Sunday, April 24

2016: First Quarter Review


Portfolio Update 
- Technical: After growing sceptical of the rally during December (but not flashing any major warning signs), the Technical model quckly flashed a warning and a full sell signal during the first couple of weeks of January.  As a result, OM exited the positions in mid-January when the S&P was in the mid-1900s.

- Equity:  With the warning lights from the Technical model flashing, and the myriad of issues with China (and as a result EM) coming to the forefront, OM decided it would be a judicious time to exit some of his Equity positions that have a Chinese-bent.   As such he completely exited TTM (which suffers doubly from any slowdown in auto sales in China and the US, where sales are already at a high rate) and JD.com (Chinese company, in Internet consumer sector).   Our Man also sold ~1/3 of the VIPS position, another Chinese internet name, but one in which he has higher conviction than JD.com (in part because it generates a profit).

- International:  As noted in the year-end review, with all the issues in Europe and Our Man’s lack of faith in European decision-making, he exited all of the Italy (EWI) and Spain (EWP) positions in mid-January.   In addition, after the exceptional performance of the Argentinean names as President Macri first forced a run-off and then won it (and proved far more decisive and aggressive in dealing with the issues in his first 100days than was believed possible), OM took the opportunity to take profits in his Argentina position (by selling TGS).

- Currencies:  With Europe following Japan into negative interest rates, and having witnessed the impact of the move in Japan on both the currency (stronger, not weaker) and banking system (stocks falling), OM reduced his Short Euro position by 1/3 during the second half of the first quarter.  

- China Thesis: With Chinese New Year followed by data that looks to be improving (or at least, not getting worse) and the bounce in commodity prices, OM substantially reduced the Short AUD position (by 80%+).  The position has been a great winner, but OM suspects there will be a much better time when he’s able to re-enter it (at much better prices).

Performance and Review  
The first quarter saw the portfolio drop 4.95%, though after suffering a 7.0% loss in the first two weeks of January, the book was incrementally profitable in the remainder of the month and both February and March.

Unsurprisingly, the Equities book (-304bps) and the Technical book (-283bps) were the largest causes of the loss.  As the Portfolio Update above notes, both books were heavily cut back during the month (they were over 50% NAV, and are now 10%) and in the Technical Book’s case the exposure is unlikely to return any time soon barring a significant change (this is as the Technical model is signalling a bear market, rather than just a notable correction).  The International/Country book (-94bps) suffered during January (primarily from the European positions), though the Argentinean names have continued to perform well as President Macri exceeds expectations (settling with the holdouts, and accessing global capital markets for the first time in 15yrs).

Despite their reduced size, the currency-orientated book were negative contributors, Currencies (-48bps) and China Thesis (-2bps), during the quarter with all of the losses coming in March; clearly OM wasn’t surprised by the dollar’s weakness (hence why the positions were reduced) though the speed of the reversal was a surprise.  That said, expect OM to rebuild the currency positions in the future, especially the Euro (prior to Brexit, Greece’s latest problems, etc).  Finally, the Precious Metals (+235bps) book contributed to returns with Gold, Gold Miners and latterly Silver all contributing well and erasing most of last year’s loss (oh the cost of being too early!!).  While OM’s yet to be convinced this is more than the start of a sharp reversal in a bear market, he’s holding onto the positions as (though it will likely be volatile) there’s likely much more to come.

Portfolio (as at 03/31 - all delta and leverage adjusted, as appropriate)
15.6% - International/Country (GVAL, and Argentinian names)
12.0% - Precious Metals (GDX, GLD and SLV)
10.0% - Equities (RDY & VIPS)

-1.8% - China-Related Thesis (CROC – Short Australian Dollar)
-9.9% - Currencies (EUO – Short Euro)

56.6% - 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.

Thursday, February 4

Fourth Quarter 2015 Review

Portfolio Update  
- Equity: Our Man added to the position in VIPS, after the company disappointed the market with its earnings and guidance early in Q4.
- International: Our Man exited the position in Greece during December; while the Greek market looks cheap on a long-term basis (CAPE), there remain questions about how useful the Greek data is.  The data-set starts in ’95, and hence predominantly covers the period when Greece was trying to get into and then a member of the Euro.  As such, how truly representative is this period? Does it just reflect a time of unusual ‘good’ behavior by the actors – government, companies, etc – in Greece?  Given the continued austerity as a condition of remaining with the Euro and the uncertainty (while it’s not at the forefront of people’s minds, currently) of whether it will remain so, Our Man decided it best to (finally) just cut his losses and move on.  Those of you, who’re pondering “what’s changed” are largely right…it’s a decision Our Man should have come to some time ago.
- Currencies: The position S Japanese Yen (YCS) was closed out during the fourth quarter, having been profitably held (at various sizes) for over 2 years.  While there may be more actions to come from the Japanese Central Bank, Our Man isn’t convinced they’ll have as much of an impact as those we’ve seen over the last 3 years.

Performance and Review  
The portfolio gained 4.3% during Q4, though this meant it still ended the year in negative territory at -4.6%.  Despite the profitable quarter, Q4-2015 is likely to go down as one of Our Man’s most disappointing.  During the quarter, and especially in December, there were many signs of both macro changes (including weakening US data) and in market tone – in particular with regards to China (further RMB weakness and concerns over its banking system) and credit markets (Third Avenue’s redemption suspension from their credit fund).  These factors impacted the portfolio negatively in December (and subsequently January), and Our Man failed to respond to them proactively.  Thus, rather than the normal round-up of a quarter, the below represents both a round-up coupled with Our Man’s current thinking and plans on the various books.

China Thesis: While the moves in the Australian Dollar cost the portfolio 64bps, the Long USD/S AUD position contributed 2x this during the course of the year.   OM retains the position, expecting a substantially lower AUD (i.e. more like the 2001 lows than the 2008/9 lows) as the unwinding of the China-driven secular bull market in commodities continues.  Unfortunately, while OM expects the AUD position to continue to be a good contributor it’s an inefficient way to play the thesis, but the other options (S the RMB or Shorting 2nd derivative stocks from the mining/commodity fall-out – I’m looking at you CAT) aren’t available to him.

International/Country:  Was a great contributor, +335bps, during the 4th quarter.  The performance was driven by the Argentina exposure; Macri (the most market friendly candidate) did better than expected, initially forcing a run-off which he subsequently won.  Since he took office in December, he has been better than anyone could hope for; removing capital controls, making changes to the tax system, replacing the Central Bank Governor and the Head of the Statistics office, and even starting to negotiate with the holdouts which would bring Argentina back to the global capital markets.  Stocks have responded to these moves, but OM trimmed the position during January – while Argentina is a great alpha story, it’s a terrible beta one as a Latin American emerging market (look at Brazil, for what could go wrong) in what’s become a less patient and forgiving environment.

The European positions were mild detractors in the case of Spain and Italy, and a continued disappointment with regards to Greece.  Our Man’s never been a huge Europhile, so he’ll spare you the Europe is a “political construct not a popular one” comments, and just say that in times of stress (be it caused by Euro, or now the refugee crisis in Syria that’s impact European countries) he has little faith in “Europe” making sound long-term decisions.  As such, after exiting Greece in December, Our Man exited both Spain and Italy in January – they’re still ‘cheap’ and he hopes to be back, though it may be a while!

Equities:  The equity book was a mess in Q4, despite the rising markets, costing the portfolio 125bps.
- JD/VIPS were hit by China concerns and VIPS, in particular, produced disappointing numbers which it also handled ineptly (deciding to pre-announce on a Friday, a couple of days before their Earnings announcement).  While growth is decelerating, unlike most Internet companies VIPS generates profits and thus can be valued off earnings (rather than revenue, or clicks, or whatever).  The stock trades at a reasonable PE (14x 2016) while still seeing 40-50% top and bottom line growth!  Despite this, OM reduced the position in January while also exiting JD (which doesn’t generate any profits)
- The two Indian positions were also disappointments.  Tata Motors (TTM) continues to roll-out new models (especially Land Rover and Jaguar) and they’ve been doing well, but was hit by concerns that the auto cycle has peaked (especially in China, and important market).  While it may outperform other automakers, it’s another good alpha/bad beta story, and OM would rather keep his Argentinean exposure, hence he sold out of the position in January.  Dr Reddy’s problems were largely of its own making, which at least gives it the opportunity for self-help going forwards.

Technical: The Technical book contributed 261bps during the 4th Quarter from the OEW-driven positions.  Unfortunately, there were some signs in December that the market’s bull run had peaked, after the S&P failed repeatedly to break to new highs (which were expected), though no sell signal was seen.  Unfortunately, the sharp descent early in January produced the sell signals, and OM exited the positions (at around the current levels).  Given the OEW-driven model has signaled the end of the 2009-2015 bull market, OM doesn’t expect to have any positions in the Technical book (without substantial market changes) until we’re into 2017.  He is however, working on another (very simple) model to add to the book – as with the OEW-driven model, the new one will seek to help OM get over his skepticism and systematically add market exposure for prolonged periods.

Currencies:  The currency books continued to be productive, adding 56bps in Q4.  As noted, OM has closed out the Short Japanese Yen position, but he retains the Short Euro position (EUO).  With the Federal Reserve raising rates in December and Europe continuing to try and ease (or at least Draghi trying to convince investors that’s the intent) there is a nice dichotomy in policy.  Hopefully, it will last.

Precious Metals:  Our Man wasted almost 300bps in 2015, by entering these positions both too early and sizing them too big.  Unfortunately, OM continued to pay for his inaction after recognizing this relatively early-on.  Despite costing the portfolio 28bps in Q4/December, there were finally signs that the time may finally be here for them…though a large part of any move, is merely recouping losses.

Portfolio (as at 12/31 - all delta and leverage adjusted, as appropriate)
35.0% - Technical Book (DDM, QLD and SSO)
31.4% - International/Country (EWI/EWP in Europe, GVAL, and Argentinian names)
23.5% - Equities (JD, RDY, TTM, & VIPS) 
9.1% - Precious Metals (GDX, GLD and SLV)

-11.3% - China-Related Thesis (CROC – Short Australian Dollar) 
-15.6% - Currencies (EUO – Short Euro)

5.1% - 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, December 20

Things from my Newsblur: December-2015 - The wait, what, this still exists edition?

So, Our Man realized it’s been an interminably long time since he let you know about stuff of interest from his Newsblur!   After racking his brain, and  checking his files (thus being certain that there was lots of good stuff bookmarked) it seems there was no good reason for this…other than good old fashioned laziness.  Thus consider things from my Newsblur back, with a New Year's resolution to help ensure it!*

This won’t come entirely as a surprise to those of you that have kids but nearly 25yrs after his death, Dr. Suess continues to own the world of children’s books having sold multiples of the next author on the list (a certain JK Rowling).   Oh, and Green Eggs and Ham only uses 50 different words.  (Priceonomics).

Allergies, especially food ones, have been on the rise over the last couple of decades and the “solution” is typically to do everything on can to avoid the allergen.  While this typically works well for those will limited/controllable/etc allergies, it’s not much help for those with very severe reactions but thankfully there are other things being worked on. 
(Melanie Thernstrom, Stanford Medicine)

Folks of Our Man’s generation (were young, about to be middle aged!) saw the technical revolution hit as we went through high school/university so are pretty good at using stuff!  Our Man’s kids are going to need to know more than how to just use things (though they’re freakily good at that too).  Our Man’s using this article so he’ll be able to nod, in just the right spot, in a few years when one of the kids explains how they programmed the toaster to the do the laundry or something like that!
(Paul Ford, Bloomberg Business)

What happens when 2 VC firms try to map out the HC world, from a current traditional map to trying to figure out where it’s going and then blog about some of the things they’re seeing…
(Union Square Ventures and Version One Ventures, On Digital Healthcare)

Anyone who’s been to the DMV, knows how bad the government’s IT systems can be…there is some hope!
(John Gertner, Fast Company)

With the recent run of corporate scandals (including the Banks/Libor, Volkswagen/diesel emissions, and Valeant/stuff) it seems a good time to look back at the East India Company.  The company is thought of as the first corporate raiders, though their approach was to do this in the literal sense with the backing of their 200,000+ strong military force rather than through today’s boardroom maneuvres.
(William Dalrymple, The Guardian)

* Like all NY's resolutions, this only guarantees that Things from My Newsblur will be strongly considered but not actually acted upon/produced in the month of January.

Friday, November 6

Third Quarter Review

Portfolio Update  
- Currencies: Our Man added to S Euro position during the month.

- China Thesis: Given the signs of weakness in China during late Q3 and the likelihood that the next move in Australia was going to be easing (vs. a potential rate hike in the US) Our Man added to the S Australian Dollar position

- Equity: With the sharp pull back in Chinese equities, OM added to his position in VIPS and added a new position in JD.  Both are Internet based retailers which would benefit from the continued increased consumption in China, even as the broader economic growth (especially industrial) is slowing.  In VIPS’ case the company is already profitable, and the pullback meant it was on a reasonable valuation without even considering its growth.


Performance and Review  
Our Man’s portfolio suffered heavily with the markets during the Third Quarter, falling by 8.4% with the majority of the losses coming in August (-5.7%).  This leaves the book at -8.5% for the year, comfortably behind the market.  The markets were roiled by numerous concerns, with the slow down in China being the foremost in investors minds.

The portfolio lost money everywhere through the quarter, with the exception of the China thesis (+73bps) which benefited from the continued slide in the Australian Dollar.

The Technical book (-220bps) fell with the market over the quarter.  It was an interesting quarter for the book, with a trim signal and a sell signal generated in consecutive days.  Unfortunately, for Our Man, they were the close of trading on the 20th/21st…some weeks after the market peaked, but a day before it fell heavily.  With OM unable to secure the approvals to trade (which would have been moot anyways, given the sharp gap down open on the 24th) the Technical book bore the entirety of the sharp fall to the market lows.  The upside of this, was that the decline was so fast and steep, that the market hit OM’s technical range for a pull back on that first day, so OM never traded.  This at least saved the double whammy of the Technical book capturing all of the downside, then the positions being closed as the market rallied and OM having to wait the required period (almost till October) before being able to re-enter them. 

The Equity book (-282bps)  was the largest negative contributor, and it was no surprise that given the concerns over China that it was the two Chinese Internet names represented substantially all of the loss though neither VIPS nor JD reported anything of significance during the market decline.  TTM (Tata Motors) suffered as fears over China impacted the auto-sector and the company had a plant shutdown (exacerbating it's main problem of not being able to make enough Land Rovers/Jaguars to meet demand)though its losses were offset by gains in RDY (Dr. Reddy Pharma).

The International/Country Book (-241bps) suffered during the month, with the concerns regarding China leading to increased risk aversion which saw Peripheral Europe and Argentina both suffer.  While OM retained both sets of positions, their medium-term outlook is somewhat different.  The Argentinean positions retain the catalyst of the October/November elections, and all signals point that irrespective of which of the major candidates wins change will be coming.   Unfortunately, the same is not true of the European names where the technical damage to the charts in EWP (Spain) and especially GREK (Greece), in addition to the continued weak Earnings in those countries (making the valuations less attractive) and political problems (Grexit, Catalan votes on independence), means that OM is holding those positions (especially Greece) for the short-term bounce as he looks to potentially exit them during Q4.  The position in EWI (Italy) is currently on the bubble with the attractive valuation, not yet having been overwhelmed by the terrible technical factors.

The Currencies book (-30bps) was a small negative contributor, with both the Euro and Yen positions going against Our Man.  The future of these positions is also likely diverging, with potential additional QE and the continued fragility in Europe likely to mean there’s at least one more leg down for the Euro.  In Japan, after their aggressive QE, OM suspects that renewed commitment to yet more QE we might see a retracement of some of the fall in the Yen.  The Precious Metals book (-135bps) continued to be a disappointment, which Q3’s moves largely confirming that while OM may be right, he’s certainly early – given the fall in the equity markets, it’s no surprise that GDX (which is also the most levered to precious metals movements) represented 2/3 of the loss.

Portfolio (as at 9/30 - all delta and leverage adjusted, as appropriate) 
34.1% - International/Country (EWI/EWP/GREK in Europe, GVAL, and Argentinian names)
31.4% - Technical Book (DDM, QLD and SSO)
22.2% - Equities (JD, RDY, TTM, and VIPS) 
9.8% - Precious Metals (GDX, GLD and SLV)

-13.0% - China-Related Thesis (CROC – Short Australian Dollar) 
-22.9% - Currencies (EUO – Short Euro, YCS – Short Japanese Yen)

0.2% - 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.