the click of a mouse by some functionary, instantly creating gobs of dollars bearing no relation to silver or any real world commodity whatsoever. And our government has, in congruence with the prevailing Keynesian cant, consistently “loosened” the money supply—created gobs of new dollars—to “stimulate” the economy whenever growth slowed down to the point where job creation was failing to keep pace with population growth. They have also slowed down the growth of the money supply when inflation got too high…but somehow, the tightening has, over time, failed to balance out the loosening. Consequently as the increase in the supply of dollars has, over time, outstripped the growth in the goods and services to spend them on—not to mention outstripping the growth in the number of spenders—the value of the dollar over time has declined.

This imbalance has occurred, in our opinion, because attempting to “manage” the ups and downs of the economy is a fool’s game. Artificial fiat-created incentives fosters malinvestment, distorting valuations and inevitably leading to unnaturally large bubbles. In essence—as we have said before—it is akin to fighting an oscillating skid. The proper way to react to a skid is to turn into it to reestablish control, not to fight it, which only makes it more likely you will crash.

Economists have been arguing about this for decades. But regardless of whether one favors Keynes or Hayak, the existence of the imbalance—in the sense that overall, the dollar has lost more value than it has gained—is inarguable, as you can see in this chart showing the value of the dollar for the last 25 years:

U.S. Dollar, October 1985-October 2010

Unfortunately, the bias towards inflation is reinforced when the government falls into debt itself. This is because if the government is unable to collect enough revenues to pay the interest and principal due on bonds as well as maintain their other expenditures, the temptation grows to simply print (or electronically create) more dollars to make up the shortfall. We are clearly moving in that direction here…and then there is the proximate imperative for more quantitative easing—in this case, using the funny money to purchase bonds—to “stimulate” inflation or job growth (or whatever). We know the effect will be to inflate/devalue the dollar; we fear the (likely) risk of stoking a currency war, or even the (less likely but possible) risk of igniting runaway hyperinflation.

Our choice to protect ourselves against devaluation is the PowerShares DB US Dollar Bearish Fund (UDN). This ETF is based on the Deutsche Bank Short US Dollar Index (USDX®) Futures Index™ (DB Short USD Futures Index). The Index, which is managed by DB Commodity Services LLC, is a rules-based index composed solely of short USDX® futures contracts. The USDX® futures contract is designed to replicate the performance of being short the US Dollar against the following currencies: Euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona and Swiss Franc.

UDN has a twin brother, the PowerShares DB US Dollar Bullish Fund (UUP, of course). Both funds opened for business in February 2002. Since then, the U.S. dollar index is -9%, while the UDN is +11% (two percent better than expected) and the UUP is -11% (two percent worse than expected). This gives the UDN an Intelledgement ETF Rating (IER) of +5 (meaning on a compounded annual growth rate basis, it is about 5% ahead of where we should expect it to be). So no problem there. Here is a chart showing the performance of both ETFs as well as the dollar index:

UDN & UUP vs. the dollar index, Feb 02 to Oct 10

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