Saturday, December 20

Portfolio Update: Some 2014 & 2015 Thoughts…

2014 has largely been a year of missed opportunities for OM, some unfortunate (e.g. what eventually turned out to be a false sell signal in the Technical book) but most self-inflicted; predominantly mistakes of omission than mistakes of commission.   This is broadly represented in a consistent theme that you’ve seen since Our Man started running the book; a significant level of underinvestment, too often caused by OM waiting for the perfect price to enter (or add to) a name rather than starting to build a position at a good price (i.e. with a sufficient margin of safety) and seek to build it should it decline further.  Thus, the big aim for 2015 and 2016, is to get better at this…

Some things that are interesting OM for 2015, and beyond… 
- International Book - Argentina:  This is one of those positions that falls into the mistakes of omission, since OM has been waiting to put on a position since Argentina defaulted on its debt over the summer.  On the surface there’s very little good to say about Argentina; the country is in an acrimonious fight with some bond hold-outs from its last default resulting in another default, the economy is terrible with high inflation, a weakening currency (which trades at both official vs. unofficial prices) and high interest rates.    Given that, why Our Man’s interest?  Well, everyone knows all of the above and despite the huge rally in stocks, they’re still cheap by any definition.  However, this is with good reason; high and volatile interest rates, mean banks only lend short term, which means businesses on focus on the short-term and eschew investments where the future return may be substantial.  Ditto for investors, who rightly value short-term cashflow or earnings far more heavily than any future earnings, due to the high discount rate.  The opportunity lies in that during 2015, there are ‘events’ that could change this paradigm; (i) it becomes a lot easier to negotiate with the bond holdouts as the calendar turns to 2015 (due to the expiration of a clause in the restructured bonds), and more importantly (ii) the current President cannot seek a third term, with all 3 major candidates promising a break from the Kirchner's (Cristina Kirchner has been President since 2007, and her husband was President for the 4 years prior) style and policies.  Therein lies the upside potential – the hope of a sensibly governed Argentina (perhaps even with an independent Central Bank), with its limited fiscal deficit and debt, and having ability to return to international capital markets would lead to a falling in the risk premium and corporations focusing on maximizing return (including future growth) rather than just surviving.  The downside, is yet more of what we’ve already seen, which is largely priced into the markets.  Given the lack of a good ETF, OM began investing in a small basket of positions in Argentina to get exposure during December.

- Equity - Oil/Gas related:  The decimation in the Energy markets has been amazing to watch, with the Russell 2000 Energy losing around half its value in the last 6 months and many individual names suffering far more heavily than that!  The sharp fall in oil has also reopened many of the debates about fracking and how the US Shale boom has been funded.  From a historical analog, there are certain similarities to what happened in 1985/86, when an influx of new production from the North Sea increased supply and saw the Saudis choose to maintain market share in a period of weakish demand, leading to a 60%+ decline in WTI within a 6month period despite ongoing Middle Eastern tensions; for 2014, substitute in US Shale (where production increased 1mn barrels per day in 2013, and likely 1.7mn bpd in 2014) for North Sea.  In short, Our Man thinks there are going to be things to do to in Energy during 2015, but we’ve yet to see the numerous corporate casualties (other than in their stock prices) that indicate it will be a better time to look for those that might be winners.  As such, OM’s exposure will continue to remain of the toe-dipping variety, but don’t be surprised if you start to see some Energy names in the Equity book next year.

- Equity – Internet:  OM loves the Internet and at this point, who doesn’t?  Be it shopping, catching up on the highlights from the big game, keeping in touch with family and friends or just doing one’s work, the Internet is pervasive*.  OM doubts it’s even an argument whether the Internet is this generation’s defining contribution and theme**, and like many of the prior themes it’s not only reshaping our world but is a key force of the deflationary pressure that we’re seeing globally.  The Tech Bubble of the late 90’s was clearly the very early innings, but it’s hard to say how far into the game we are currently.  While OM loves the Internet, he struggles to buy positions in a world where valuation is based on Total Addressable Markets (TAMs, or how big a company’s market “could” be) that can be almost anything and where low rates mean the value of future growth is vastly more important than the value of any profitability in the near-term (i.e. $100 at the end of 5years is worth ~$62 today at a 10% discount rate vs. ~$90-$91 today at a 2% discount rate).  Thus OM has only really been a buyer of Internet stocks at times when they’ve been sold aggressively (e.g. early last year); expect this to continue into 2015.  But like this year's Internet exposure, OM hopes that each time he invests in these sell-offs there will be a name or two that becomes longer-term holdings for the portfolio (like VIPS and TWTR in 2014).

* Furthermore people have now largely accepted the Faustian bargain of the Internet; that it is “free” to use and “cheap” to buy things on, BUT in exchange for all your personal data, whose protection & safety is currently not a priority for anybody be it individuals or corporations.
 **OM will leave it historians to argue how it compares to the Railroad, the industrialization of manufacturing driven by oil/gas, the Automobile, etc.

Saturday, December 13

November 2014 Review

Portfolio Update  
- Technical:  Much to OM’s chagrin, the moves in the indices in early November confirmed that that the late-September/early-October signal had indeed been a false ‘sell’ signal.  As such, OM is watching the market and looking for the right entry point to get back into the Technical book’s positions.

Performance Review  
October proved a volatile month for the market, though somewhat less so for OM’s book, which ended +209bps for the month, putting the YTD performance at +6.0%.

The driver of performance was OM’s currency exposure, specifically the portfolio’s large Long US Dollar exposure.  The Currencies book (+158bps) was up strongly on the month, driven by the position in YCS (Short Yen/Long USD) which contributed 140bps, most of which came very late in the month after the Japanese Central Bank announced plans to further increase their QE.  The China Thesis (+90bps) saw contributions both from CROC (+55bps) as the Australian Dollar weakened, and from CAF (+35bps) as Chinese A-Shares strengthened.

Though the equity markets rose during October, OM’s equity proved unprofitable costing the portfolio around 64bps.  The losses were caused by the Theravance positions (THRX/THBP, -41bps combined) as fears continued that the take-up of the products is below expecations, and the position in EOX (-52bps) which continued to fall together with the ever declining oil price.  The Internation/Country book (+28bps) posted a healthy gain, while the Absolute/Bond Fund (+4bps), Puts/Hedges (0bps) and Energy Efficiency (-6bps) had limited impact on performance.

Portfolio (as at 11/30 - all delta and leverage adjusted, as appropriate) 
18.7% - Equities (EOX, RDY, TBPH, THRX, TTM, TWTR & VIPS) 
8.0% - International/Country (GREK & GVAL)
4.2% - Bond/Absolute Return Funds (DLTNX)
0.1% - Energy Efficiency (AXPW, and XIDE)

 -0.0% - Hedges/Put Options (premium of less than 5bps EWZ and EWJ Jan-15 puts) 

-14.8% - China-Related Thesis (CROC – Short Australian Dollar, partially offset by CAF – Long Chinese A-Shares) 
-57.6% - Currencies (EUO – Short Euro, YCS – Short Japanese Yen)

27.9% - 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, November 16

October 2014 Review

Portfolio Update   
- Technical:  After September’s initial sell signal, the second trigger to sell (implying a correction is likely, i.e. 67%+) came during the first couple of days of October, and Our Man exited the Technical positions.  This move looked inspired for the vast majority of the month, though the sharpness & strength of the rally (higher highs and higher lows, every day with a monotonous regularity, to a level beyond expectations) increasingly raised the prospect of this being a ‘false sell’ signal as we reached month-end.

- Equity:  There were two small changes to the Equity portfolio; the first was that the position in TWTR was reduced slightly (this was the tail-end of the size reduction discussed last month, but which didn’t get filled during September).  Secondly, while most of the carnage in the Energy sector has been warranted (especially if Oil stays near $80), there are (hopefully) a few opportunities, and to this end Our Man started to dabble by taking a very small position in EOX.

Performance Review  
After a volatile month, the portfolio fell by 154bps putting the YTD performance at 3.8%

Despite the strong rally in the second half of the month, Our Man’s equity exposed buckets all suffered losses.   The International/Country bucket (-118bps) was by far the largest negative contributor, suffering heavily during the risk-off moves during the first half of the month when GREK (Greece) fell almost 20%, and failing to recover during the sharp rally in the second half of the month.

The Technical book (-29bps) was also a negative contributor, after the positions were closed out in the first couple of days of the month.  The Equities book (-42bps) was also a negative contributor, though more than 100% of the losses came from the positions in THRX and TBPH after the initial sales of their new products were at the low-end of expecations.  The Energy Efficiency (-9bps) was a small negative contributor as Exide continues to move through its bankruptcy process.  Finally, the Puts/Hedges book (-15bps) also lost money through both time decay and the underlyings moving slightly against it.

In the medium-term, the biggest news came from the Currency-related positions.  Our Man has been bullish the US Dollar for some time, believing that post-2011 we are in the start of a big US Dollar rally rather another of the many bear market rallies that have dominated memories since it mid-80s peak.  November saw some fundamental signs, that pointed to the increased possibility that this is coming to fruitition; while the US exited quantitative easing and the Fed now ostensibly discusses WHEN it might consider raising rates, Europe (where they are talking about starting some version of QE) and Japan (where on the final day in the month, they redoubled their QE efforts in the befuddling hope that doing more would make it would better) are headed in the opposite direction.  The Currency book (+71bps) unsurprisingly gained from the weakness in the Euro and Yen, throughout the month.  The China Thesis book (-14bps) posted a moderate loss, as the rise in Chinese A-shares (prior to them opening up a little more to foreign investors) did not offset the loss in the Short Australian Dollar position.  The Absolute/Bond Fund (+3bps) was a marginal gainer.

Portfolio (as at 10/31 - all delta and leverage adjusted, as appropriate) 
19.8% - Equities (EOX, RDY, TBPH, THRX, TTM, TWTR & VIPS) 
7.8% - International/Country (GREK & GVAL)
4.3% - Bond/Absolute Return Funds (DLTNX)
0.2% - Energy Efficiency (AXPW, and XIDE) 


-0.0% - Hedges/Put Options (premium of less than 5bps combined in EWZ Jan-15 puts and EWJ Jan-15 puts)


-12.6% - China-Related Thesis (CROC – Short Australian Dollar, partially offset by CAF – Long Chinese A-Shares) 


-49.6% - Currencies (EUO – Short Euro, YCS – Short Japanese Yen)

27.9% - 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.

Wednesday, October 8

September 2014 Review


Portfolio Update  
- Technical:  For the first time in a long-time (i.e. well before OM added the Technical book to the portfolio), the initial sell signal was triggered for all 3 of the indices in the Technical book.  This trigger indicates that the probability of a noticeable correction is elevated (i.e. 40-50% of it happening) and typically OM would reduce the position here (to c20%) but given it’s only marginally larger than the target positon and the cost of doing so, no changes were made.  Should a second trigger be seen (implying a correction is likely, i.e. 67%+) then the positions will be exited.

- Equity:  Given the initial sell-signal triggered in the Technical Book, OM thought this would be an opportune time to exit out of most of lower conviction equity names, comprising of DRWI and a number of the Internet positions (P, PNQI, QIWI and some of the TWTR) put on during Q2.  Of the Internet positions, only VIPS and (a reduced in size) TWTR remain.

Performance Review  
For the month the portfolio fell 74bps, leaving it up 5.5% YTD.

It was a very broad spread month, though unsurprisingly the losses were largely concentrated in the equity-related books.  The Equity book (-283bps) was the largest negative contributor, driven by the Theravance positions (THRX and TBPH) which cost c200bps – though there was no great news, the stocks are pretty speculative.  The Intenet names cost the fund about 52bps, but were strong contributors for the period they were in the portfolio.  The International/Country (-120bps) also suffered from the risk-off move during the month, with the position in GREK (Long Greek equity) driving the losses.  The Technical book (-20bps) also fell during the month.  The Puts/Hedges (+15bps) benefited from the falling market.  The Absolute/Bond Funds (-1bp) were largely unchanged and the Energy Efficiency (+10bps) names posted a small profit, after a corprate action (reverse stock split, increasing the likelihood of a full market listing) in Axion Power.

The winners were centred on the currency related books, which were driven by the strength of the US Dollar.  The Currencies book (+222bps) benefited pretty evenly from the rise in the Dollar against the Euro (on hopes of a Euro-version of QE) and Japan (where bad economic news, heightened hopes of further QE).  The China Thesis (+104bps) was also driven by the US Dollar exposure, and the Australian Dollar’s weakness against it.

Portfolio (as at 9/30 - all delta and leverage adjusted, as appropriate) 
21.9% - Technical (DDM, SSO and QLD)
19.5% - Equities (THRX, TBPH, TWTR, TTM, RDY, & VIPS) 
8.9% - International/Country (GREK & GVAL)
4.2% - Bond/Absolute Return Funds (DLTNX)
0.3% - Energy Efficiency (AXPW, and XIDE) 

-1.2% - Hedges/Put Options (premium of 18bps in EWZ Jan-15 puts, and 2bps in EWJ Jan-15 puts) 

 

-12.4% - China-Related Thesis (CROC – Short Australian Dollar, more than offset by CAF – Long Chinese A-Shares) 

-48.8% - Currencies (EUO – Short Euro, YCS – Short Japanese Yen)

17.2% - 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.

Wednesday, September 17

August 2014 Review

Portfolio Update  
- China Thesis:  With data out of China continuing to be tepid and signs that the US is at the beginning of the end of its monetary easing policy, OM scaled back up his Short Australian Dollar position (CROC) in the middle part of the month.

Performance Review  
Aided by buoyant Equity markets, and a strengthening US Dollar, August proved a very healthy month for the portfolio which rose 4.0%, putting the year-to-date performance at 6.3%.

As noted, the strong equity markets were very beneficial to the portfolio.  The Equities (+249bps) was the largest contributor to performance, with strong contributions from RDY and THRX (both Healthcare-related names), TTM (Jaguar/Land Rover sales continue to go well) and a number of the Internet names (especially TWTR).  Our Man is nearer exiting some of the positions in this book, mainly some of the Internet-related ones which were added after the large fall in the space in April/May.  The Technical book, through its leveraged index positions, added 89bps to performance.

The main economic event of the month was the annual conclave of Central Banker types at Jackson Hole, from where folks got the continued sense that the US is coming (albeit slowly and reluctantly) towards the end of its easing cycle, but where Mario Draghi (President of the European Central Bank) opened the door to further easing in Europe.  Coupled with further mediocre news on the Japanese economy, the result of all of this, was a bunch of Euro and Yen weakness and some Dollar-strength.  The Currencies book (+76bps) was a grateful beneficiary. 

Elsewhere, much ado about nothing.  Absolute Return/Bond Funds (+4bps) and the International/Country book (+9bps) helped performance, while the Puts/Hedges (-13bps, markets kept going up), Energy Efficiency (-2bps) and China Thesis (-13bps, mainly from the weakness in Chinese A-Shares) hurt.

Portfolio (as at 8/31 - all delta and leverage adjusted, as appropriate) 
32.7% - Equities (THRX, TBPH, PNQI, TWTR, TTM, RDY, VIPS, QIWI, P & DRWI) 
22.1% - Technical (DDM, SSO and QLD)
10.1% - International/Country (GREK & GVAL)
4.1% - Bond/Absolute Return Funds (DLTNX and HSTRX)
0.2% - Energy Efficiency (AXPW, and XIDE)

-0.2% - Hedges/Put Options (premium of 3bps in EWZ Jan-15 puts, and 2bps in EWJ Jan-15 puts)

-12.4% - China-Related Thesis (CROC – Short Australian Dollar, more than offset by CAF – Long Chinese A-Shares) 
-48.5% - Currencies (EUO – Short Euro, YCS – Short Japanese Yen)

6.5% - 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, August 17

July 2014 Review

Portfolio Update 
- International/Country:  Our Man exited his positions in both Italy (EWI) and Spain (EWP) during the second half of the month.  Both had been good performers for the portfolio in the 12-18months that we held them (especially EWP, which returned 50%+), so why sell?   It’s a combination of a couple of things; from those OM speaks to, opinion on Europe seems rather uniformly positive with too many folks claiming this is the start of a new bull market (sadly, bull markets rarely ever start when everyone proclaims them to be starting, see 2009) – this combined, with the deteriorating technical of markets across Europe (not just Spain/Italy, but France and Germany too amongst others), still mixed/mediocre macro and company news, and the increased nervousness OM has over the various larger issues in the world, made it seem like a good time to step away.

- Absolute Return/Bond Funds: Our Man closed out the small position in HSTRX.

Performance Review
The portfolio fell 2.02%, leaving it at +2.2% for the year. 


However, despite the magnitude of the loss it was actually a quiet month for the book.  The Equities book (-235bps) represented the key detractor from performance, and within that book it was the position in THRX (which cost c205bps) that drove performance.  THRX gave back much of recent gains on a mixture of negative press regarding uncertainty as to the speed of take-up and potential market size of its drugs which could impact the ability of the company to maintain (and increase) the dividend, and investors exiting the name following the recent spin-off.  The rest of the Equities book was largely flat, though DRWI (-25bps) continued to struggle following the recent fundraise, while the Internet-related names added this year posted a marginal positive contribution.

As noted, the majority of the books had limited impact on the portfolio.  The Absolute Return/Bond Funds (-1bps), Puts/Hedges (-9bps), Technical (-11bps) and Energy Efficiency (-3bps) all posted small losses, which were offset by the gain in China Thesis book (+35bps, on the back of strong Chinese A-share performance).  The International/Country book (-67bps) was a noticeable detractor as European markets weakened significantly, though the exiting of the positions in Spain/Italy during the middle of the month helped constrain the impact.  The weakness in Europe also saw the Euro weaken, which drove the positive performance in the Currencies book (+89bps).

Portfolio (as at 7/31 - all delta and leverage adjusted, as appropriate) 
31.6% - Equities (THRX, TBPH, PNQI, TWTR, TTM, RDY, VIPS, QIWI, P & DRWI) 
21.2% - Technical (DDM, SSO and QLD)
10.4% - International/Country (GREK & GVAL)
4.3% - Bond/Absolute Return Funds (DLTNX and HSTRX)
0.2% - Energy Efficiency (AXPW, and XIDE) 


-0.4% - Hedges/Put Options (premium of 17bps in EWZ Jan-15 puts, and 2bps in EWJ Jan-15 puts) 

2.0% - China-Related Thesis (CROC – Short Australian Dollar, more than offset by CAF – Long Chinese A-Shares) 

-48.9% - Currencies (EUO – Short Euro, YCS – Short Japanese Yen)

14.2% - 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.

Sunday, July 6

June 2014 Review

Portfolio Update
- None

Performance Review
June proved the first month in a while that the portfolio significantly outperformed the market, rising +5.11%, which puts the YTD performance at +4.3%. 

The entirety of the portfolio’s performance came from the Equity Book (+519bps), with winners being broad spread across the book.  As noted in recent months, THRX (Theravance) spun-off TBPH (Theravance BioPharma) – while the stock(s) had fallen into the spin-off (on limited news), they rallied strongly during June after it was completed (on limited news), more than recouping their losses and contributing 183bps and 91bps respectively to the portfolio.  The Internet-related names, which were added to the portfolio during the Mar-Apr pullback, added a combined 178bps as the sector continued to rally strongly, with TWTR (+88bps) leading the way.   Finally, the position in DRWI contributed 33bps, after the stock rallied after the company won a contract and raised guidance – perhaps, after a long period of disappointment, the company might finally be poised to take advantage of its technology.

Elsewhere, the portfolio largely broke-even – with markets rising, the Technical Book (+40bps) helped performance, and there were marginal contributions from the Absolute/Bond Funds (+3bps), Energy Efficiency (+2bps) and China Thesis (<+1bp).  Offsetting these were the International/Country book (-14bps, poor performance in the European periphery), Currencies (-26bps, weaker dollar) and the Puts/Hedges book (-12bps, rising markets and low volatility).

Portfolio (as at 6/30 - all delta and leverage adjusted, as appropriate) 
31.7% - Equities (THRX, PNQI, TWTR, TTM, RDY, VIPS, QIWI, P & DRWI) 
21.5% - Technical (DDM, SSO and QLD)
20.5% - International/Country (GREK, EWP, EWI & GVAL)
5.7% - Bond/Absolute Return Funds (DLTNX and HSTRX)
0.2% - Energy Efficiency (AXPW, and XIDE)

-1.3% - Hedges/Put Options (premium of 25bps in EWZ Jan-15 puts, and 4bps in EWJ Jan-15 puts)

1.5% - China-Related Thesis (CROC – Short Australian Dollar, more than offset by CAF – Long Chinese A-Shares) 
-48.8% - Currencies (EUO – Short Euro, YCS – Short Japanese Yen)

3.5% - 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.