May 2012 Review

Portfolio Update 

There were no changes to the portfolio during May. 

Performance Review

In similar fashion to both 2010 and 2011 the old stock market adage “Sell in May and go away”, proved to be useful advice as the S&P 500 tumbled by over 6%.  Unsurprisingly, it was as macro fears across the globe raised their heads once more.  In Europe, the slow-moving car crash continued as Greece’s elections brought matters to a head, with the possibility of Greece’s exit (which seems to have been term a “Grexit”) being openly discussed for the first time, while Spain seems to be doing its best to follow Ireland’s version of the bank & real estate debt problems!  The news outside of Europe wasn’t much better as speculation and debate continues as to whether China will have a hard landing or will instead avoid it through another large stimulus program in the full knowledge that the 2009-stimulus program only made their long-term economic rebalancing much harder.  Not to be left out, the US showed continued signs of softening in the economy, though it’s yet to reach levels where the talking heads are speculating about recession.  

Given the portfolio’s slightly negative/bearish tilt it fared reasonably well during May rising 1.13%, though it still remains underwater for the year (-9bps YTD).  The breakdown of performance was unsurprising.  The China book (+47bps) and Puts/Hedges (+42bps) both benefited as equity markets fell, with the Treasury book (+39bps) benefiting from the flight to quality.  The largest contributor was the Currencies book (+77bps) which benefited from the USD strengthening against the Euro following uncertainty in Europe, especially the fears that Greece would exit the Euro and speculation this could lead to contagion across Europe.

Equally unsurprising was that the equity-orientated books suffered heavily during the month, with both the Value Equities (-61bps) and Energy Efficiency (-46bps) books hampering performance.  As regular readers know, the names in these books tend to be smaller-capitalization companies where either a large part of their value is in (expected) future growth (i.e. the Energy Efficiency book) or where there is some uncertainty be it over legal issues, the value of an asset, the company’s normalized earnings, or corporate behavior/action.  Unfortunately, these traits mean that if there is no idiosyncratic even affecting the names in these books, they can be sold off heavily during bouts of uncertainty.  The Bond/Absolute Return Funds (+2bps) and NCAV (+12bps) books weren’t significant contributors to performance.

Portfolio (as at 5/31 - all delta and leverage adjusted, as appropriate)

17.6% - Bond/Absolute Return Funds (DLTNX and HSTRX)

5.5% - Value Idea Equities (THRX, and DRWI)

4.8% - Treasury Bonds (TLT)

1.9% - Energy Efficiency (AXPW, and XIDE)

0.5% - NCAV Equities

0.0% - Other Equities (none)

-2.4% - China-Related Thesis (92bps premium in EWZ Jan-13 puts)

-2.8% - Hedges/Put Options (37bps in IWM Jan-13 puts, 36bps in SPY Jan-13 puts and 25bps XLY Jan-13 puts)

-12.1% - Currencies (EUO – Short Euro)

61.8% - Cash

Disclaimer:  For added clarity, Our Man is invested in all of the securities mentioned (TLT, DLTNX, HSTRX, THRX, DRWI, AXPW, XIDE, , EWZ puts, IWM puts, SPY puts, XLY 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.