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.

Saturday, July 30

BREXIT and Power to the People

As noted, Our Man wasn’t particularly shocked by the Brexit result and given there have been numerous post-mortems, Our Man’s going to limit his thoughts. 

It seems pretty clear that “Leave” ran a much better campaign than “Remain”, starting off with just having a better and more productive name.  Strategically Leave had three prongs, (i) Sovereignty, (ii) Immigration, and (iii) Anti-status quo (and with the major parties both on the Remain side, status-quo has a wider scope than normal, i.e. politics/politicians/bureaucrats/etc); while immigration got all the attention (especially from the press and Remain campaign), sovereignty was much more important.  On the other hand, the Remain campaign’s strategy was primarily driven by the economic cost of leaving the EU (with a nod to apparent strategic benefits of being a member, which were never fully articulated).  The largest flaw in this being that using economic fear (even if justified) has a diminished impact, when the same population (if not electorate) have been exposed to it as the primary weapon in votes in 2014 (in the Scottish referendum) and 2015 (in the General Election).  People don’t have to be economic experts to figure out either (i) the world can only end so many times, or (ii) if the economy is so fragile that Scotland leaving/Labour getting into power/Brexit can each individually crash it, then there will be something else soon enough is Brexit is avoided.  Finally, on a tactical basis “Leave” had better leadership (say what you want about Boris/Gove and their behavior, but everyone knew who to listen to as opposed to Cameron/Osbourne’s the world is ending again, and Corbyn’s errr…errr…exactly) and a simple effective slogan (“Take Back Control”) that meant different things to different people (like Obama’s “Yes, We Can”, and Trump’s “Make America Great Again” – it’s hard to take the opposite side of a good slogan!).

While the campaign matters, the structural setting for a Leave vote was in place; it is readily apparent (to OM, at least) that there is the widespread popular discontent (be it in Greece, Spain, France, the UK and US) with the range of political choice offered and their policy prescriptions.  The widespread nature of this discontent is I think better understood by the population than by the political (and elite) class, and the attempts to ascribe it solely to immigration (more of a symptom) is reflective of this.   The lack of willingness to investigate and understand this discontent has helped create the opportunity for the populist characters on the left and right like Jeremy Corbyn, Nigel Farage, Bernie Saunders and Donald Trump.  Furthermore, the complacency shown by the major parties as these characters rose (due to their low quality and general incoherence), and still being shown towards Mr. Trump, reflects how badly the political class are underestimating the underlying message.  Finally, the distorting impact of QE on inequality and corporate incentives, has only added fuel to the fire of that dissatisfaction. 

That this manifested itself in a vote for Brexit, seemingly aided by stalwart Labour areas in England, should not come as a surprise.  For the last generation, as globalization and with it free trade and free movement of capital (with its negative impact on tax bases) have swept across the globe, the policy prescription has been to increase welfare to deal with the uneven impact.  Now however, the costs of welfare are becoming prohibitive both financially (on government budgets) and in terms of lost productivity.  While welfare is necessary, and one can easily understand how data and economic models suggest it is the best approach, Our Man suspects that likely reveals more about the models, and their over-valuation of the short-term than anything.  The extremes of the welfare state help foster a culture of dependency and while transfer payments help people live their lives, it constrains them to ones that are harder to develop meaning and self-respect.  Furthermore, on an economy-wide basis, it helps undermine productivity through the lost skills (and lack of development of new ones) limiting the economy’s potential.  In the fullness of time and with the repeated prescriptions of the same solution, these micro and macro factors swamp the easy fix of a cash transfer.

Finally, it is said that history rhymes, rather than repeats, and to that end Our Man has been surprised at the lack of mention of Britain’s exit from the gold standard in 1931.  After all, following 6yrs of austerity back then, Britain was the first country to come off the gold standard and its departure came after a naval mutiny (Invergordon revolt), which caused market panic and the Pound fell 25% in the aftermath!   Inevitably, it was deemed at the time to be sacrilege to leave the Gold standard, a tragic mistake from which the country would never recover and one that would doom London's financial centre.  Of course, it proved not to be in part due to the huge stimulus from that devaluation and within 2 years (1933) most other countries had followed Britain’s lead and left the Gold standard.

Now of course, we’ve just had 6yrs of austerity (Chancellor Osborne's first austerity budget was July 2010), and Britain voted to become the first country to leave the EU delivered by a different mutiny (the 2.8mn non-voters who delivered Brexit).  It too has caused market panic (albeit briefly), and (so far) the Pound has fallen 15% in the aftermath!   It’s also being called a tragic mistake, against the perceived wisdom of the day and London's financial centre is doomed.  Time will tell how different ending the UK will have this time…

Our Man, will return shortly, with some things he thinks in the aftermath of Brexit…

Friday, July 15

2016: Second Quarter Review

Portfolio Update  
- Equity:  Our Man finally managed to exit the Dr. Reddy’s (RDY) position late in the quarter, for a very marginal profit.

- Currencies: Midway through the quarter, after the strong rally in the Euro, Our Man added substantially to the S Euro position.

Performance and Review   
The second quarter proved far more generous than the first, with the portfolio rising +4.54%, leaving it -0.6% YTD.

The performance was primarily driven by the Precious Metals (+301bps) positions.  While both Gold (GLD, +27bps) and Silver (SLV, +68bps) contributed, it was the exposure to the Gold Miners (+207bps) that made the difference.  Our Man was too early into the Precious Metals positions in 2015, but the positions have more than recouped those losses and provided a healthy gain over 2015/2016.  The strong performance of the Precious Metals book (along with the Dollar strength, especially versus the Euro) meant that Our Man's portfolio was quite profitable in the days following ‘Brexit’.

The Equity book (-17bps) posted a small loss, as VIPS continues to work through its issues and the stock is between investor bases; while cheap (Internet company at less than 20x PE) and growing (40%+ p.a.), it’s also seen its growth slow from 100%+ p.a. and so is transitioning from being held by growth investors to more value-orientated ones.  The International book (+126bps) performed well, led by Pampa Energie (PAM).   Argentina continues to be the gift that keeps on giving – the pace of Macri’s reforms continues unabated, and MSCI moved the country to the watch-list for possible inclusion in the MSCI Emerging Markets Index.  

Finally, the Long Dollar positions were profitable with the China Thesis (+3bps) and the Currencies book (+41bps) generating returns as the dollar strengthened slightly against the Aussie Dollar and especially the Euro (post-Brexit).

Portfolio (as at 06/30 - all delta and leverage adjusted, as appropriate) 
16.1% - International/Country (GVAL, and Argentinian names)
14.4% - Precious Metals (GDX, GLD and SLV)
2.6% - Equities (VIPS)

-1.7% - China-Related Thesis (CROC – Short Australian Dollar)
-32.5% - Currencies (EUO – Short Euro)

49.8% - 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.

Friday, July 8

Things from my Google Reader; 2016 Part I

It’s been an exceptionally long-time since Our Man posted a “Things from my Google Reader”, so here’s a bumper edition.  Hopefully, the wait will not be so long in the future!

- The Spy Behind the Plane that Saved Britain 
In the skies over Britain in 1940 the Spitfire turned the tide against the Nazis, but only a handful of people knew that it owed its edge to secrets cribbed from Germany.  (Clive Irving, the Daily Beast)

- The FBI vs FIFA 
Football is the world’s game, and it wasn’t exactly a secret that FIFA, the governing body, was corrupt.  Yet, it took the Americans to get the sport to start to clean up its act – maybe we should start calling it ‘soccer’ out of gratitude!   Just kidding!  But here’s ESPN with the in-depth story about how the FBI brought down FIFA! (Shaun Assael & Brett Forrest, with Vivek Chaudhary, at ESPN)

- What the iPhone has done to cameras is completely insane 
 File this one under things you know, but are still stunning to see (especially in graphical form).  How badly do you think camera sales fell, following the iPhone’s introduction in 2007?  Roberto Ferdman looks into it, and it’s uglier than you thought (well, uglier than OM thought at least).  (Roberto Ferdman, Washington Post).

- Taxi, Uber and Lyft usage in NYC 
The TLC provides regular usage data, and Todd Schneider made life easier by collating it all and taking a look.  You know what to expect, but seeing it in graphical form always helps confirm things; Uber up, taxis down, Lyft still trying.   (Todd W. Schneider, at his eponymous blog)

- Will self-driving cars lead to grade-separated cities? 
What will real self-driving cars (think more the Google version than the fake Tesla version) mean for cities?  Well, the folks at MIT’s Sensable City Lab had a look at the future of traffic lights, and predict their days may be numbered.

 It’s been the biggest thing in Our Man’s homeland since sliced bread, and though the world hasn’t (yet) ended it’s certainly been shaken up.  Rest assured, Our Man has lots of thoughts on Brexit and related things, but you’re likely to be saved from most of them (though Our Man probably won’t be able to resist writing one post, and no more, on the subject).   In the meantime, here are some of the few things Our Man has actually found worth reading on Brexit (and related things) in the aftermath.

- Calm Down: The Brexit Result is not a 21st-centurySarajevo 
For those worrying about Armageddon, hopefully reading this helps you back away from the ledge.  (David McWilliams, Irish Independent)

- Evolution not Revolution 
While newspapers & politicians want to talk about about immigration, the date indicates it was 'sovereignty' that drove the Leave vote.   Ideally, this should inform the British negotiations, and the Adam Smith Institute make the case for the EEA option.  (Adam Smith Institute)

- The 2.8million Non-voters who Delivered Brexit 
An interesting analysis of where the polling went wrong (spoiler alert: turnout models) and the large cohort of ‘new’ voters that it largely missed.  Ascertaining who they are isn’t the hard part, but what do they want and will they vote again is much harder?   Secretary Clinton better hope that Donald Trump isn’t as successful at finding them.  (Matt Singh, Bloomberg…though he’s normally found at the excellent Number Cruncher Politics) 

- Brexit: A disaster decades in the making 
You do not have to agree with the author’s viewpoint (that it’s a disaster) to appreciate that there’s some really good stuff in here about the long-term issues that led to the lack of trust/faith/etc in the establishment (and both major political parties). (Gary Younge, Guardian)

- How Remain Failed: the inside story of a doomed campaign
- How David Cameron blew it 
It wouldn’t be a political campaign, without the post-mortems…after all mistakes were made and there's more than enough blame to go around!  (Rafael Behr, Guardian and a number of folks at, respectively)

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 (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 (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.