November 2012 Review

Portfolio Update

There were a couple of changes to the portfolio during the month: 

- The position in Treasuries (TLT) was closed during the month.  The position has been the largest contributor by a substantial distance since the launch of the portfolio, but with 30-yr yields near 2.75% the near-term seems to pose greater risk than potential reward. 

- The portfolio’s position in Gold (GLD) was increased during the month.  While, Our Man is somewhat skeptical over any substantial and permanent long-term Gold price appreciation, the position offers some short-medium term opportunity based on favourable technicals and as a hedge against political & central bank stupidity. 

- As mentioned in an earlier post this month, the NCAV book was increased through the addition of some new positions that met the book’s criteria.

Performance Review 

November proved a relatively quiet month for the portfolio, which fell 13bps to leave the YTD performance at -1.6%. 

The month saw most of the books post small losses, which were partially offset by some larger gains.  The Puts/Hedges book (-3bps) and China thesis (-3bps) books posted small losses as the time decay continued to reduce the remaining value of the puts.  The Currencies (-5bps) book also posted a small loss during the month, with speculation continuing on future of the Euro and the path that the countries will take.  The Value Equities (-2bps) and Energy Efficiency (-10bps) books posted small losses as there was little in the individual company reports to substantially driver performance.  Gold (-11bps) was also a negative contributor during the month.

These losses were largely offset by performance from the Treasury book (+10bps), and also from the NCAV book (+12bps) where both the existing and new names helped performance.  The Bond Funds (-0bps) had no impact on performance.

Portfolio (as at 11/30 - all delta and leverage adjusted, as appropriate)  

19.6% - Bond/Absolute Return Funds (DLTNX and HSTRX)

13.1% - Precious Metals (GLD)

6.0% - Value Idea Equities (THRX, and DRWI)

2.4% - Energy Efficiency (AXPW, and XIDE)

1.7% - NCAV Equities

0.0% - Other Equities (none)

-0.0% - China-Related Thesis (3bps premium in EWZ Jan-13 puts)
-0.0% - Hedges/Put Options (less than 1bps each in IWM Jan-13 puts, SPY Jan-13puts, XLY Jan-13 puts)

-11.8% - Currencies (EUO – Short Euro)

51.3% - Cash 

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

NCAV 2012-2

It has been a long time since the first NCAV update of the year, but this represents the process failing to show up any names that could be added to the Absolute Value/NCAV bucket portfolio (for information on this bucket, and how it works, read here).

As reminder, the initial screen is a valuable tool but from its list of potential positions, a number of names are removed after a simple qualitative overlay.   The conceptual reason for this quantitative overly is ensure that the data used by the NCAV screen as an input is of suitable quality, and that the results are thus meaningful.  A fuller explanation of some of the reasons why names are removed after this qualitative overlay can be found in the earlier update from this year.

The NCAV screen (run on 11/25) produced 2 new positions;
- Imation Corp (IMT), a c$160mn market cap company.  Based on its Q3-12 report, 65% of the company’s Net Current Assets (=Current Assets - Total Liabilities) was $185mn.
- Radioshack (RSH), a $190mn market cap company.  Based on its Q3-12 reports, 65% of its NCAV was $225mn.
As a result, both of these positions were added to the portfolio.

The one existing name in the portfolio (TWMC), no longer qualified for the screen and thus the final date that this name must be sold by was not extended (here are the rules when NCAV names are sold).  

Things from my Google Reader: Nov-12 Edition

Well, with the Holiday Season upon us, what better time to update you some things that Our Man read over the last couple of months.  There's a special US Election-related section, at the end, since I couldn't quite hold my tongue entirely 

- America’s Slippery Slope into Britishisms!

Can I take credit for this?  Did Goldman Sachs’ (allegedly) prevalent use of the word ‘muppet’ to describe clients in London lead to this article?   Or are American’s finally accepting that Brits just do the whole colloquialism/slang thing vastly better!  (Alex Williams, New York Times) 

- The Birth of Bond

Continuing our British-theme, what could be more British than James Bond?  Well, excluding some of Daniel Craig’s dubious pronunciation in Skyfall - no doubt it was for the benefit of a US audience – didn’t they read the above NY Times article!  On that note, Our Man saw SkyFall last week, loved it and heartily recommends it if you liked Casino Royale (but somewhat less so if you preferred anything Roger Moore/Pierce Brosnan!  There’s no accounting for taste!).  (David Kamp, Vanity Fair) 

- Show Me The Money

After long being the red-headed stepchild of economics, behavioural economics is now being used more than every (especially in the US and UK) to shape policy and bend its impact.  Here, Professor Cass Sunstein’s talks about its development and impact on policy (especially consumer protection).  (Cass Sunstein, The New Republic) 

NB: You may want to try the experiment in this video, before reading the article! 

- The Hunt for “Geronimo”

Mark Bowden’s adaption from his forthcoming book, detailing the process, research, preparation and decisions behind the Administration’s decision to green-light the raid on Osama bin Laden.  (Mark Bowden, Vanity Fair) 

- When The Growth Model Changes, Abandon theCorrelations

Professor Pettis describes why he thinks a lot of the current research on China’s GDP growth over the coming decade is flawed.  He also considers why Japan in the late 80’s is a better comparable to the China of today, than the more often mooted Japan in the 70’s.

(Michael Pettis, on his website and also at Credit Writedowns) 

Election Fever

Things that amused and interested me about this year’s US Presidential election.
- That (as Mark Cuban noted, post election) the multi-millionaire CEO who was running built an organization that was technologically inept (and had no back-up plan), was inefficient in its expenditures (purchase of ads) and never tested its core assumptions.
- Sasha Issenberg being right beforehand, and Alexis Madrigal subsequently adding much more colour, about how the President’s team was creating the first truly 21^st century campaign, and utilizing data efficiently and effectively (i.e. like they do in the private sector).
- That systematically using data (whether it was 538, RCP, Pollster, or my personal favourite Votamatic) was more helpful than using your “gut” and paying little attention to the data (Karl Rove, George Will, DickMorris, etc).  And that people were then shocked by this!
- That the ‘auto bailout’ was deemed  a major factor in helping the President win re-election.  That's fair enough, but it's strange how nobody points out how universally unpopular the bailout was, even in Michigan, back in 2009 when the decision was made!  
- That Democrats think that demographics and data mean the future is theirs.  As ErickEricksson noted within a pretty thoughtful and insightful piece (especially given it was barely a couple of hours after the Republicans had lost the White House) on the election and the conservative movement, it’s yet to be proven that Obama’s coalition is a Democratic one (as opposed to just an Obama one).

October 2012 Review

*Post updated 12/1, to reflect some inaccuracies in the performance figures of the individual books (the overall performance, exposure information, etc was unchanged).

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

Performance Review
The portfolio fell, together with the market, during October losing 1.12%, which leaves the book -1.51% YTD.

The moves in the Treasury book (-1bps) and the Bond/Absolute Return book (+2bps) largely cancelled each other out, as Treasuries widened during the month while other bonds (especially mortgage-related) tightened in October.  The Energy Efficiency (-4bps) and NCAV (-4bps) books posted incremental losses, as they fell with the markets.  The Precious Metals (-23bps) position was a negative contributor.  The Currencies book (-11bps) hurt the portfolio, after the Euro strengthened following continued signs that the politicians and bankers are prepared to support the currency and the member nations that run into fiscal problems.

The Puts/Hedges (-2bps) and China Thesis (-10bps) strategies both suffered in spite of the falling market due to the cost of the time decay outweighing the benefit of the various options being closer to profitability.  While the falling market brought both books closing to being in the money, they remain some way out of the money (20%+) and thus suffer from a rapidly declining probability of being profitable. 

The primary detractor was again the Value Equities (-58bps) book, with the losses from the position in THRX offsetting the much smaller gains in DRWI.  Despite the difficult markets, Dragonwave (DRWI) rose over 10% after announcing its Q2 number during the month and guidance that suggested the integration of the division it recently purchased from Nokia was going well and that the firm was likely to be break-even by its fiscal year-end.   In contrast, Theravance (THRX) fell over 15% during the October, which means that the position has given up the majority of the gains it made since it announced Glaxo taking a larger stake and the positive progress of their key drugs back in June/July.  There has been limited news since then meaning that market fears over the success of these drugs has returned, and this has been compounded by Glaxo’s weak results which means people feel it’s less likely to bid for THRX (in which it owns a 20%+ stake) in the short-medium term.

Portfolio (as at 10/31 - all delta and leverage adjusted, as appropriate) 
19.6% - Bond/Absolute Return Funds (DLTNX and HSTRX)
7.5% - Precious Metals (GLD)
6.0% - Value Idea Equities (THRX, and DRWI)
5.1% - Treasury Bonds (TLT)
2.5% - Energy Efficiency (AXPW, and XIDE)
0.6% - NCAV Equities
0.0% - Other Equities (none)

-0.7% - China-Related Thesis (6bps premium in EWZ Jan-13 puts)
-0.1% - Hedges/Put Options (2bps in IWM Jan-13 puts, 2bps in SPY Jan-13 puts and <1bps jan-13="jan-13" puts="puts" span="span" xly="xly">

-12.1% - Currencies (EUO – Short Euro)

52.7% - 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.

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.

Things from my Google Reader: Sep-12 Edition

With summer ending, and Autumn beginning, here’s some things that Our Man read over the last couple of months.  As per normal, the articles become more serious the further you manage to get through this post!  With that in mind, why not start off with some Sports News!

Sports News 
- The London Chronicles: Great Britain Lives Up to its Name! 
The Olympics were held in Our Man’s home town this year, and after a slow start Team GB exploded into life on "Super Saturday".  Even American uber-sports writer Bill Simmons was impressed. (Bill Simmons, Grantland)

- RA Dickey Has Straightened-out His Life and Crooked-out His Pitches 
The most interesting man in baseball, and one of the (very few) bright spots on a very mediocre (and apologies to the word mediocre, for the insult!) Mets team!  Bizarrely, it’s not hyperbole to ask if the only man in the world currently capable of throwing a knuckleball at a Major League-level is about to be declared the best pitcher in the National League this season!  (Dave Sheinim, Washington Post)

- Cosell Talks: Eli’s Arrived 
Finally, with Football season kicking off, what better time to reminisce in the happy ending to last year’s season and Super Bowl  XVLI.  (Greg Cosell, NFL Films)  

And In the Real World 
- How Apple & Amazon Security Flaws Led to my Epic Hacking 
If (for some unbeknownst reason) you don’t have a two-step verification process for your email, then this article will inspire you to get one…quickly!  A look at how simple it is for someone to take over your online life and all of your accounts, while knowing minimal data about you.  It also says rather a lot about the poor controls at Amazon & Apple (amongst others), and how little they value your data.  The author, who’s technologically far more savvy than Our Man, did manage to get his digital life back!  (Matt Honan, Wired)

- A Critic's Manifesto: The Intersection of Expertise & Taste
A critic's view of what a critic should do, or least aim to do. (Daniel Medelsohn, The New Yorker) 

- The Weasel, Twelve Monkeys And The Shrub
Since it's election season, and Our Man doesn't talk politics, here's some political reading for those of you that need your election fix.  A David Foster Wallace's article from his time on John McCain's campaign bus, back in 2000!  A more interesting and far better read, than anything you're likely to see that's a little more 2012-relevant!  (David Foster Wallace, Rolling Stone...though since I couldn't find a copy on their website, this one is from Txt Post)

- The NSA is Building the Country’s Biggest Spy Center 
Now Our Man and Mrs. OM are fans of the CBS show “Person of Interest”, which is based around a government program that tracks all of our communications, which a former CIA agent & a computer genius-type guy use the information from to try and help prevent crimes.  Who knew that it’s all rather closer to the reality than fiction!  (James Bamford, Wired) 

- China: Shadow Bankers Vanishing Leave China Victims seeing Scams 
Yup, China, again!  Our Man may seem like Chicken Little, but it is stories like this, and their ever increasing prevalence, that should be worrying to folks!   Credit is (unfortunately) the key building block of modern-day economies, and there ever increasing signs that the underlying collateral is either over-valued or doesn’t exist (i.e. Ponzi finance)!  You saw what happened in the US, when supposedly good collateral (housing) was significantly over-valued…now imagine vast reams of it not existing!  (Bloomberg News)

- Roberts Switched Views to Uphold Healthcare Law 
I don’t much care if you think the Healthcare Law is good, bad or indifferent, I just thought this was the best reporting of the Supreme Court’s decision and what went on behind the scenes.  Given the paucity of actual reporting (as opposed to opinion masquerading as such) in the press these days, it’s worth acknowledging.  (Jan Crawford, CBS News)

August 2012 Review

Portfolio Update
- As noted in the recent “After Half-Term Ponderings” it seems that we’re set for QE Everywhere.  With the portfolio positioned poorly for this, Our Man added a position in Gold (GLD) for a 6-12month ‘trade’.

Performance Review
Despite August proving a positive month for the markets, the portfolio fell by 64bps during the month once again leaving the portfolio around flat (+0.15% YTD) for the year.

The fund spent the entire month in the red with the losses being fairly broadly spread across the portfolio.  The Puts/Hedges (-21bps) and China Thesis (-11bps) books both suffered as markets across the globe rallied, with both now representing very limited exposure.  The Currencies book (-29bps) gave back most of July’s gains, with almost the entirety of the loss coming after ECB President Mario Draghi pledged to do everything to support the bond markets (especially those in Spain/Italy) and keep the Euro together.  The Treasuries book (-7bps) also gave back part of its recent gains.  Finally, despite the general rise in equities, the Value Equity book (-32bps) was also a negative contributor.  This was due to the fall in THRX, which saw some profit-taking following its 25%+ rally during July, and despite a positive contribution from DRWI.

The positive contributions were all relatively small.  The Absolute Return/Bond Funds (+13bps), NCAV (+5bps) and Energy Efficiency (+8bps) books both benefited from the rise in risk appetite and asset markets.  The addition of the GLD position, meant that the Precious Metals book (+10bps) proved to be well-timed with expectations for QE3 rising after Fed Chairman Ben Bernanke’s speech at Jackson Hole

Portfolio (as at 8/31 - all delta and leverage adjusted, as appropriate)
19.1% - Bond/Absolute Return Funds (DLTNX and HSTRX)
7.3% - Precious Metals (GLD)
6.8% - Value Idea Equities (THRX, and DRWI)
5.2% - Treasury Bonds (TLT)
2.5% - Energy Efficiency (AXPW, and XIDE)
0.6% - NCAV Equities
0.0% - Other Equities (none)

-1.0% - China-Related Thesis (34bps premium in EWZ Jan-13 puts)
-0.1% - Hedges/Put Options (8bps in IWM Jan-13 puts, 7bps in SPY Jan-13 puts and 4bps XLY Jan-13 puts)

-12.4% - Currencies (EUO – Short Euro)

51.8% - 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.