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).
Wednesday, November 28
Friday, November 23
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!
- 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
- 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
- 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”
- 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
- 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.
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 21st 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).
- 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 21st 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).
Sunday, November 11
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.
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.
Monday, October 1
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.
Tuesday, September 18
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)
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)
Sunday, September 9
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.
- 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.
Wednesday, August 29
After Half-Term Ponderings
After a flat first half, there’s not a vast amount to analyze with regards to the portfolio’s performance. As such, this year’s half-term ponderings will focus on some (half-formed?) thoughts that have been germinating in my mind.
- More QE – everywhere?
While the summer has largely been very quiet, the one thing that stands out is the increased likelihood of more quantitative easing or stimulus across the globe. We’ve had the continual hints of QE3 from various Fed doves, and the market remembers Bernanke’s 2010 words at Jackson Hole that signaled QE2 while it waits for him to speak at the same venue on Friday (my guess is he’ll talk the market up, but we won’t see QE3 enacted till December’s Fed meeting). More surprising was ECB President Mario Draghi’s July promise to “do whatever it takes” and claims that this action “will be enough”. This being Europe, it goes without saying that “whatever it takes” depends on what country you’re from and the political dance matters as much as the promises; we wait to see what the reality of Draghi’s promise is and whether it’s enough. Finally, there’s China where the data continues to come in weak, which has led to hopes of another 2009-style round of investment spending and stimulus.
Frankly, the fact we’re now discussing yet another round of QE should be sign to the Fed that they’re pushing on a string and that the previous rounds have failed at stimulating any sustainable growth. However, I’m sure they feel the need to do something and the world of the counter-factual (“imagine how much worse it would be without QE1/2/Operation Twist/etc”) that they inhabit no doubt provides reason enough to try more unorthodox policy in the hope something works. It’s no surprise that I’m skeptical about there being any medium-term benefits (despite the long-term costs). However, with global QE/stimulus seemingly coming and the portfolio not particularly well positioned for it, Our Man’s added a little Gold as a 6-12month ‘trade’.
- Has the Fed succeeded, at least on one psychological level, by turning everything into a yield asset?
While there’s much debate over the whether QE1/2/Lite, Operation Twist, et al have succeeded in generating any sustainable economic growth, they have succeeded in getting investors to focus on yields. This is evident across markets, from the obvious places such performance of Investment Grade bonds (LQD: +9% YTD) and High Yield (JNK: +7.5%) to the keen focus on dividend yield stocks and on potential rental yields in the housing market. By persuading investors to reach for yield, and kindling their animal spirits the Fed’s moves can be seen, so far, as a success by helping to drive a range of asset prices higher and endowing people with the wealth effect.
The problem, of course, is that by encouraging investors to “reach for yield” the Fed is also trying to persuade them to focus on return on capital rather than return of capital, and thus take more risk. What do I mean by this? Let’s take the simple examples: much has been written about how “cheap” stocks are, either due to their earnings yield (inverse of P/E) or their dividend yield. As these yields compare very favourably to the low yield on a 10-year Treasury, the argument goes that one should own stocks. After all, a 10-year Treasury yields a mere 1.6%, why wouldn’t you want to own the S&P 500, which has a 2.1% Dividend Yield, instead. The answer of course lies in the risk you’re taking to earn those yields, or more simply – bond math matters. In bond-world, a major risk metric is duration which simply tells you the weighted average of the time that the cash-flows from an asset are received. For a 10-year Treasury bond this figure is between 7-8years, for the S&P based on the dividend yield it is 30-40years, hence in the world of bond-math you’re taking 4-5x the risk to own the S&P. Suddenly, that extra 50bps/year of extra yield doesn’t quite look as attractive…
- Earnings: But what about the margins?
Our Man has long been surprised at the resilience of corporate profit margins, which have hovered around historic highs for the l2mos and whose strong bounce-back from 2008/9 has driven Earnings-growth and been an important contributor to the rally in stocks. Interestingly, we’re now starting to see Earnings-growth falter for the first time post-2008, with YOY Earnings growth turning negative in Q2-2012.
This fall has also started to impact analyst projections for the upcoming quarters, which have steadily fallen throughout the year.
Given the falling Earnings, and with margins at historic highs, it means that the market is relying on either multiple expansion or the quick reversion of this trend to help it go higher. That should sound a note of caution to investors.
- Ideas: what’s Our Man looking at?
As is traditional a little note/insight, albeit brief this time, into some of the new things that Our Man is pondering and spending his free time looking at.
a). Europe: There are signs, like this Global Shiller/CAPE analysis by Mebane Faber, that Europe is approaching the boundary being potentially very cheap. While a number of European countries certainly look cheap comparative to other OECD nations, Our Man is keen on looking at them versus their own history before declaring them absolutely cheap and looking to invest. Given Our Man is limited to US-listed positions, any future positions will largely be ETFs or potentially some ADRs.
b). Possible Puts/Shorts: Generally, Our Man can only short using puts and predominantly has to use ETFs to get his exposure. That said, I’m looking at few things that might be interesting. The fall into two main buckets; (i) Stocks which have benefited as investors chased yield and may offer opportunity if the dividend isn’t as secure as it seems on the surface (areas of interest include REITs and some Consumer Staples/Telecoms), (ii) stocks where the drivers of growth are misunderstood or where the forward-looking expectations are particularly unrealistic (the two names, in particular, that have drawn Our Man’s interest are Lulu Lemon and Tesla, although Apple is, or rather one-day could be, potentially particularly fascinating)
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