January 2014 Review

Portfolio Update 
- Technical Book:  As discussed in the recent portfolio update, the technical book.  All 3 of the indices (S&P 500, Dow and Nasdaq) have had long-held buy signals (since late-2011) and though they’re all close to final legs for this bull-run, it was decided that positions would be taken.   Since Mr. Market appreciates irony, initial sell-signals came later in the month for both the S&P 500 and the Dow.  While this would normally have resulted in Our Man cutting back the positions to their cost basis, it was unnecessary in this instance as the positions were at their cost basis.

- NCAV: The position in Radioshack was exited, as it had been in the portfolio for a year since it last met the criteria for the NCAV book.

Performance Review 
January was a positive month for the portfolio, which posted a marginal (+22bps) gain despite markets falling and a large move away from risk.

Given the sharp fall in the markets, it wasn’t surprising that the largest positive contributor was the Puts/Hedges book (+91bps) which benefited from the exceptionally week equity performance in Japan and especially Brazil.  The Absolute Return Funds (+30bps) book also benefited from the flight to safety, with both Treasuries and Gold helping the performance.

The Equity-biased books were largely negative contributors during the month, with the International/Country book (-38bps) suffering from its exposure to both Greece and Spain.  With all 3 major US indices (S&P, Dow and Nasdaq) losing money for the month, the Technical (-74bps) book began life as a negative contributor.  Things on the stock-specific side were somewhat better; the Equities book contributed (+30bps) despite a falling market, after DRWI showed incremental signs of the much hoped for growth in its wireless deployment and THRX saw some management present and some marginally positive news.   The NCAV (-5bps) and Energy Efficiency (+1bps) books are pretty small, and thus had marginal impact.

Despite the fall in the markets, the US Dollar failed to make much headway.  The Currencies book (-17bps) was hurt as the detraction from the Yen’s strength outweighed the contribution from the Dollar’s strength against the Euro.  The China Thesis book (+3bps) was marginally positive as though the weak news from China saw the A-Shares struggle, it also saw the Australian dollar weaken.


Portfolio (as at 1/31 - all delta and leverage adjusted, as appropriate) 
18.4% - Technical (DDM, SSO and QLD)
17.3% - International/Country (GREK, EWP and EWI)
13.6% - Bond/Absolute Return Funds (DLTNX and HSTRX)
7.9% - Equities (THRX, and DRWI)
0.6% - NCAV Equities
0.2% - Energy Efficiency (AXPW, and XIDE)   

-8.5% - Hedges/Put Options (premium of 141bps in EWZ Jan-15 puts, and 30bps in EWJ Jan-15 puts)  
-13.8% - 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)

13.1% - 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.

2014 Portfolio Update: Some small changes

With 2013 representing the second consecutive flat year for Our Man, it made sense to spend the holiday period thinking about whether any changes should be made to the portfolio and the best way to go about these.  The result was two-fold; the first is purely cosmetic with the renaming of some books such that they better reflect the types of investments within them.  The second is a little more structural; as I’m sure you’ve noticed Our Man tends to be somewhat underinvested and the reality is, this is merely a reflection of personality.  Simply put, OM is a cynical and curmudgeonly fellow, and a result of this is that he’s skeptical of the world and thus typically underinvested.

How to combat this perpetual underinvestment is something Our Man has been pondering for a while.  Ironically, the answer partially stems from an existing book; the NCAV book takes a fairly simple (and mainly) quantitative approach to valuation (see here for some initial description). As a result, the book should have a large exposure when markets look “cheap” (i.e. lots of stocks pass through the NCAV book’s screens) and very small exposure when markets look “expensive” (like now!).  This gave Our Man the idea to incorporate a l-only Technical book, which will be driven by when the technicals and market psychology, typically having positions when these factors suggest that we are in long-term (expected multi-month to multi-year) bull market run and otherwise having no exposure.

The Technical Book
Our Man has been a follower of Objective Elliott Wave (OEW) theory for the last 6-7yrs, and has been learning to become a practitioner of OEW over the last year or so.  The problem with most technical analysis is that it’s often used to justify the analyst’s subjective views, but hopefully Our Man’s experience will be different as OEW takes an objective approach to the Elliott Wave principle which “posits that collective investor psychology, or crowd psychology, moves between optimism and pessimism in natural sequences.”

Our Man’s idea is to use this OEW on the Long-side, to help capture the longer-term trends in the market, and primarily those within bull markets.  As such, this ‘book’ would have been L for most of the last 5 years.  Hopefully, Our Man will also benefit from his observation that bottoms in markets tend to be points, whereas tops tend to be longer processes.  The broad rules for entering and exiting positions will be as follows:
- OM will track the Dow, S&P 500 and Nasdaq using OEW, and will use the double-levered ETFs to invest in those (to get some capital efficiency and compounding benefits, which will be very beneficial…assuming the technical book works!)
- Entry: OM will allocate approx 3.33% to each ETF when the technical model says it’s a long-term buy (i.e. 10% at cost, max)
- Exit: OM will cut the position back to the original 3.33% size (if it is already below this size, then there will be no change but OM will note in his monthly update) when an initial technical sell signal is hit for the relevant ETF, and will exit it completely if the signal is confirmed (typically, this occurs after the market has already declined to some degree).  In instances where the signal is not confirmed (i.e. the market reverses and continues higher) then the book will run with the existing position (c3.33%) until a new initial exit signal (where OM will again reduce the existing position and exit the balance on confirmation).

The Existing Books: Update

With regards to the other “books”, it makes sense to take this moment to clean the existing ones up a little.  If we step back, the idea behind the various "books" is to help compartmentalize the various types of investments that Our Man makes.  Having been writing this investing diary/blog for a couple of years, it's become clear that in some cases the book names don’t really encapsulate the trades within them.

For most of the existing books there’s absolutely no change as the names effectively express the types of investment that are made in those books.  Thus expect the Currencies, Absolute Return/Bond Funds, NCAV, Puts/Hedges, or any of the theme specific books (Energy Efficiency, China Thesis, etc) to carry on.

Elsewhere, three of the existing books are having their names changed slightly to better reflect the types of investments within them.
- The Value Equities book is becoming the Equities book; while the book will continue to house long-term (i.e. multi-year) positions in individual stocks (including both US-based and international companies with a US-listing or ADR), the more generic name reflects that not all of these will be driven by old-school value. 
- The Other Equities book is becoming the International/Country book, which reflects that it is where all of the macro/CAPE/etc bets on Countries (and perhaps Regions), expressed through ETFs, are and will be housed.
- The Precious Metals book is becoming the Commodities book, just so it’s all encompassing should Our Man ever own any other commodities.

Things from my Newsblur: Jan-14 Edition

It’s traditional that as the calendar turns over to start a new year, folks make some resolutions.  Well, Our Man’s are to keep you a little better informed about what he’s doing and thinking in 2014 than he did in 2013.  Like all New Year’s resolutions, it’s likely that this will probably be long given up on by the time the second quarter rolls around, but in the interim…what better way to start us off than some of the things that Our Man rather enjoyed reading over the holiday period. 

- An Oral History of Trading Places

Our Man was lucky enough to get to watch Trading Places on a cross-country flight over Christmas – I say lucky, because it’s both the best Christmas movie and the best Finance movie ever made.  Here’s some timely history behind how it was made, and the way it helped launch (or relaunch) the careers of a lot of those involved.  (Rob Wile, Business Insider)

- T-Rex Calories

If a T-Rex was released in NYC, how many humans per day would it need to consume to get its needed calorie intake.  Don’t worry folks, the answer may surprise you…you don’t need to be able to run that fast!   (What if?)

- The Beatles Succeeded Through Talent, Ambition and a Lot of Arrogance

Our Man’s mentioned his skepticism for the whole 10,000hours argument (popularized by Malcolm Gladwell, amongst others); here’s a take on some other reasons why the Beatles became successful.

(Andrew Romano, Daily Beast)

- “I do not trust Politicians”

The calendar might only have just turned to 2014, but folks are already jockeying for position for the Presidential primaries of 2016.  Brian Schweitzer, the former Governor of Montana, is the media’s current favourite to challenge Hillary Clinton in the Democratic primary.  He’s also Our Man’s favourite candidate in either party.  (David Weigel, Slate)

- The Snowden Leaks and the Public

The Guardian has had a good run on the investigative journalism front, leading the charge with the Murdoch phone-hacking, the Wikileaks documents and now the Edward Snowden/NSA stories.  Alan Rushbridger, the editor of the Guardian, talks about the Snowden case, the impacts and the future.

(Alan Rushbridger, The New York Review of Books)

- The World Economy’s Shifting Challenges

You don’t have to agree with George Soros’ politics to recognize that he’s made his (vast) fortune but understanding the global economy and its impact on markets than just about anyone in recent history.  As such, when he’s offering his views on the world’s economies it’s certainly worth listening (or reading) to them even if you don’t agree with them.  Spoiler Alert: If you’re interested in, or worried about, China then it’s definitely worth you reading!  (George Soros, Project Syndicate)

- The Rise and Fall of Blackberry

Oral histories seem to be the rage at the moment and Blackberry was the thing, some 7-10years or so ago.  Thus why not combine them, and see a little about how Blackberry became the thing and then squanders it all away, to become nothing…all while seeming not to recognize and then mocking the things that replaced it.  (Felix Gillette, Diane Brady and Caroline Winter, Bloomberg Business Week)

December 2013 Review

Portfolio Update 

- Puts/Hedges:  Our Man increase his position Short Brazil, through a further purchase of out of the money Jan-15 put options on iShares Brazil Index (EWZ).  The position reflects a multitude of factors including Our Man’s negative view on China (Brazil being a large supplier of raw materials to China), the weak technical picture, the positive view on the US Dollar (the implicit short of the Brazilian real in the trade) and the potential issues surrounding and arising from (the continued) credit growth in Brazil.

Performance Review 

For the month, the portfolio was down 50bps which also left the portfolio broadly flat (+0.83%) for all of 2013.  This year saw the second broadly flat year, in a generous equity tape, and together with some new things that Our Man has been working on is likely to see some (small rather than radical) changes to the portfolio going forwards; more on that later.

The portfolio suffered from as the Absolute Return/Bond Funds (-13bps), Value Equities (-34bps) and Puts/Hedges (-47bps) moved against it.  The key drivers of these losses were the continued rise in longer-term rates & weak precious metals prices (for the Absolute Return/Bond Funds) and the rise in the equity markets (for the Puts/Hedges).  These losses were partially offset by the US Dollar showing some reasonable strength during the month, especially against the Japanese Yen and the Australian Dollar, which helped the Currencies (+12bps) and China Thesis (+18bps) books.  While this strength was not seen versus the Euro, the strong performance of European equity markets helped the Other Equities book (+17bps).  The NCAV (-1bps) and Energy Efficiency (-1bps) books are very small at this point and had limited impact on the portfolio.

Portfolio (as at 12/31 - all delta and leverage adjusted, as appropriate)  

17.7% - Other Equities (GREK, EWP and EWI) 
13.3% - Bond/Absolute Return Funds (DLTNX and HSTRX) 
7.6% - Value Idea Equities (THRX, and DRWI)
1.0% - NCAV Equities
0.2% - Energy Efficiency (AXPW, and XIDE)

-3.5% - Hedges/Put Options (premium of 68bps in EWZ Jan-15 puts, 11bps in EWJ Jan-15 puts, and less than 1bps in XLP Jan-14 puts, in XLB Jan-14 puts and in EWG Jan-14 puts respectively)

-13.1% - China-Related Thesis (CROC – Short Australian Dollar, partially offset by CAF – Long Chinese A-Shares) 

-50.0% - Currencies (EUO – Short Euro, YCS – Short Japanese Yen)

22.8% - 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.

November 2013 Review

Portfolio Update 

- Puts/Hedges:  Our Man opened a position Short Brazil, through purchasing out of the money Jan-15 put options on iShares Brazil Index (EWZ).  The position reflects a multitude of factors including Our Man’s negative view on China (Brazil being a large supplier of raw materials to China), the weak technical picture, the positive view on the US Dollar (the implicit short of the Brazilian real in the trade) and the potential issues surrounding and arising from (the continued) credit growth in Brazil.

Performance Review 

November proved a decent month for the portfolio, which gained 1.1% putting the performance at +1.3% YTD.

The performance was driven by the portfolio’s Asian exposure, through the Currencies (+37bps) and China Thesis (+84bps) books.  In the Currencies book, the short position in the Japanese Yen drove performance more than offsetting the Euro’s strength against the dollar.  In the China-Thesis book, the fund benefited from its short position in the Australian dollar but especially its exposure to Chinese A-Shares.

Elsewhere, the portfolio suffered small but persistent losses with the Absolute/Bond Funds (-8bps), Other Equities (-2bps), NCAV (-2bps), Puts/Hedges (-9bps) and Energy Efficiency (-8bps) all costing small amounts of money.

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

17.6% - Other Equities (GREK, EWP and EWI)
13.4% - Bond/Absolute Return Funds (DLTNX and HSTRX) 
7.9% - Value Idea Equities (THRX, and DRWI) 
1.0% - NCAV Equities 
0.2% - Energy Efficiency (AXPW, and XIDE) 

-2.4% - Hedges/Put Options (premium of 44bps in EWZ Jan-15 puts, 24bps in EWJ Jan-15 puts, and less than 1bps in XLP Jan-14 puts, in XLB Jan-14 puts and in EWG Jan-14 puts respectively) 

-12.4% - China-Related Thesis (CROC – Short Australian Dollar, partially offset by CAF – Long Chinese A-Shares) 

-38.7% - Currencies (EUO – Short Euro, YCS – Short Japanese Yen)

28.5% - 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.

October 2013 Review

Portfolio Update 

- Puts/Hedges:  The sole addition to the portfolio was acquiring some well out-of-the-money Jan-15 puts on EWJ, the iShares Japan ETF.  While QE is now a global phenomenon, it’s pretty widely accepted that Japan is in the worst spot and the new(ish) Abe government and the BoJ are the most aggressive in terms of its QE usage.   Japanese Equity and currency markets have reflected this, with the equity markets soaring (Nikkei: +70%+ over the last 12mos) and the Yen falling heavily against all major currencies.  Owning puts on the EWJ essentially gives Our Man exposure to falling Japanese equity markets and a falling yen (as the ETF doesn’t hedge the currency, which is why it’s up *only* 35%+ over the last 12mos).  In essence, a type of bet on the ineffectiveness of QE!

Performance Review   

October was a positive month for the portfolio (+0.54%), which flipped the YTD performance from a slight negative to slight positive at 0.3%.

The main positive driver of the book was the long exposure to the European peripherary in the Other Equities book (+214bps).  While there remains significant economic weakness in Greece (GREK) and Spain (EWP), the equity markets in these countries continue to perform exceptionally strongly, with much of the bad news already priced into stocks, and Our Man may move to trim these two positions back slightly.  However, the gains here were largely offset by the Value Equities book (-107bps) – most of the losses came from the position Theravance (THRX), which continues to be volatile (both positively and negatively) and has been a healthy contributor this year (stock is up 50%+).

The Currencies book (-14bps) and China Thesis (-22bps) largely suffered from a weaker US Dollar, as the Fed decided not to taper though the dollar rebounded some towards month-end.  The decision not to taper also bolstered equity markets, which negatively impacted the Puts/Hedge book (-28bps).  The Absolute Funds (+14bps), NCAV (-3bps) and Energy Efficiency (+0bps) had no great impact on the portfolio.

Portfolio (as at 10/31 - all delta and leverage adjusted, as appropriate)   

17.8% - Other Equities (GREK, EWP and EWI) 

13.6% - Bond/Absolute Return Funds (DLTNX and HSTRX) 

7.8% - Value Idea Equities (THRX, and DRWI) 

1.0% - NCAV Equities 

0.3% - Energy Efficiency (AXPW, and XIDE) 

-1.9% - Hedges/Put Options (premium of 26bps in EWJ Jan-15puts, and less than 1bps in XLP Jan-14 puts, in XLB Jan-14 puts and in EWG Jan-14 puts respectively) 

-12.1% - China-Related Thesis (CROC – Short Australian Dollar, partially offset by CAF – Long Chinese A-Shares) 

-38.5% - Currencies (EUO – Short Euro, YCS – Short Japanese Yen) 

29.4% - 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.

Things from my Newsblur (was Google Reader, with a stop at Old Reader): Oct-12 Edition

Welcome to part 2 of this “Things from my…”, though you’ll notice that I cunningly waited till the calendar rolled over to October so that I didn’t have to mess around with the title! 

- The Erstwhile Hedge Fund King of Akron…
Seriously, how do people like this end up running someone’s money, what possesses people to entrust them with their hard-earned money, etc. (Roddy Boyd, Southern Investigative Reporting Foundation)

 - How Brazil’s Richest Man lost $34.5bn 
The fascinating tale (so far, at least) of the rise and fall of Eike Batista who built the OGX group of companies and whose personal wealth at $34.5bn made him one of the top 10 richest people in the world at the start of 2012…and who, as 2013 comes towards its close, is potentially on the verge of losing it all. (Juan Pablo Spinetto, Peter Millard, and Ken Wells, Businessweek)

 - Mayor Bloomberg’s Geek Squad 
With Mayor Bloomberg departing his role this year, this article helps shine a little light on one of his big successes – the Office of Policy and Strategic Planning.  It’s where Bloomberg most obviously used his business background with its focus on collecting/analyzing/using data, to…err well get the City to collect, analyze and use data to be more efficient!  (Alan Feur, New York Times)

 - 5 Statistical Problems That Will Change the Way You See the World 
Humans are instinctively bad at understanding statistics and probability; take a look at these (relatively simple) problems and see how bad…and how data can be misleading, especially if viewed on a surface level.  (Walter Hickey, The Atlantic)

The What If? Section  

This blog/site is so special it gets its own section – after all, haven’t you always wanted answers to the questions you’ve long pondered but never been smart enough to figure out?  Well, Randall Monroe, a friendly former NASA physicist takes the time to use physics to answer one of these questions each Tuesday.  Here are 5 (just 5, I know) of my favourites – though please note, it’s entirely possible that (i) a lot of small children submit questions, or (ii) Our Man thinks like a small child! 

- Yoda: How much force power can Yoda output?   

Sure, he’s small and green and uses the force…but how strong is the force – like, could he get it to power a car or a house or a city or a planet or what? 

- Machine Gun jetpack: is it possible to build a jetpack using downward firing machine guns? 

It’s fine if you’re in NZ where the Civil Aviation Authority has given out a permit for a jetpack but what about the rest of us…we need a plan B! 

- Leap Seconds: Every now and then we have to insert a leap second because the Earth’s rotation is slowing down. Could we speed up Earth’s rotation, so that we do not need Leap Seconds?

 As a bonus, you’ll also discover why your smartphone and desk phone have different times! 

-  Droppings: If you went outside and lay down on your back with your mouth open, how long would you have to wait until a bird pooped in it? 

I mean, who hasn’t wondered that! 

- Sunset on the British Empire: When did the sun finally set on the British Empire? 

SPOILER Alert - it still hasn’t, so deal with it people!