Portfolio Update
- Equity: Our Man added
to the position in VIPS, after the company disappointed the market with its
earnings and guidance early in Q4.
- International: Our Man
exited the position in Greece during December; while the Greek market looks
cheap on a long-term basis (CAPE), there remain questions about how useful the
Greek data is. The data-set starts in ’95, and hence predominantly covers
the period when Greece was trying to get into and then a member of the
Euro. As such, how truly representative is this period? Does it just
reflect a time of unusual ‘good’ behavior by the actors – government,
companies, etc – in Greece? Given the continued austerity as a condition
of remaining with the Euro and the uncertainty (while it’s not at the forefront
of people’s minds, currently) of whether it will remain so, Our Man decided it
best to (finally) just cut his losses and move on. Those of you, who’re
pondering “what’s changed” are largely right…it’s a decision Our Man should
have come to some time ago.
- Currencies: The
position S Japanese Yen (YCS) was closed out during the fourth quarter, having
been profitably held (at various sizes) for over 2 years. While there may
be more actions to come from the Japanese Central Bank, Our Man isn’t convinced
they’ll have as much of an impact as those we’ve seen over the last 3 years.
Performance and Review
The portfolio gained 4.3%
during Q4, though this meant it still ended the year in negative territory at
-4.6%. Despite the profitable quarter, Q4-2015 is likely to go down as
one of Our Man’s most disappointing. During the quarter, and especially
in December, there were many signs of both macro changes (including weakening
US data) and in market tone – in particular with regards to China (further RMB weakness and concerns over its banking system)
and credit markets (Third Avenue’s redemption suspension from their credit fund).
These factors impacted the portfolio negatively in December (and subsequently
January), and Our Man failed to respond to them proactively. Thus, rather
than the normal round-up of a quarter, the below represents both a round-up
coupled with Our Man’s current thinking and plans on the various books.
China Thesis: While the
moves in the Australian Dollar cost the portfolio 64bps, the Long USD/S AUD
position contributed 2x this during the course of the year. OM
retains the position, expecting a substantially lower AUD (i.e. more like the
2001 lows than the 2008/9 lows) as the unwinding of the China-driven secular
bull market in commodities continues. Unfortunately, while OM expects the
AUD position to continue to be a good contributor it’s an inefficient way to
play the thesis, but the other options (S the RMB or Shorting 2nd derivative stocks from the mining/commodity fall-out –
I’m looking at you CAT) aren’t available to him.
International/Country:
Was a great contributor, +335bps, during the 4th quarter. The
performance was driven by the Argentina exposure; Macri (the most market
friendly candidate) did better than expected, initially forcing a run-off which
he subsequently won. Since he took office in December, he has been better
than anyone could hope for; removing capital controls, making changes to the
tax system, replacing the Central Bank Governor and the Head of the Statistics
office, and even starting to negotiate with the holdouts which would bring
Argentina back to the global capital markets. Stocks have responded to
these moves, but OM trimmed the position during January – while Argentina is a
great alpha story, it’s a terrible beta one as a Latin American emerging market
(look at Brazil, for what could go wrong) in what’s become a less patient and
forgiving environment.
The European positions
were mild detractors in the case of Spain and Italy, and a continued
disappointment with regards to Greece. Our Man’s never been a huge
Europhile, so he’ll spare you the Europe is a “political construct not a
popular one” comments, and just say that in times of stress (be it caused by
Euro, or now the refugee crisis in Syria that’s impact European countries) he
has little faith in “Europe” making sound long-term decisions. As such,
after exiting Greece in December, Our Man exited both Spain and Italy in
January – they’re still ‘cheap’ and he hopes to be back, though it may be a
while!
Equities: The
equity book was a mess in Q4, despite the rising markets, costing the portfolio
125bps.
- JD/VIPS were hit by China
concerns and VIPS, in particular, produced disappointing numbers which it also
handled ineptly (deciding to pre-announce on a Friday, a couple of days before
their Earnings announcement). While growth is decelerating, unlike most
Internet companies VIPS generates profits and thus can be valued off earnings
(rather than revenue, or clicks, or whatever). The stock trades at a
reasonable PE (14x 2016) while still seeing 40-50% top and bottom line
growth! Despite this, OM reduced the position in January while also
exiting JD (which doesn’t generate any profits)
- The two Indian positions
were also disappointments. Tata Motors (TTM) continues to roll-out new
models (especially Land Rover and Jaguar) and they’ve been doing well, but was
hit by concerns that the auto cycle has peaked (especially in China, and
important market). While it may outperform other automakers, it’s another
good alpha/bad beta story, and OM would rather keep his Argentinean exposure,
hence he sold out of the position in January. Dr Reddy’s problems were
largely of its own making,
which at least gives it the opportunity for self-help going forwards.
Technical: The Technical
book contributed 261bps during the 4th Quarter from the OEW-driven
positions. Unfortunately, there were some signs in December that the
market’s bull run had peaked, after the S&P failed repeatedly to break to
new highs (which were expected), though no sell signal was seen.
Unfortunately, the sharp descent early in January produced the sell signals,
and OM exited the positions (at around the current levels). Given the
OEW-driven model has signaled the end of the 2009-2015 bull market, OM doesn’t
expect to have any positions in the Technical book (without substantial market
changes) until we’re into 2017. He is however, working on another (very
simple) model to add to the book – as with the OEW-driven model, the new one
will seek to help OM get over his skepticism and systematically add market
exposure for prolonged periods.
Currencies: The
currency books continued to be productive, adding 56bps in Q4. As noted,
OM has closed out the Short Japanese Yen position, but he retains the Short
Euro position (EUO). With the Federal Reserve raising rates in December
and Europe continuing to try and ease (or at least Draghi trying to convince
investors that’s the intent) there is a nice dichotomy in policy.
Hopefully, it will last.
Precious Metals:
Our Man wasted almost 300bps in 2015, by entering these positions both too
early and sizing them too big. Unfortunately, OM continued to pay for his
inaction after recognizing this relatively early-on. Despite costing the
portfolio 28bps in Q4/December, there were finally signs that the time may
finally be here for them…though a large part of any move, is merely recouping
losses.
Portfolio (as at 12/31 - all delta and leverage adjusted, as
appropriate)
35.0% - Technical Book
(DDM, QLD and SSO)
31.4% -
International/Country (EWI/EWP in Europe, GVAL, and Argentinian names)
23.5% - Equities (JD,
RDY, TTM, & VIPS)
9.1% - Precious Metals
(GDX, GLD and SLV)
-11.3% - China-Related Thesis (CROC – Short Australian Dollar)
-15.6% - Currencies
(EUO – Short Euro)
5.1% - 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.