September 2012 Review

Portfolio Update
- There were no changes to the portfolio during the month. 

Performance Review
The markets continued to rise during September, as Central Banks globally showed their willingness to provide plentiful cheap liquidity.  Unfortunately, the portfolio caught little of this upswing and ended the month down 54bps, tipping it back into slight negative territory (-0.4% YTD) for the year.

For the most part, the book behaved largely as expected given the market conditions.  The Treasury Book (-9bps) suffered as investors showed an increased willingness to take risk, though the Bond/Absolute Return Funds (+13bps) benefited from this as other types of credit and equities generated positive returns.  The books that were short equities, the China Thesis (-13bps) and Puts/Hedges (-16bps), both lost money as the market rallied.  On the positive side, many of the books that were expected to gain from QE3 and the other pledges of liquidity , largely did so, with the NCAV (+5bps), Energy Efficiency (+3bps) and Precious Metals (+20bps) all helping the month’s returns.

The portfolio’s negative performance largely stemmed from 2 books, whose performance disappointed during the month.  The Currencies book (-26bps) gave back gains from recent months, despite renewed signs of problems in Greece and Spain that may require bailouts, as the optimism over the Euro-countries staying together generated by Mario Draghi’s pledge to do what was necessary continued.  More disappointingly, the Value Equities book (-31bps) hurt the portfolio despite the rise in equity markets.  Almost the entire loss came from the position in DRWI, which fell 15% during the month; while the company guided its revenue projections above analysts’ expectations for its Q2, it failed to offer any guidance for the balance of the year.  This added yet greater uncertainty to the stock, though shouldn’t be entirely surprising given their recent acquisition of Nokia-Siemens’ Microwave Transport business which will represent a substantial part of the company going forwards.

Portfolio (as at 9/30 - all delta and leverage adjusted, as appropriate)
19.3% - Bond/Absolute Return Funds (DLTNX and HSTRX)
7.4% - Precious Metals (GLD)
6.2% - Value Idea Equities (THRX, and DRWI)
5.1% - Treasury Bonds (TLT)
2.6% - Energy Efficiency (AXPW, and XIDE)
0.6% - NCAV Equities
0.0% - Other Equities (none)
-0.7% - China-Related Thesis (25bps premium in EWZ Jan-13 puts)
-0.1% - Hedges/Put Options (5bps in IWM Jan-13 puts, 4bps in SPY Jan-13 puts and 3bps XLY Jan-13 puts)

-12.0% - Currencies (EUO – Short Euro)

52.2% - Cash 

Disclaimer:  For added clarity, Our Man is invested in all of the securities mentioned (TLT, DLTNX, HSTRX, GLD, 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.