The portfolio returned 4.1% for the month, bringing our year-to date return to 10.8%. The big story from April was the 7.8% equity rally. So, uh, great we managed to earn a bit more than half the market return for the month. This was disturbing, not because we missed out on a larger gain, but because it was positive at all: the portfolio was supposed to be short equity, and the performance leaves us wondering if our portfolio construction is really as clever as we think. Have we been deceiving ourselves, thinking we are short the market while actually being long? Probably. After increasing our short early in the month, we were indeed very short true equity instruments. However, when we add up the betas on gold, oil, and corporate bonds, we found the short is very small or even a net long. We plan to increase the equity short again in May, and will continue until we lose money on days when the market is up. The following chart helps us track exactly where the returns have come from so far this year. Some of our smaller trades (like nuclear and Asia) have made meaningful contributions. We take that as an indication that they are appropriately sized. The percentages add up to 10.8%.
Why were the markets up in April? One factor must be that many companies posted Q1 earnings that either met or exceeded analysts’ expectations, though those expectations represented a huge decline from a year ago and even from earlier in the quarter. Also, many companies - especially in the financial sector - put large losses in the non-recurring category, which makes headline earnings look quite a bit better. Stories from the financial sector were less panicky than they had been for much of the past year, possibly leading investors to believe the shocks are behind us.
A big theme during the month was the "stress tests" that the US government implemented to judge any potential capital requirements US financial institutions faced. For the life of us, we can’t figure out why anyone is paying any attention to this. Bank shareholders, boards, and management teams (who really had an interest in doing so) weren’t able to figure out the right level of capitalization for their institutions. The ratings agencies and regulators (who are intelligent and well-meaning) couldn’t do it. So why would anyone lend a penny of credence to a group of bureaucrats directed by politicians? Possibly because the results might foreshadow how much more political interference the US is in for, though we didn’t hear that view expressed. From what we’ve seen so far, the US is in for a lot more political intervention. Witness President Obama’s public scolding of investment firms for having the audacity to argue for their contractual (constitutional) rights.
The "P-side theory" of GDP and recessions: this is open to critique, ridicule even, but it is our simplified working model of the economic climate. The focus of much economic discussion revolves are "the consumer" and whether or not this allegorical figure will spend or save. Why is this? It’s hard to measure production directly but mathematically, GDP = consumption + gross investment + government spending + (exports − imports). Consumption is the largest, most variable quantity in the equation, so economists spend a lot of time trying to forecast consumption, which leads to focus on "the consumer". But rarely is "the producer" ever mentioned - even though it is her activity which GDP actually measures. "The producer" and "the consumer" are, of course, one and the same - but they have diametrically opposed motivations. We think that over the last several years of expansion, the producer has been working hard. She has increased productivity to the point where she does not have any obvious avenues to further gains. She has grown satiated, complacent, and a little tired. She feels she has built up the savings/borrowing capacity/social benefits to withstand some time off. GDP won’t begin to recover until the producer feels motivated to go out and produce something.
Finally, a friend noted that had we just gone long at the beginning of the month, we would have made huge gains. Actually, if we had applied leverage to that, we could have made even huger gains. Very true indeed. However, as we’re not comfortable predicting the short-term, or any-term for that matter, swings in the market, we are happy if we can make some gains out of positions which ex-ante make sense. We value probability over prognostication, statistical significance over sophistry. Our friend still owes us £100.
Why were the markets up in April? One factor must be that many companies posted Q1 earnings that either met or exceeded analysts’ expectations, though those expectations represented a huge decline from a year ago and even from earlier in the quarter. Also, many companies - especially in the financial sector - put large losses in the non-recurring category, which makes headline earnings look quite a bit better. Stories from the financial sector were less panicky than they had been for much of the past year, possibly leading investors to believe the shocks are behind us.
A big theme during the month was the "stress tests" that the US government implemented to judge any potential capital requirements US financial institutions faced. For the life of us, we can’t figure out why anyone is paying any attention to this. Bank shareholders, boards, and management teams (who really had an interest in doing so) weren’t able to figure out the right level of capitalization for their institutions. The ratings agencies and regulators (who are intelligent and well-meaning) couldn’t do it. So why would anyone lend a penny of credence to a group of bureaucrats directed by politicians? Possibly because the results might foreshadow how much more political interference the US is in for, though we didn’t hear that view expressed. From what we’ve seen so far, the US is in for a lot more political intervention. Witness President Obama’s public scolding of investment firms for having the audacity to argue for their contractual (constitutional) rights.
The "P-side theory" of GDP and recessions: this is open to critique, ridicule even, but it is our simplified working model of the economic climate. The focus of much economic discussion revolves are "the consumer" and whether or not this allegorical figure will spend or save. Why is this? It’s hard to measure production directly but mathematically, GDP = consumption + gross investment + government spending + (exports − imports). Consumption is the largest, most variable quantity in the equation, so economists spend a lot of time trying to forecast consumption, which leads to focus on "the consumer". But rarely is "the producer" ever mentioned - even though it is her activity which GDP actually measures. "The producer" and "the consumer" are, of course, one and the same - but they have diametrically opposed motivations. We think that over the last several years of expansion, the producer has been working hard. She has increased productivity to the point where she does not have any obvious avenues to further gains. She has grown satiated, complacent, and a little tired. She feels she has built up the savings/borrowing capacity/social benefits to withstand some time off. GDP won’t begin to recover until the producer feels motivated to go out and produce something.
Finally, a friend noted that had we just gone long at the beginning of the month, we would have made huge gains. Actually, if we had applied leverage to that, we could have made even huger gains. Very true indeed. However, as we’re not comfortable predicting the short-term, or any-term for that matter, swings in the market, we are happy if we can make some gains out of positions which ex-ante make sense. We value probability over prognostication, statistical significance over sophistry. Our friend still owes us £100.
No comments:
Post a Comment