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.