2016: Third Quarter Review

Portfolio Update  
- Precious Metals:  As mentioned in the recent post, Our Man exited all of his positions in precious metals (GLD, GDX, SLV) very early in the 3^rd quarter.  The positions were the largest contributor to performance in 2016, but Our Man is unconvinced that the rally is the start of a new bull market (especially given Our Man’s view on the dollar strengthening).

- Technical book:  Our Man’s technical indicators believe there’s a good probability (i.e. 50%+) that the rally from Feb-16 lows is the start of a significant up-leg in the markets (rather than a sharp bear market rally) and as such it recommended re-entering the positions (DDM, QLD and SSO).  Our Man duly did so, almost at the start of Q3.

-  Currencies: Our Man entered a small/medium size position Short Japanese Yen (vs Long US Dollar, YCS) early in the third quarter.  Following a strong rally in the Yen (to the 100 level vs. the USD), and the continued commitment of the Bank of Japan to easing monetary policy, Our Man felt comfortable re-entering this position.

Performance and Review   
The portfolio performed pretty well during the third quarter, adding 348bps which puts the year-to-date performance at 2.81%.

The primary driver of performance was the International/Country book, which added 185bps.  The Argentinean equity positions contributed almost the entirety of the profit – the new government has continued to impress international onlookers (lifting capital controls, taxation changes, settling with the bond holdouts and issuing new debt, etc) and MSCI put Argentina on review for possible inclusion into the Emerging Markets indices (potentially in mid-2017).   The early impact of this was most visible in the position in Pampa Energie (PAM) which contributed over 100bps on its own.  It’s a beneficiary of the move to market prices (removal of subsidies/etc), which although gradual will positively impact profitability over the coming years, and its decent liquidity/size and management history, has resulted in the stock being one of the first to attract large mutual fund interest.  The probability is Our Man will be looking to exit the Argentinean names during 2017, most likely in the run up to the MSCI decision.

Elsewhere, the other equity-orientated books were positive contributors during the quarter.  The Technical book (+50bps) benefited from the rising market (post it’s mid-July addition to the portfolio).  The Equities book (+81bps) currently holds just a position in Vipshop Holdings (VIPS), a Chinese Internet retailer, which rallied after announcing strong Q2 growth and earnings.  The company retains an interesting niche in the Chinese market, and unlike many peers is already generating a healthy profit.

Despite being in the portfolio for only a few weeks, the Precious Metals book (+99bps) nonetheless contributed strongly.  The Energy Efficiency book (-2bps) had a marginal impact, as the sole position was liquidated.

Portfolio (as at 09/30 - all delta and leverage adjusted, as appropriate) 
21.6% - Technical (DDM, QLF and SSO)
17.3% - International/Country (GVAL, and Argentinian names)
3.3% - Equities (VIPS)

-1.6% - China-Related Thesis (CROC – Short Australian Dollar)
-44.3.5% - Currencies (EUO – Short Euro, and YCS – Short Japan)

45.7% - 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.