Tag Archives: hedging

UP 26.6% Year-To-Date 2011

13 Jun

I made a clear decision to get out of the market on the 5 April 2011 and the market is down almost 5% since:

http://thecognitivedissonance.com/2011/04/05/up-33-5-ytd-sold-out-everything-except-slv-agq-su/

This is my current position: oil and silver. The only other position that I added was to short Monster Worldwide (currently up 21%) which I detailed here:

http://thecognitivedissonance.com/2011/04/17/established-a-small-short-position-in-monster-worldwide-mww/

Overall my market position is very defensive. The below holdings in silver and oil are long term holdings which I would be comfortable owning for at least the next 18 – 24 months at least.  I believe the market will continue to weaken and remain subdued until the debt ceiling issue is resolved. To the extent that this is resolved, this will give market participants a false confidence to re-enter the market with vigour. Of course the US debt position remains precarious regardless of whether the debt ceiling is raised or not. Eventually the debt ceiling will be raised and that will be the greenlight to position yourself back into the market.

However, volatility is still likely to continue even after the debt ceiling raise passes. Remember back to when the Euro crisis was in full swing, concern permeated the Street. The ECB announced a $1.0 trillion Euro-wide bailout package to calm the market and investors. Initially it was received positively, but that reaction slowly reversed to one of concern and economic fragility.

Similarly, US debt ceiling dynamics are likely to be similar so getting into the markets immediately after the debt ceiling upsize would be unwise. It would be better placed to wait a couple of weeks at least to allow the market to stabilise and then to establish positions which have a highly disproportionate possibility of upside relative to the risk profile.

Current portfolio holdings:


I have detailed exactly my investment thesis and the justifications for my stock selections across the website. Here is a summary:

Summary of winners: (This has essentially been the core holdings of my portfolio >80%)

BIDU – UP 40% – Growing Chinese consumer base, and at a purchase point valuing the business at $34 billion the bottom line was that this was low relative to existing revenues and growth metrics. BIDU is the premier web franchise in China, it has high barriers of entry, a wide moat, and the company is able to leverage existing ideas into services that generate strong and consistent earnings. BIDU has a high growth trajectory and seemingly has central government support and assistance.

CLNE – UP 34% – T Boone Pickens is the largest shareholder and the US is the Saudi Arabia of natural gas. I have personally used natural gas-powered vehicles so it has passed the tried and tested element. CLNE was attractive on a value metric basis combined with growth and product uptake by AT&T, UPS and Wal-Mart. Reasonable correlations to high oil prices also made it attractive.

AGQ – UP 33% – Silver as an inflation hedge, an inverse of confidence in central bank policy and a high correlation to the performance of gold (gold being a store of value in a highly inflationary environment). Precious metals have been seen as a store of value for more than 3000 years, that perception will not change in our lifetime.

NDN – UP 31% – Another value play, food discounters intrinsically linked to the state of the economy both in prosperity and difficulty. High inclusion of premier brands and even organic. High growth, good management and growing within a bullish sector.

2498UP 27% – HTC is the Taiwan-based manufacturer of Android driven smartphones. The thesis was based on the global secular growth of information and its dissemination. Valuations were also attractive and growth metrics were phenomenal. Product margins were healthy and HTC innovations were technically superior to most competitors. Their choice to fully embrace the Google Android platform enhanced their focus on devices unlike other competitors who were muddled in competing and offsetting strategies. I recall observing two ladies on a train journey in their late 40s, early 50s in deep conversation about their HTC Android devices and apps. That one conversation crystallised my thoughts and highlighted the broad reach that new mobile technologies had now penetrated. This basically reinforced my thesis.

DO – UP 25% – Headwinds over the Gulf of Mexico were overdone and misplaced, clear misprice and one of the biggest market laggards in 2010. Purchased in January 2011 at a heavy discount to core value and future growth prospects. Highly correlated to the price of oil which I had a bullish stance on. Goldman Sachs gave DO a double upgrade, a rare occurrence. Not that GS ratings matter, but it was just a validation of the increasing acknowledgement of the misprice crossing Wall Street.

SLV – UP 25% – Silver as an inflation hedge, an inverse of confidence in central bank policy and a high correlation to the performance of gold (gold being a store of value in a highly inflationary environment). Precious metals have been seen as a store of value for more than 3000 years, that perception will not change in our lifetime.

PLCE – UP 23% – Strong value play,  a very strong balance sheet with little debt and strong recurring revenues.  PLCE is a premier franchise in children’s apparel/clothing; children’s clothing is price elastic and better able to weather price increases; parents seeing their child in adorable clothing are less likely to be as price sensitive relative to other apparel markets. PLCE therefore can better able manage margin compression with rising cotton and input prices. Children’s clothing is less sensitive to market trends.   At that valuation takeover/private equity etc. would also seem to be a viable possibility with an appropriate premium.

BRCD – UP 14% – Strong recurring revenue flows, value + growth within a secular bull market, good cost control and management.

GENZ – UP 9% – Merger-arbitrage position with an expectation of a takeover. The risk-reward skew was disproportionately high, essentially there was a high probability of a successful takeover. Overall there was a high degree of consolidation within the biopharmaceutical sector aiding the possibility of a takeover.

SHORT MWW – UP 21% – Horrible fundamentals, legacy financial reporting issues and option settlement charges. Strong competition from Indeed.com and SimplyHired.com. Poor search functionality and weak integration into the social cloud. Heavy and continuous discounting lowering margins and more advertising dollars chasing a diminishing market share. Misunderstood correlation on the Street that an improved job outlook translated into a better performance by MWW. This link was arbitrary and the transmission mechanism was weak. 

Summary of losers:

CCJ – DOWN 19% – Was up fairly significantly, events in Japan hammered nuclear power stocks indiscriminately. I still believe the long-term profile of nuclear remains positive and that it still needs to represent part of the total energy mix. Exited the investment as part of a broader concern with the market.

Advertisements

UP 38% 2011 – Out of the market since 5 April – only AGQ, SLV, SU being held

16 Apr

I have been out of the market since 5 April 2011. I believe eventually year-on-year the market will be positive and that opportunities should be capitalised on where value can be exercised. However, with significant gains YTD already and retaining core positions in AGQ, SLV and SU this still gives some exposure to the market. My concerns are that this earnings season is going to be received poorly. We can now see commodity expenses feeding into operating costs which is impacting earnings. The traditional feed downstream into higher price points has not yet taken effect entirely. Companies have had to absorb the majority of input price hikes. As discussed previously I believe there will be a lot of volatility around the time when the national debt ceiling requires increasing and that will impact the stock averages. Eventually it will be passed and that expected downside that is likely to occur prior to agreement should allow a better entry point with more visibility into year-end. Regarding the end of stimulus at the end of June 2011 this is more an issue of semantics rather than material information. The Fed is on a continuous quantitative easing program as it monetises Treasuries but the pace at which this occurs will fall. Without QE2 the incline upwards on the stock market curve will be less pronounced compared to when QE2 was launched.  Right now, as discussed,  protection should be sought either through an offsetting short position or option hedging to protect from the downside.

A brief note on Gold

I don’t believe there are any weak hands in gold as prices near new nominal highs. My exposure to silver is because of the higher price appreciation propensity the metal traditionally experiences when gold receives positive momentum. The approx 40% industrial component of silver also adds to this complex, however, the downside risk exposure with silver is also greater. Gold is essentially another currency, its price is a reflection of confidence in central banks and is an inverse of total fiat money output. My preference would be to hold precious metals physically rather than an ETF exchange although access to physical holdings is somewhat constrained.

Derivatives as a mechanism to hedge

9 Apr


Stephenson (1967) conducted a monkey experiment aptly narrated by another blogger Safetynut:

Four monkeys were put into an observation room with one banana on the floor. The monkeys were wired so that the researchers could give each monkey a mild shock. When the first monkey approached the banana and tried to pick it up, he received a mild shock.

When the second monkey approached the banana, the first monkey became very agitated and attempted to stop the second monkey from touching the banana. Any monkey who touched the banana received a mild shock. Suffice it to say that the monkeys learned very quickly that touching the banana was an unpleasant experience.

Now for the most interesting part of the story. One of the four original monkeys was then replaced with a new monkey. As this new monkey approached the banana, the other three became extremely agitated, and succeeded in stopping the new monkey from touching the banana. A short while later, one of the remaining three original monkeys was replaced with a new monkey.

As this new monkey approached the banana, the other three monkeys, including the one who had just replaced the first monkey, became extremely agitated and stopped the new monkey from touching the banana. This replacement process continued until all of the original four monkeys had been replaced with new monkeys.

None of these new monkeys would touch the banana, and whenever a new monkey came into the observation room, he was quickly taught not to touch the banana. In effect, none of the remaining monkeys understood what would happen if they touched the banana — they just knew that they should never touch it. These monkeys were immersed in this culture and were completely unaware of the reasons for their behaviour.

This is a great real-life example of repeated behaviours that are learned / acquired without understanding cause and effect. This is very similar to the ways in which governments operate. They lack effective controls and insight; the vast majority of interest rate derivatives, credit default swaps, fixed income and equity options are not to hedge farmers output or to hedge fuel costs for airlines; they are purely an instrument for speculators. Enforcing margins of 30 or 70 basis points on deal structures is insufficient; sales are wrongly incentivised to push deal quantity including 30 year durations. Current PV’s are extrapolated into the stratosphere to determine future PV’s; it’s mostly imagination.

For those working within the investment banking community you will be well aware that the majority of the deal volume in derivative and esoteric financial products are heavily weighted towards the hedge fund community. Hedging fuel costs or agricultural produce is not the main function of derivatives; derivatives like Warren Buffet has stated are: “financial weapons of mass destruction” that could harm the whole financial and wider system.

UP 33.5% YTD Sold out everything except SLV, AGQ, SU

5 Apr

I’ve been concerned about the debt ceiling since 2000.  Additional pressure now has heightened these concerns.  I am wary that there will be a lot of volatility over the coming months and with a significant positive performance it would be reckless not to rebalance the portfolio.  I would always advocate portfolio hedging and purchasing protection. I have posted a number of relevant articles at Seeking Alpha here http://seekingalpha.com/user/894781/instablog which I will also post here on the blog shortly. Because the market in these positions are very liquid this is a sensible strategy.

21 Mar 2011 – UP 20.5% YTD

21 Mar

Adding the cash generated from exit positions including merg-arb in Genzyme and exit from BRCD. NDN position also exited after takeover proposal.

Larry Summers – Japan quake may lead to temp. GDP increments

13 Mar

http://www.cnbc.com/id/15840232?play=1&video=1837577735

Firstly, this is a tragedy and our thoughts are with the people who have suffered in this quake. This is the problem when we have a distorted view of what economic growth is. Indiscriminate spending does not contribute to economic growth. Summers basically believes in the ‘broken window’ philosophy and quite clearly one has to recognise that the spending that will ensue to rebuild Japan will not contribute to the productive capacity of the nation; rebuilding Japan will require increased borrrowing from Japanese citizens to rebuild buildings and infrastruture that were already functioning and efficient. So this will not contribute to GDP growth but it will add to their structural deficit and heighten their bond market awakening.

The current portfolio $100M total 12 MAR 11 YTD: 19.55%

12 Mar

%d bloggers like this: