Tuesday, December 11, 2007

Are You Still Playing With C's 2007 Xmas Presents?

There are few better remedy's for selective memory disease than periodically reviewing one's prior prognostications.It is a particularly useful exercise prior to passing along further ones to interested readers. Though far less structured than MacroMan's highly disciplined and near-real-time accounts, I did offer some Xmas presents just before the holidays, last year, that I hope readers enjoyed, and, inshallah, profited from. But its instructive in any event, to have a look:

1. Long CAD$ vs. Short Sterling. I was pleased to have flagged the under-appreciated Loonie, still reeling at the time of the writing from the shakeout in Nov06. The cross has returned a raw 10% YTD though one must shave off a few percent for the negative carry. The prescient, however might have been able to grab more than 15% before carrying costs if one had lightened up in early Nov. In hindsight of course, the USD v. CAD was the ticket.

2. Short US Consumer Long Japanese Consumer. The best way to express this was perhaps to go long the Topix Retail index (TPRETALA Index) and short the S&P Retail index (SPRETC Index). Early on, this was decidely unwise, drawing down a reasonably amount, as Japanese consumption waned and the US consumer continued its zombie-walk, financed by kind Asian mercantile vendors. With US housing meltdown Q3 and Q4, coupled with near-$100bbl oil, the US consumer appeared to be about to be KO'ed, causing investors to drill the SPRETC back down, leaving the spread down nearly 4% for the year. Sentiments were correct on the short side, though with Japanese housewives punting in Icelandic Kronor rather than buying fashionable clothing and handbags, Japanese retail was punished even more severely.

3. Short Copper, Long Gold. Short Copper v. Long softs was the alternative, but the copper/gold spread was deemed the lower risk trade. It paid 10% immediate, before hovering flat for most of the year, before doing what I believed it stagflationarily should with copper reflecting weak US housing and gold reflecting weak USD and continued global inflationary realities. There is more in this trade, longer-term for the patient, though one has a reasonable probability of re-establishing at better levels than those prevailing currently.

4. Long YEN vs. Short Euro. Ummmm did I really recommend this? Although one had two chances to unwind without pain (Feb & Jul), and once in Feb with a couple of points profit courtesy of the carry-unwind fat-tail, this would have cost -6% before carry, so more than -9% given no tactical action. Mea culpa. MM did the right thing: bought yen vol (straddles) AFTER a large negative move. Bully for you!!

5. Short USD Bonds. It was a tug-o-war between slackening demand due to weaker dollar and inflation fears, vs. recessionary fears and flight-to-quality (or rather away from shite). The position paid +6.4% in the first half, before, if one held the position, it proceeded to lodge itself deeper adn deeper inside one's rear lower orifice ending down more than -3.5%.

6. Short USD Quality spreads. I would like to think this would have included negative sub-prime bets like Paulson's, but I wasn't so close to these markets to have been able to structure the trade. I was simply thinking of general ABS, and lower quality junk, CMO tranches and LBO-debt as spreads were to narrow across the spectrum. I'd look to you to suggest how this might have fared over the course of 2007.

7. Long Newmont (NEM) Short Nucor (NUE). Not only was there an opp for the underlying commodity spread, but the equity was equally attractive. NEM continued to get hammered in Q1 & Q2 - mostly for idiosyncratic reasons, so the spread went as much as 25% against before zipping to a +25% YTD gain by mid Nov. Alas, with deflation fears fading as result of an ADD-like market, it now sits at +6.5%.

8. Long Cheap Oil Co's. The price returns speak for themselves: Devon (DVN)+31%, Anadarko (APC)+43%, Apache (APA)+52%, Cimarex (XEC)+9%, Encana (ECA) +42%, Suncor (SU) +30%, Conoco-Philips (COP) 15% , Chevron (CVX)+ 26% & Marathon MRO) +28%. Dividends are just bonus. They were so-called lay-ups then, and remain cheap.

9. Long Misc Asset Plays Through Equity: Global Sante-Fe (GSF)+45%, Diamond Offshore DO)+60%, Cleveland-Cliffs (CLF)+113%; Raynier (RYN)+17% & PlumCreek (PCL)+26%, & Svenska Cell 'B' (SCAB SS) +2%price + 12% ccy + 3.5% divs = 17.5% tot return, and Sherritt (S CN)+17% all-in in USDs.

10. East-European & German Real Estate (Proxies = NRE LN Equity (+2%) UBSERBA LX Equity (-16.8%), SGL LN Equity (-20%)
RCEA NA Equity (+2%). Not enthralling, though thse are Euro-denom returns so there was some respite for the dollar-based investor.

The thing about Christmas presents, is that the novelty often wears of fast. However, in the case of the above, the metal spreads, oil, & misc asset plays, despite their stellar returns (something infinitely hard for a reversion investor), remain the most interesting bets as authorities attempt to surf an increasingly probable stagflationary path through deflation and wholesale inflation. Softs continue to be attractive, as does farmland, orchards, rail transport, and, in fact anything where supply is constrained or that has a more than modest chance of indexing or passing along price increases to end users or consumers.

3 comments:

capital.chronicle@gmail.com said...

C,

Praise due: remember the 12/06 post well - glad you revisted. At the time I was closest to 7, 8 & 10. NEW vs NUE trade (diff structure in my case) looks to have more mileage in this. Ditto oil; but still would take some convincing on 10...

One Love, Season to be Jolly etc etc,

R

OldVet said...

I'd like something with growing demand and falling supply - don't tell me "brains," please, like my kid. Seems oil depends as much on RUB and GCC currencies as on demand, a poss counterforce. And any chance Gold will break pattern of trading with equities since 2003? Been dodging equities all year but "Misc Assets" could be intriguing for a change in 2008 esp if not $ denominated. Happy Holidays.

"Cassandra" said...

Thanks guys...All these predictions were small potatoes in comparison to my favorites: the lack of longevity at the World Bank for Paul Wolfowitz, and the pardoning of Scooter Libby.