This quarter, I continued my foray into futures contracts, enhanced my risk management/asset allocation/investment philosophy, and created a customized benchmark to measure performance.
Recap & Outlook
1> The Euro seems to be incredibly more laughable in its current form. Individual countries have no fiscal mechanisms that prohibit excessive spending at the expense of fellow eurozone countries, like Germany. How can a small country such as Cyprus, which has a population similar to Rhode Island, be in need and expect to receive 10B Euros from neighboring countries who are likewise hurting? I believe we are at least several quarters to years away from seeing a fiscal eurozone resolution.
2> US equities appear to be overvalued. Recent slowing sales growth, lowered guidance, and an earnings miss from McDonald’s MCD, Proctor & Gamble PG, and Nike NKE, respectively, may be foretelling of future earnings disappointments. The 10yr probably bounces around near its current value for 3Q12; all bets are off as to what happens to treasuries with the fiscal cliff/election/debt ceiling/economic slowdown/European mess at the end of the year.
3> The Fed is unable to resolve decade’s worth of poor fiscal policy, and I’m still not a fan of bank stocks.
In 2Q12, I closed long positions in BHI & HAL and opened long positions in NEM, GORO, GOLD, FNV, BRK.B. I also increased my EXC position. With derivatives, I initiated a synthetic long on GDX as well as a long EWP put. Shorting S&P futures and the Euro futures during May contributed positive performance.
A risk exposure perspective incorporates five asset classes: absolute return, cash, equity, fixed income, and real assets. Each asset class’s holdings are further classified into expected holding period: core (black), intermediate (orange), and short-term (green).
*pair trades are valued on a net basis; call spreads valued at max gain (loss); short futures valued at 15% of quoted contract value; in-the-money short puts valued at max loss; out-of-the-money long calls, long puts, and short puts valued at premium; synthetic longs valued at 100% exposure
Optimally, I aim at an allocation of 20% Absolute Return, 15% Cash, 30% Equity, 15% Fixed Income, and 20% Real Assets. Using this asset class construction, I created a customized benchmark using investible securities CSMA & VOE; SHV; SPY; AGG; and IEO, IYR, & WOOD. This is a more accurate benchmark than the S&P 500, which is what was previously used.
*Overall Performance uses money weighted IRR gross of taxes, net of transaction costs; the graph shows the hypothetical performance of a $10,000 portfolio from 1/1/10 through 2Q12 using these actual performance metrics: