Tuesday, April 25

2017: First Quarter Review

Portfolio Update 

Below is a summation of the updates to the portfolio during Q1; the rationale behind these moves was largely discussed during the most recent Portfolio Update.

-  Equities: Positions in JD.com (JD), Liberty Broadband (LBRDK) and Dollar Tree (DLTR) were added.

- Funds: The positions in Advisor Shares Focused Equity (CWS, based off the Crossing Wall Street blog) and Barclays Shiller ETN CAPE (CAPE) were both added in early January.

- Commodities:  The portfolio took a position in Uranium (URA).

- China: Our Man added exposure to Chinese A-shares (ASHR).

- International: The international book was the only one that saw some sales, with the position in Petrobras Argentina (PZE) exited (too early) and the position in Pampa Energie (PAM) was trimmed in early January.

Performance and Review 
For the 1st quarter, the portfolio returned a very healthy 950bps, continuing the good recent trend.  Markets were also largely positive for the quarter, with the S&P 500 TR (6.07%) and the MSCI World (+6.53%) both posting healthy returns.

The performance was driven by the International/Country book (+645bps), in particular by the exposure to Argentina (+505bps) with names benefitting from positive sentiment following continued Macri reforms.  In January, Macri removed a rule that required investments remain in Argentina for 120days, a move that further enhances the probability of Argentina getting included in the MSCI Emerging Market indices.  Further signs of interest in Argentina were visible, with Blackrock filing with the SEC in February to launch a US-listed Argentina ETF.  For the portfolio, within Pampa Energie was the primary driver of Argentina’s contribution with the company also benefiting after issuing a US-dollar bond.

The Equities book (+213bps) was a good contributor during the month with a number of names contributing; VIPS/JD (+142bps) benefited from the reduced tensions & increased confidence around China, while both LBRDK (+48bps) and IBB (+44bps) rose with the markets.  The Technical book (+164bps) is fully invested and thus also benefited from the rising markets.  The Funds book (+67bps) performed solidly, with all of the positions contributing and marginally outperforming the markets over the period.

The non-Equity books failed to contribute during the quarter.   The China book (+6bps) broke-even with positive contribution from Chinese A-shares being offset by the strength of the Australian Dollar.   The Commodities book (-18bps) posted a small negative contribution, while the Currencies book (-127bps) was the sole negative contributor of size, suffering as the US Dollar weakened against the Euro and in particular the Japanese Yen.

Portfolio (as at 3/31 - all delta and leverage adjusted, as appropriate) 
22.7% - Technical (DDM, QLD and SSO)
20.1% - International (Brazil, Italy and Argentina)
19.3% - Equities (JD, VIPS, DLTR, LBRDK, FNMA and IBB)
9.9% - Funds (CWS, GVAL, and CAPE)
2.9% - Commodities (URA)

2.3% - China-Related Thesis (CROC – Short Australian Dollar, ASHR)
-46.3% - Currencies (EUO – Short Euro, and YCS – Short Japan)

9.1% - Cash  

Disclaimer:  Nothing above represents a recommendation in any way, shape or form so please don’t even think of trying to take the above that way.  For added clarity, while Our Man is invested in all of the securities mentioned that’s a terrible reason for anyone else to do so.  Our Man also holds some cash and a few other securities (of negligible value).  You should not buy any of these securities because Our Man has mentioned them, but should do your own work and decide what’s best for you given your own circumstances/risk tolerance/etc. 

Thursday, April 13

Portfolio Update

Given there were a number of new additions to the portfolio at the end of 2016 and in early 2017, this seems like an appropriate moment to look at the various books/themes in the portfolio and talk a little more about them.

Technical: 22.7% NAV (all sizes are as of March-end) 
The positions are unchanged and are relatively evenly split between DDM, SSO, and QLD, which represent exposure to the major US indices   Currently Our Man’s technical model is strongly in “Buy” territory, and while it indicates there are possibilities of 5-8% pull backs in the near future barring a much more substantial reversal in markets it seems unlikely that its recommendation will change.  Thus, Our Man’s not expecting much to change here for a while.

International:  20.1% NAV 
This book currently has positions reflecting themes in Argentina, Brazil, and Europe (Italy).
- Argentina (8.9%) is the largest theme, though this was reduced during Q1 as OM exited PZE (Petrobras Argentina, which rallied strongly in late-2016) and reduced the size of the PAM (Pampa Energie) position.  The remaining exposure to the theme comes through Pampa (6.4%) and Adecoagro (AGRO, 2.5%).  It’s now been over a year since President Macri took office, and he’s made a remarkable number of changes to help Argentina transition towards a more market-based (vs. government driven) economy including the removal of capital controls, allowing real independence to the Central Bank (which has since decided to target inflation), settling with bond holdouts opening the way for Argentina to raise USD debt, and reducing government subsidies and price caps.   While these things are only now starting to impact the economy, they have already improved investor sentiment which is highlighted by the prospect of Argentina returning to the MSCI Emerging Markets Index this summer.   While OM hopes to see the benefit of the increased liquidity and flows, the position is likely to be one that declines as Argentina continues its move towards normalization.

- The recent additions of Brazil (7.6%) and Europe (Italy 3.7%) were discussed in the year-end review.  Both positions are likely to increase in the future, especially if the recent pullback in Brazil continues.

- Finally, at the start of the year, GVAL was removed from this book and added to the new Funds book (see below)

Equities: 19.3% 
The equities book is made up of broadly evenly sized positions (~3.5%) in JD.com (JD), Vipshops (VIPS), the Nasdaq Biotech ETF (IBB), Dollar Tree (DLTR) and Liberty Broadband (LBRDK).  JD (which Our Man re-entered in January at a mildly better price than he sold it at last year) & the long-held VIPS position are both plays on the Chinese Consumer; think of them as companies that one day could be Amazon & an online TJ Maxx respectively.   Both Dollar Tree and Liberty Broadband (mainly Charter Communications, whose services fellow New Yorkers see as the new “Spectrum”) are exceptionally well run businesses which would also would be beneficiaries of tax reform in the US.

There is also a much smaller position in Fannie Mae (FNMA, 80bp), which along with the position in IBB was discussed in the year-end review.

Funds:  9.9% 
This represents a new book/theme in the portfolio; all of the exposure is expressed through ETFs (or potentially funds).  These ETFs have something about them that has piqued OM’s interest and are why I think they’ll outperform markets over the long-term.   Given that this outperformance is expected over the long-term, the changes to this book are expected to be extremely small.  Currently, there are 3 broadly equally-sized positions in the book:
- GVAL and CAPE are both based on applications of Shiller’s PE Ratio (aka Cyclically Adjusted Price Earnings, CAPE).  GVAL applies it to International stocks (finding the cheapest stocks in the cheapest countries), and CAPE applies it to US sectors.  To Our Man’s mind Shiller’s PE Ratio/CAPE is a tool that is poorly applied in finance with too many trying to use it as a timing mechanism or reason for a short-term decision, whereas it’s real value is as a very long-term measure of relative value.  The intent of both ETFs is to buy things that are cheap on a relative basis (compared to other countries/sectors) and Our Man’s wager is that over the long-term this will prove to be more profitable than the market.  The GVAL position was moved from the International book/theme as it seems to better fit here.
- CWS:  Our Man has read the Crossing Wall Street blog for most of the last decade, and this ETF is based off that blog.  CWS publishes an annual “Buy List” of ~25 stocks at the start of each year, which are equally weighted and then no changes can be made during the year.  Each year only 5 stocks from the Buy List have been replaced, with the others carried forward (with any additions) onto the new Buy List.  This longer-term focus (typically, 4-5 years on the Buy List) leads to a bias towards quality and value and if the process can remain disciplined this can lead to out performance over time.

Commodities: 3.4% 
This book was changed from Precious Metals to better encapsulate the things that might go into it
- The Uranium stock ETF (URA) was added during January, and is the sole position in this book.  OM will likely go into the thesis on Uranium in greater detail at some point, but the cliff notes are:
1). Supply: 70% of supply comes from 2 producers (Cameco, a North American company, and the Republic of Kazakhstan) and both have cut supply in the last 12months and announced their intention to keep it down.  It takes a really long-time (5-7years+) to permit, build, and develop a mine so this capacity constraint has limited offsets.

2). Demand: The primary demand for Uranium is from nuclear power plants.  Post-Fukushima the demand fell substantially as Japan (and other countries like Germany) closed down their nuclear power plants.  Over the last year+ we’ve started to see some of these Japanese plants being updated and come back online, while other countries have approved and are building new (typically Generation III/III+) nuclear plants.  The building of new plants takes time (5-7 years to the plant approved, built) and will likely be slow (as countries wait to see how the new Generation III plants operate) but represents positive incremental change.  In the short-term, contracts for uranium supply are long-term (2-10yrs) with a significant percentage coming due within the next couple of years.

3). Price/Technical:  URA is down 80-90% from its 2011 peak and hit a low of $11.31 in mid-Jan 2016.  Subsequently, it held above this low in early November ($11.74) and confirmed a yearly uptrend in early 2017 (it’s price in 2017 closed at a level higher than any price in 2016!).  OM’s technical model suggests that the future path of URA is more likely to be a bear market rally than the start of a new bull market, but also that this could well be a particularly vicious bear market rally (to $40+!!!) given the depth & time of the decline.

Given this combination of supply/demand factors and the price/technical lining, OM believes that URA currently represents an attractive risk/reward.

Currencies: -47.6% 
OM continues to remain very long the US Dollar, with short positions in the Euro (via EUO) and Japanese Yen (via YCS).  The Euro short is around 2x the size of that in the Yen, with OM continuing to believe that the Euro will comfortably break par to the Dollar within the next 12-18mos.

China Thesis: 2.3% 
There are two components to OM’s China thesis; (i) that the Chinese are seeking to transition their economy to a Consumer-driven one (like the US/Europe/etc) and away from a Fixed Investment one, and that (ii) that they will provide as much monetary support as they’re able to in an attempt to smooth this transition.  To some degree, the Chinese internet positions (JD and VIPS) in the Equities book incorporate the view described in part (i) but in the China Thesis book it is expressed via a small short position in the Australian dollar (42% of Australian exports go to China, in particular commodities used for Fixed investments).  This short position has been substantially larger than it is today (10%+ vs ~1.5%). Part (ii) of the thesis is expressed through a position in Chinese A-shares (~3.5%) with OM believing that much of China’s monetary support will end up finding its way into the local stock market and that 2007 and 2015’s highs (50%+ above here) will be eclipsed before the market finally peaks. 

Disclaimer:  Nothing above represents a recommendation in any way, shape or form so please don’t even think of trying to take the above that way.  For added clarity, while Our Man is invested in all of the securities mentioned that’s a terrible reason for anyone else to do so.  Our Man also holds some cash and a few other securities (of negligible value).  You should not buy any of these securities because Our Man has mentioned them, but should do your own work and decide what’s best for you given your own circumstances/risk tolerance/etc. 

Friday, January 20

Things from my Newsblur - 2017: Part 1

In an effort to start 2017 off on the right foot, here's a “Things from my Newsblur (formerly Google Reader)” to start off the New Year.    It's quite the bumper edition, but hopefully the light (comic?) relief at the end will help!

There’s a massive restaurant industry bubble, and it’s about to burst
This is the third part of a series, and in it the author talks about the challenges facing restaurants and why America’s golden age of restaurants is coming to an end.  It’s something that resonates with Our Man, given the closure over the last 12 months of some of his neighborhood favourites.  Part 1 (about the Good Food Revival Movement) and Part 2 (about the impact of a shortage of cooks) are also both well worth a read.  (Thrillist, Kevin Alexander)

Brexit:  How rebel MPs outfoxed Cameron to get an EU Referendum 
While the result is far from universally popular, this article on the background of how the UK ended up with an EU referendum vote is intriguing.  In some ways, it is reassuring as this is how politics is supposed to work!  A small & determined band of backbench MPs required a lot of skill and discipline, along with some large slices of luck, and fortunate timing, as well as misjudgments from their opponents to just get the referendum that they wanted.  Our Man thinks that the minority/backbenchers should have some way to make their case, but that it should be hard and require those traits listed above.  (BBC, Mark D’Arcy)

Farewell to the Chief
A whole bunch of Bloomberg columnists assess President Obama’s two-term presidency; irrespective of your opinion of President Obama, there’s probably at least one view you agree with (and one you can’t stand) in there.  (Bloomberg, various)

The Fourth Industrial Revolution: a primer on Artificial Intelligence (AI)
“From Amazon and Facebook to Google and Microsoft, leaders of the world’s most influential technology firms are highlighting their enthusiasm for Artificial Intelligence (AI). But what is AI? Why is it important? And why now? While there is growing interest in AI, the field is understood mainly by specialists. Our goal for this primer is to make this important field accessible to a broader audience.” (Medium, David Kelnar)

The Great AI Awakening
A look at how Google used AI to transform Google Translate, and a broader look at some of the impcats of machine learning.
(New York Times, Gideon Lewis-Kraus)

2016 Blockchain Year in Review
While there are no mainstream uses for Bitcoin, or the Blockchain and though it seems to have been around for a while, it’s far from dead.  Here’s a brief primer on the blockchain & bitcoin and some of the most important data from 2016.  (The Control, Nick Tomaino)

How Blockchains Could Change the World
“Ignore Bitcoin’s challenges. In this interview, Don Tapscott explains why blockchains, the technology underpinning the cryptocurrency, have the potential to revolutionize the world economy.”
(McKinsey & Co, interview with Don Tapscott)

Finally, some light relief…
To be or not to be
After all there are just so many ways to say the iconic phrase.  Here’s the RSC with some special guests, at Shakespeare Live, pointing that out.   (Shakespeare Live on Vimeo)

Yes Minister – Why Britain Joined the European Union
Yes Minister (and the ‘sequel’ Yes Prime Minister) is a satirical British sitcom from the early 1980’s, and one of OM’s favourite shows.  Like all good satire, there’s more than a hint of truth to it and although this is ~30yrs old that still holds true.  (BBC on Youtube)

A Sushi Master’s Five Simple Rules for Not Embarrassing Yourself
Some simple rules on how to avoid embarrassing yourself, when you’re sitting at the sushi bar and the chef’s hard at work making your delicious dinner. (Bloomberg Pursuits, Kate Krader)

Friday, January 6

2016: Final Quarter Review

Portfolio Update 
-  Currencies:  In mid-October, as it became clear that the Federal Reserve were likely to raise rates in December, while the ECB and BOJ remained on hold, Our Man slightly increased the S Euro position (by ~15%) and substantially increased the S Yen position (by 150%).   By the middle of December, following the exceptionally strong performance of the S Yen position, Our Man sold all the shares he’d bought in October.  The much larger size of the remaining S Euro positon (it’s 2x the size of the S Yen one) reflects Our Man’s view of the respective opportunity set going forwards.

- Equities: In the middle of the quarter, Our Man added to the position in Vipshop Holdings (by 75%) in the week or so following the company’s earnings announcement in November.  Our Man also added 2 positions in December, Fannie Mae (FNMA) and the iShares Nasdaq Biotech Index (IBB) though both are undersized. 
In FNMA’s case, Our Man added the position following the nomination of Steve Mnuchin as Treasury Secretary and various public comments that he subsequently made on Government’s involvement in the housing market.  The FNMA position is so small, as it’s essentially an option – it’s either worth much less or multiples more of its current price depending on the path the Treasury (and Congress) choose.  While the prospect of a positive resolution is now likely higher (in OM’s opinion), it’s not overwhelming in part due to the shareholders of FNMA (largely hedge funds aka “Wall Street”) and the likely public reaction (irrespective of whether it’s legally correct) to seeing these shareholders as the beneficiaries of public policy.
In IBB’s case, OM has wrestled with the decision for most of the year – in OM’s view, it’s likely that Biotech is today where Technology was somewhere in the 1997-2000 period, he’s just not smart enough to tell you where (best guess, in the middle!).  Given this, the pull-back after the US election and Our Man’s subsequent more positive leaning towards equities, Our Man felt comfortable taking a half-position in IBB.

- International:  Good fortune smiled on Our Man, as following the US elections and with the US Dollar strengthening a number of Emerging markets sold off.  These included Brazil, where the ETFs (EWZ for large caps, EWZS for small caps) both fell ~20% from their peaks in early November providing Our Man with a very healthy entry point.  Given Our Man had largely been kicking himself during the second and third quarters for missing the opportunity to invest in Brazil, this was a welcome bit of fortune.  The simple case for Brazil is largely unchanged from Q2/Q3; (i) the equity indices have been in a substantial (~50%) and prolonged (5yr+) bear market which appears to have bottomed in Q1, (ii) the political situation, namely the ‘carwash’ corruption investigation, reached its nadir with the ousting of President Rousseff in Q3, and (iii) the Brazilian current account posting a surplus (historically a great time to buy Brazil) in the middle of the year.
Additionally, Our Man re-entered his position in Italy (EWI), in the days following the Italian referendum (at a mildly better price than he’d exited in January) – little has changed, Italy continues to look exceptionally cheap and in the run up to the referendum the sentiment was very poor.

Performance and Review 
For the 4th quarter, the portfolio returned a very healthy 799bps, taking the 2016 performance to 11.0%.  The year was a marked improvement on recent years, and ended up nestling between the S&P 500 Total Return (+12.0%) and the more global MSCI World Index (+7.5%).

The performance in the 4th quarter was driven by the Currency book (+748bps), as the US Dollar strengthened substantially.   Initially, this was it became clearer that the Federal Reserve were likely to hike interest rates in December and the belief that this rate hiking cycle in the US  (nascent as it is) substantially diverged from Japan and Europe, which were expected to continue easing.  This trend was further accelerated, following President-elect Trump’s election victory as investors looked at plans (tax cuts, stimulus program, etc) and concluded they were likely inflationary and hence the path of US rate increases would be steeper.   The Short Euro position (+232bps) was a consistent contributor throughout the quarter, while the Short Yen position (>+500bps) moved even more aggressively.  The small China Thesis (+9bps) position that currently is just very limited exposure to S Australian dollar was a marginal contributor.

The performance of the various equity-centric books was more mixed.   The Technical Book (+85bps) benefited from the rising US markets, especially in November.   The International/Country book (+80bps) also benefited from rising markets, in particular from its exposure to Argentina which contributed ~50bps, and where the individual names performed strongly (comfortably outpacing Argentinean markets).  Additionally, it saw a decent gain from GVAL and marginal gains from the new positions in Italy (EWI) and Brazil (EWZ/EWZS).  Unfortunately, the Equities book (-123bps) was a negative contributor, with substantially all of the losses coming from the position in VIPS; the company announced good earnings in November, but disappointed the market with relatively conservative guidance and investors had concerns over the company’s new financing subsidiary (JD/BABA suffered from similar concerns, a year or so ago).  Despite this OM remains positive on the company, taking advantage of the pull back to add to the position; the company’s issues stem from a turnover in investor base (as it went from uber-growth to a value name, though still growing 30%) and management’s limited credibility that’s yet to be earned back (following their poor handling of an earnings miss a year ago).

Portfolio (as at 12/31 - all delta and leverage adjusted, as appropriate) 
27.5% - International/Country (GVAL, Brazil, Italy and Argentina)
21.6% - Technical (DDM, QLD and SSO)
8.9% - Equities (VIPS, FNMA & IBB)

-1.6% - China-Related Thesis (CROC – Short Australian Dollar)
-53.2% - Currencies (EUO – Short Euro, and YCS – Short Japan)

25.3% - Cash  

Disclaimer:  For added clarity, Our Man is invested in all of the securities mentioned.  He also holds some cash and a few other securities (of negligible value).  You should not buy any of these securities because Our Man has mentioned them, but should do your own work and decide what’s best for you.

Tuesday, December 20

Things from my Newsblur (formerly Google Reader); 2016 Part II

Our Man was going to write an update along the lines of “Thinks I think I think”, as the portfolio has shifted far more than normal (and has likely only started down that path) since the US election, but he thought he’d try and avoid Trump-talk for a little longer.   Given it’s been an exceptionally long-time since Our Man posted a “Things from my...”, so here’s a catch-up bumper edition.  Our Man's New Year's resolution is to get at least 4 of these to you next year! 

- How to Sleep 
Politics getting you down?   Kids keeping you up?  Here’s some useful thoughts and research (though in largely lay terms rather than doctor-speak) that might help.  (The Atlantic, James Hamblin) 

- The Fourth Industrial Revolution: a primer on Artificial Intelligence 
Or you could just forget about sleeping, and read this.   Again, while the subject matter might seem daunting, the writing is very readable and understandable.  It takes you from “What is AI” to “Why AI is important” and “Why it matters today”.   If you only read one thing from this Google Reader, please make it this one!   (Medium, David Kelnar) 

- Unconventional Thinking Helps End Columbia War 
This is actually a video, which explores the various unconventional ways that helped lead the Columbian government and FARC to their historic peace.  For all the talk in the corporate world of thinking outside the box, this is vastly more impressive (and outside the proverbial box).  (CBS News, via the Big Picture) 

- A Conversation with Dan Ariely about what Shapes our Motivations 
Our Man enjoys reading almost everything Dan Ariely writes, and if you want to know more about behavioural economics and what motivates people to do things this is a good place to start (and he’s a good man to follow/read).  (Longreads, Jessica Gross with Dan Ariely) 

- Inside a Moneymaking Machine Like No Other 
A peek behind the curtain of Renaissance Technologies, and their Medallion Fund, which has one of the (probably just THE) performance histories in Finance.   (Bloomberg Markets, Katherine Burton)

And since it’s impossible not to talk about politics, I’ve saved these for below the fold… 
- Why Trump appointees will be effective, for better or worse 
I think this is a smart take by Tyler Cowen (a Professor of Economics at George Mason) which I’m in 100% agreement with.  I suspect too many on the left are making the mistake that those on the right did when President Obama was elected; just because you dislike something/one doesn’t mean that things they’re doing don’t have thought/a plan behind them.  (Bloomberg View, Tyler Cowen) 

- On Krugman and the Working Class 
Krugman’s super-smart and all, with a “Nobel prize” to prove it, but if he can’t see how he’s part of the problem then he’s unlikely to be any part of the solution.   Professor Duy, who’s very interested in that solution, points this out far more charitably than Our Man would.  (Tim Duy’s Fed Watch) 

- What Canada can Teach post-Brexit Britain 
“The main thing is simple. Canada likes being Canada. It's a good neighbor, but would rather not be part of the United States. Perplexing as it may be to many British commentators, that position is not in the least bit delusional. On the contrary, there's a lot to recommend it.”  That would be the simple synopsis.  (Bloomberg View, Clive Crook)

Saturday, November 5

2016: Third Quarter Review

Portfolio Update  
- Precious Metals:  As mentioned in the recent post, Our Man exited all of his positions in precious metals (GLD, GDX, SLV) very early in the 3rd quarter.  The positions were the largest contributor to performance in 2016, but Our Man is unconvinced that the rally is the start of a new bull market (especially given Our Man’s view on the dollar strengthening).

- Technical book:  Our Man’s technical indicators believe there’s a good probability (i.e. 50%+) that the rally from Feb-16 lows is the start of a significant up-leg in the markets (rather than a sharp bear market rally) and as such it recommended re-entering the positions (DDM, QLD and SSO).  Our Man duly did so, almost at the start of Q3.

-  Currencies: Our Man entered a small/medium size position Short Japanese Yen (vs Long US Dollar, YCS) early in the third quarter.  Following a strong rally in the Yen (to the 100 level vs. the USD), and the continued commitment of the Bank of Japan to easing monetary policy, Our Man felt comfortable re-entering this position.

Performance and Review   
The portfolio performed pretty well during the third quarter, adding 348bps which puts the year-to-date performance at 2.81%.

The primary driver of performance was the International/Country book, which added 185bps.  The Argentinean equity positions contributed almost the entirety of the profit – the new government has continued to impress international onlookers (lifting capital controls, taxation changes, settling with the bond holdouts and issuing new debt, etc) and MSCI put Argentina on review for possible inclusion into the Emerging Markets indices (potentially in mid-2017).   The early impact of this was most visible in the position in Pampa Energie (PAM) which contributed over 100bps on its own.  It’s a beneficiary of the move to market prices (removal of subsidies/etc), which although gradual will positively impact profitability over the coming years, and its decent liquidity/size and management history, has resulted in the stock being one of the first to attract large mutual fund interest.  The probability is Our Man will be looking to exit the Argentinean names during 2017, most likely in the run up to the MSCI decision.

Elsewhere, the other equity-orientated books were positive contributors during the quarter.  The Technical book (+50bps) benefited from the rising market (post it’s mid-July addition to the portfolio).  The Equities book (+81bps) currently holds just a position in Vipshop Holdings (VIPS), a Chinese Internet retailer, which rallied after announcing strong Q2 growth and earnings.  The company retains an interesting niche in the Chinese market, and unlike many peers is already generating a healthy profit.

Despite being in the portfolio for only a few weeks, the Precious Metals book (+99bps) nonetheless contributed strongly.  The Energy Efficiency book (-2bps) had a marginal impact, as the sole position was liquidated.

Portfolio (as at 09/30 - all delta and leverage adjusted, as appropriate) 
21.6% - Technical (DDM, QLF and SSO)
17.3% - International/Country (GVAL, and Argentinian names)
3.3% - Equities (VIPS)

-1.6% - China-Related Thesis (CROC – Short Australian Dollar)
-44.3.5% - Currencies (EUO – Short Euro, and YCS – Short Japan)

45.7% - Cash  

Disclaimer:  For added clarity, Our Man is invested in all of the securities mentioned.  He also holds some cash and a few other securities (of negligible value).  You should not buy any of these securities because Our Man has mentioned them, but should do your own work and decide what’s best for you.

Sunday, September 18

Some things I think, I think - Post-Brexit edition

- Donald Trump will (continue?) to do better than expected
Yes, in many ways he’s a very flawed candidate and he’s exceptionally unpopular one.  His opportunity lies in Secretary Clinton’s weaknesses as a flawed campaigner with her trust/honesty issues (whether they’re perception or real, is irrelevant) and a popularity level that’s in the Trumpian realm.  They’re literally the most unpopular candidates to run for President – they key for each, might just be avoiding appearing in the press in the final week!  In all likelihood, the favorable demographics and Mr. Trump’s weaknesses should be enough for Secretary Clinton to win, assuming she gets enough of those young voters who stubbornly only turnout to vote for President Obama, to the polls! That said, I wouldn’t expect a majority in the popular vote or much of a mandate despite the claims otherwise. 

- Limits of monetary policy and R*
One of the more thought provoking things that Our Man has read recently is this essay from San Francisco Fed’s John Williams that came out just before the staff of various Central Banks met at Jackson Hole.  In it, he argues the world has changed (and the neutral rate of interest is lower), thus monetary policy needs to change and that monetary policy is not the only answer.  Suggested changes on the monetary policy side include a higher inflation target, or replacing inflation targeting with a flexible price-level or nominal GDP targeting framework.  Both of these suggest a lower-for-longer (maybe forever) since with inflation (and GDP) undershooting existing targets (and thus increasing the distance to future targets) the pressure to increase rates diminishes further.  As for what lower-for-longer/ever means…well, there are some thoughts on that below. 

- People’s QE
It may go by a different name, and under many different guises, but it’s coming to a country near you…soon!   With monetary policy at close to its limits, and rising populist sentiment in numerous countries around the globe, the stage is being set for “People’s QE”.  What does Our Man mean by “People’s QE” – think massive fiscal spending, supported (directly, but possibly indirectly to get around legal issues) by an aggressive Central Bank QE program.   It will be done differently across countries, but the most successful will by those countries that realize “infrastructure spending” in the 21st century while not yet well defined likely doesn’t mean the same as it did in the post-World War 2 period!   Our Man’s sneaking suspicion is that Britain, with the readymade excuse of Brexit and seeking global competitiveness, will do it best with a mixture of old school infrastructure spending (bridges, roads, etc), new-style infrastructure spending (start with internet/cellular connectivity, but who knows what else, maybe it’s drones, etc), education (especially in very pro-Brexit areas) and healthcare (updating hospitals, from the bricks and mortar to processes/etc). 

- Regulation 
 Despite all the talk in the political realm, Our Man rather suspects that increased scrutiny on Banks and Financials (post-08) was the start of a trend rather than a one-off, and wouldn’t be surprised to see Technology and Healthcare cos next in the regulatory firing line. 

- The market will either be much higher or much lower within the next 12mos
Our Man just can’t tell you which but is pretty sure it ain’t going to hang around here.  The downside case is the clearest with investors able to take their pick of potential issues, including China, slow growth, falling Earnings/high valuations, Europe and the Euro, Brexit, etc.  The upside case is more complicated, but linked to negative rates (and the prospect of negative or low rates for some time).  At a certain level negative rates make sense; it’s an acceptance that we can’t afford our debts, and thus pricing the interest rate at the level at which we can amortize them.  If this is true, and as yields turn negative and assets fall in real terms (with central banks adding money to prevent nominal falls), then the answer is to buy duration, and stocks are exceptionally long duration instruments.  So if you think negative yields are here for the long-haul, you want to be buying stocks…hand over fist.

Portfolio Update 
Our Man’s felt that the market is sitting at the edge of the binary path for a couple of months now, and so he made some changes to the portfolio earlier in the third quarter.  Out have gone all the commodity-related positions (Gold, Silver, and Gold Miners) which have generated exceptional profits year-to-date, but are stretched following their strong runs and vulnerable to dollar-strength.  Into the portfolio have come some (levered) market equity positions, in particular as Our Man’s Technical book saw a tentative buy signal – expect to see more, if the market’s price action suggests much higher highs ahead.  The Currency and International positions remain unchanged, though the Argentinean equities are nearing the end of their (so far successful) investment horizon.  Our Man full expects to sit here, not doing much, and let price determine whether some of these positions are sold or are joined by substantially more equities.