October Review

Portfolio Update
As the recent Portfolio Thoughts piece hinted, there were a number of changes to the portfolio in the last few days of October which gave the portfolio a more bearish tone.

- Puts/Hedges:  The Jan-12 puts on the Russell 2000 Index (IWM) was sold early in the month, after the Russell (and S&P) bounced off their year-to-date lows.  Later in the month, as the market rebounded, Jan-13 puts on the Russell 2000 (IWM) were added to the portfolio and the position in XIV was also sold.  The XIV position was a disappointment and negative contributor.  It’s clearly not an instrument to be bought early, when things can remain very volatile, and Our Man would have been better off sacrificing some potential upside and selling some of his puts.

- Other Equities:  Sold NWS and CMTL, and wrote SOAP down to zero.  Our Man was finally able to see the positions in NWS and CMTL at the end of the October.  The SOAP position would have been sold too, but it’s value ($1.50) is less than the commission cost of selling it (SOAP essentially liquidated itself back in 2009 and returned all of its cash back to shareholders, leaving just a shell) and thus it was written down to 0, so Our Man doesn’t have to track it any more.

- Energy Efficiency:  A c2% position in Exide (XIDE), a lead-acid battery maker, was added to the portfolio.  Our Man’s interest in Lead-Acid battery makers is largely due to the need (and regulations) for increased fuel efficiency and the unsuitably of the newer technologies for that purpose.  The more alert of you may remember that Our Man discussed missing out on buying XIDE last year; well, the best things come to those who wait and after a wild ride (from $4 to $12 and down again), XIDE is at the same level as it was back then!

- Short China Thesis:  A Jan-13put position in the MSCI Brazil Index (EWZ) was added.  The index is largely made up of Brazilian raw materials and financials companies.  In essence, Our Man views it a ricochet play on a Chinese slowdown, with a helping of local Brazilian financial/credit issues thrown in.

- NCAV:  Two stocks were removed from the portfolio (AVTR & IESC) after both had been in the portfolio for >1year since they last passed the screen.  There are likely to be a couple of additions to this portfolio in November, so look out for an NCAV update soon!

Performance Review
While the S&P posted its best month in decades, rising by over 10%, the portfolio posted a small loss of -0.9% (YTD: +7.7%).  Given the portfolio’s bearish positioning this should not be surprising, and there was very little that drove performance apart from the strong shift away from “safer” assets towards more risky ones during October. 

The losses were primarily centred on the 3 books where this bearish tilt is most obvious; Treasury Bonds, China, and Puts/Hedges.   The Treasury Book (-38bps) suffered as risk appetite increased during the month, though its substantially reduced size meant the impact on performance was minor when compared to the contributions from the book over the summer.  Both the China-related thesis (-48bps) and the Puts/Hedges book (-80bps) are short-biased, and gave up substantially all of their September gains as the market rallied.  The Currencies (-33bps) was another negative contributor, as hopes of that Europe’s continued solvency and liquidity issues were being solved rose during the month.

These losses were partially offset from the performance in the various books that are long equities.  The Value Equities (+57bps), Other Equities (+37bps) and NCAV (+15bps) posted decent performance despite the lack of major news flow on their underlying names.  The Energy Efficiency book (-12bps) posted a small loss, again on no great news.

Finally, the Bond Funds (+9bps) contributed, largely benefiting from the non-Treasury or non-Bond holdings within the underlying funds' portfolios.

Portfolio (as at 10/31 - all delta and leverage adjusted, as appropriate)
14.6% - Bond Funds (DLTNX and HSTRX)
8.9% - Treasury Bonds (TLT)
5.4% - Value Idea Equities (THRX, and DRWI)
2.1% - Energy Efficiency (AXPW, and XIDE)
1.4% - NCAV Equities
0.0% - Other Equities (none)

-1.9% - China-Related Thesis (11bps premium in FCX Jan-12 put, and 37bps premium in EWZ Jan-13 puts)
-4.6% - Hedges/Put Options (8bps premium in S&P Dec-11 puts, 82bps in IWM Jan-13 puts, and 23bps SLV Jan-12 puts)

-9.0% - Currencies (EUO – Short Euro)

61.5% - Cash


Disclaimer:  For added clarity, Our Man is invested in all of the securities mentioned (TLT, DLTNX, HSTRX, THRX, DRWI, AXPW, XIDE, FCX puts, EWZ puts, SPY puts, IWM puts, SLV puts, and EUO).  He also holds some cash.  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.