Harry Newton's In Search of The Perfect Investment
Technology Investor. Auction Rate Securities. Auction Rate Preferreds.
8:30 AM EST, Wednesday, August 13, 2008:
things have changed -- Part 1:
How things have changed -- Part 2:
Leveraged Macro Momentum Fund LP
321 Overprice Street
Greenwich, CT 00573
is to inform you that the wheels have come off of the proverbial wagon at
ACME Systematic Leveraged Macro Momentum Fund LP, and that the same awesome
thematic portfolio that made you feel (in the first half-year) as if you'd
become very rich in comparison to those sucking wind on their leveraged MBS
portfolios or Japanese Small-Cap Value Funds, has, quite literally, spontaneously
combusted in our faces.
(PBR, SU, SWN), long coal (MEE, BTU), long fertilizer (POT, MOS), and long
iron ore (CLF, RIO) positions have been crushed (no pun intended), and though
we remain hopeful going forward as the story remains "in tact",
our models have forced us to sell some in response to prevailing price action.
Our offsetting shorts in selected financials (MS, BLK, GS, and LM) have not
fared as we expected, while our core retail and consumer discretionary shorts
in AZO & URBN, DECK have quite literally been lodged deeply and inexplicably
in an unmentionable orifice.
If that were
all we'd not be too sullen, all things considered, but unfortunately our short
US dollar positions (vs. everything), our JPYNZD & CHFAUD carry trades
have also not performed to forecasted expectations, and both our our long-only,
and zero-exposure long vs. short commodity baskets have imploded with a rapidity
that would even frighten Taleb to vows of silence. Oh, and if that weren't
enough, our gold and silver longs, too, have gone south as if trying to re-embed
themselves in the ground, whilst the short Russell-2000 ETFs we've been using
as a hedge have been behaving all-too priapically. These losses of course
are not as bad - relatively speaking - as some of our peers (who regretfully
are no longer in business) and should of course be viewed in the proper context
of our delft avoidance of long exposure in the worst of the RMBS and CMBS
sectors, our eschewing of becoming a CDO issuer/manager, and our resolve to
avoid anything denominated in Icelandic Kronor. Unfortunately we still have
a large (leveraged) position in high-yielding cov-lite loans, US sub-prime
credit-card-backed receivables for which we remain unable to obtain sensible
bids at levels near to where our auditors and administrators agreed that we
should pay our prior year's incentive fees. Only our long Japanese REIT portfolio
and our unlisted fund of Spanish Olive Groves have held their ground, though
regretfully we refrained from hedging the currency risk, and so these too,
are now in the red and eroding rapidly.
We have no
explanation, since our trades are systematically based upon doing what others
are doing (only, hopefully, faster... though, in this instance, not fast enough).
Nor do we offer you apologies. You [presumably] knew the risks, and felt the
glory (if only for a while). We do lament the the now-sky-high high-water
mark, and the absence of performance fees (this year).
the best for last, we will be suspending redemptions as per the Force Majeureclause
6(c)-2 of the Private Placement Information Memorandum of the Fund. We trust
you'll agree that only something supernatural could have torpedoed such a
finely constructed portfolio put together by the best and the brightest Wall
Street has to offer.
Hugh G. Fallis
- Managing Partner
ACME Systematic Leveraged Macro Momentum Fund LP
things have changed -- Part 3: The Wall Street Journal did a piece
how we are cutting, and can still cut, our oil consumption (and hence reduce
the price of oil). The piece was called U.S.
Retools Economy, Curbing Thirst for Oil. An excerpt:
shocks of 1973 and 1979 motivated Japan, in particular, to become more energy-efficient.
In 1980, when U.S. consumers were griping about $1.25-a-gallon gas -- $3.30
in today's prices -- their counterparts in Japan were paying roughly twice
as much. They started using a lot less. In 1983, Japan consumed about 25%
less oil per person than it had in 1973. Last year, Japan used 14 barrels
per person, and the countries in the euro zone consumed 17. The U.S. used
25 barrels per person.
Yesterday my oil
guru and friend, Jim Kingsdale, who writes the excellent web site, Energy
Investment Strategies and has made a fortune investing in energy and
is my friend, posted a piece called A
Further Retreat from Oil Investments:
that oils 20+% retracement from its high is not unprecedented; such
a pullback often occurs in a bull market. I also know that currently available
values in oil and gas stocks seem excellent and that pullbacks in bull markets
are the right time to accumulate bargains.
instead of buying Ive been increasingly liquidating oil and oil service
stocks. Ive sold my options on oil futures. Ive increased the
EIS portfolios cash position for one reason. This pullback may be over
quickly but if it isnt we could be entering a very unusual period of
global contraction that would imply significant additional downside risk,
particularly for oil related stocks. That could occur due to the emergence
of a combination of some of the following possible new trends:
- a major contraction
in Chinas growth rate
- a period
of maximum new oil and gas production over the next two or three years
- oil exporting
countries experiencing a vicious cycle of lower oil prices causing less funding
available to finance their growth; slower growth resulting in more oil available
for export; contributing to lower oil prices, etc.
conflicted about what the likely direction will be for post-Olympic Chinese
oil use. Here
is a good discussion of the arguments for greater and lesser oil use.
factor, however, is that lesser oil use is likely the favored direction of
the Chinese government for several reasons. First, the Chinese economy can
grow more easily in a low-price oil world, which would be fostered by lower
Chinese demand. Second, lower oil prices reduce the troublesome risk of inflation
in the Chinese economy. Thirdly, lower oil prices take pressure off the government
to restrict energy prices and to subsidize oil which distorts the Chinese
Thus, to the
extent the government can control Chinese oil demand, it would clearly be
happy if it were lower, not higher. There is evidence that
Chinese consumers are buying fuel inefficient cars to show off.
A wise Chinese government might well put high taxes on such purchase or take
other steps to discourage such profligate oil use at a time of tight oil markets.
is the possibility that the Chinese economy will simply hit a growth wall.
It has been expanding at an unsustainably high 10+% rate for over 10 years.
That means enormous infrastructure projects have gone into the pipeline. If
end product demand is lower due to the OECD slowdown, China may face a severe
capital spending slowdown. As we know, a reduction in capital spending has
a multiplier effect in slowing the general economy, just as the great capital
spending boom of the past 10 years has had a multiplier effect on growth.
A much more
erudite version of this argument was recently published by Vitaliy Katsenelson
who describes the bloated and inefficient Chinese economy with this example:
the biggest mall in the world - the South China mall, with space for
fifteen hundred stores, only has a dozen stores open for business - it is
empty. Shoppers never materialized. Billions of dollars have been wasted.
I highly recommend his entire
essay which explains why China may well be due for a significant slowdown.
Period of Maximum Oil Production
the Wikipedia and other Megaprojects
analysis the years 2008 - 2010 will see the most new oil produced
from new large fields that has occurred in history and it will be far larger
than it will during the five years following 2010. Visibility of production
out to 2015 is possible because of the roughly 7-year lead times that new
oil projects require from announcement to production of oil.
Here is a graph
that summarizes the  Wikipedia
A detailed discussion
of projected oil coming on stream is beyond this essay, but much discussion
can be found at the above links. Moreover, one important part of the numbers
is the simple fact that Saudi Arabia is bringing on stream two major fields
in 2008 and 2009 that together are projected to add 2mb/d (million barrells
to day) to global production.
any period of time is likely to see an abundance of oil production in the
world, it is the next 2 - 3 years. After 2010, as several respected analysts
have pointed out, global new production is looking weaker and it looks especially
weak after 2012, four years from now. But the period we are entering now looks
to be especially strong for new oil production.
Countries Growth May Slow
projects are underway in the Middle East and Russia based on cash flow from
high oil prices. If oil prices decline, pressure will be felt to slow such
projects down. There would be a lag period; a slowdown will not happen quickly.
But orders for projects under consideration would be delayed and very new
projects may be scuttled. Such actions would depress global capital goods
impacted would be UAE projects in Dubai that are focused on high end business
and leisure travel. The OECD slowdown will put pressure on the these highly
leveraged projects from a demand viewpoint and a lower price of oil
would pressure them from the ability to continue to finance them.
than projected cash flow to oil exporters caused by lower oil prices would
also restrict the ability of oil exports to bolster OECD economies by making
investments and providing liquidity. There will be less ability to prop up
weak OECD financial institutions or manufacturers.
All in the
Context of an OECD Slowdown
All of the above
is predicated on a continuing slowdown in OECD economies. If the West were
not slowing down, there would be far less pressure on Chinas economy.
While greater near-term oil production would tend to slow the rise in oil
prices or cause a temporary pullback, it would not contribute to a significant
and lasting fall in oil prices without the weak demand caused initially by
the OECD slowdown. And without lower oil prices, there certainly would be
no economic stress to the oil exporting economies.
But if the OECD
slowdown continues and becomes more exaggerated, three factors discussed above
could exacerbate a global economic slowdown and prolong and aggravate a normal
pullback in the price of oil and possibly of North American gas. In fact,
these factors would combine with a severe OECD slowdown to create a vicious
cycle - a negative feedback loop - that I have tried to flesh out in very
brief summary above.
If that were
to become the case, oil could slip back to $80 - or even go lower. Natural
gas in North America would probably stay above $7.50. But the possibility
also exists that very weak global economic performance and a negative feedback
loop could cause the financial markets - already weakened by the credit crunch
and housing slump - to perform very badly.
bear in mind that the U.S. financial position has been severely compromised
by two presidential terms of deficit spending and increased national debt
of record proportions. The U.S. is still the bell-cow of the global economy.
Its weakened financial condition (especially in the context of ever-growing
entitlement spending and interest costs) would tend to add to the negative
feedback loop described above.
OPEC to the
As the price
of oil falls, OPEC will eventually try to support oil prices by cutting production.
But such a cutback might be more difficult to engineer given the fact that
Saudi Arabia is committed to increasing its oil capacity by about 2 mb/d in
2008 and 2009. The Saudis might drag out their construction process and might
cap a lot of it. But it is simply harder to reduce production when you are
already committed to bringing on important new fields.
Saudis have good political reasons to want to see much lower oil prices in
the near term. Specifically, they are locked in a desperate competition with
Iran for political influence in the region, both in terms of Lebanon and Iraq.
They do not want Iran to proceed to become nuclear, nor do they want Iran
to continue financing radical Shiite fighters.
Much lower oil
prices would put huge pressure on the Iranian economy and could become a significant
bargaining chip for the Saudis to obtain the political concessions they want
from Iran. So it is not altogether clear that the Saudis will initially cooperate
in an OPEC effort to reduce production and it is unlikely OPEC could succeed
without Saudi leadership.
All of the above
will probably not come to pass if the OECD and particularly the U.S. economies
suddenly turn around and begin to strengthen. The chances for such a turnaround
will be enhanced by lower oil prices. If the U.S. economy turns around due
to lower oil prices, I will have been wrong to withdraw my investment capital
from the market. On the other hand, I will have lost only opportunity, not
money. It is a chance I have decided to take.
I am embarrassed
that only 45 days ago  I
wrote that oil is an investment Tsunami and that the challenge to
investors is to stay invested in it. But conditions changed over the past
If I were not
convinced that an economic downturn not seen since the 1930s is a real
possibility and that it comes just as China is due for a downturn and oil
supplies are due to increase at the highest rate in history over the next
2 - 3 years, I would not have sold my oil-related investments.
Most of the
factors that are inherent in the negative scenario could have been perceived
45 days ago. I make no excuses for not seeing them. But I do listen to markets.
I see oil moving down when increased political tensions in oil-intensive areas
should cause it to move up. I do not like what I observe.
proved wrong by moving to the sidelines now, so be it. I will plead guilty
to panic. But if panic is justified, it is far better to panic earlier than
later. Some will not call this an early time but we will not know that for
another year or so.
brain as major powerhouse: Most tennis players are ecstatic when
their serve goes in. The big lift in my tennis game came when I realized I could
"will" the ball to land in a corner, down the line in the center,
etc. Some opponents have great forehand returns, so you only want to serve to
their backhands. Others move around, thinking they can figure where you're serving
to and outwit you. The key is to move the ball around and fool them. You can
do this by "willing" it and outwitting them. The brain works. P.S.
I won yesterday against someone (a pro) I shouldn't have. I'm on Cloud Nine.
incredible Olympics. Second reminder. The
swimming. The gymnastics. If you missed any of it, you can watch it on NBCOlympics.com.
You'll have to install a plug-in called Microsoft Silverlight. It's harmless.
up and move around. One of Michael's classmates
at business school just spent five days in hospital because he developed
a deep vein thrombosis a large blood clot in his thigh. This led to a
pulmonary embolism a clot that floated into his lung -- along with a
significant amount of fluid into his chest. The condition is typically caused
by long periods of sitting still, causing blood to pool and clot. He
figured the villain to be a 14.5 hour car ride from Boston to South Carolina.
The kid is under
30. He's lucky to be alive. In short, get up and move around. Do jumping jacks.
Do anything. But move.
cancel your credit cards before you die.
A lady died this past January, and Citibank billed her in February
and March for their annual service charges on her credit card. Citi also added
late fees and interest. The balance had been $0.00 and now was around $60.00.
A family member called Citibank.
'I am calling to tell you she died in January.'
account was never closed and the late fees and charges still apply.'
'Maybe, you should turn it over to collections.'
it is two months past due, it already has been.'
: So, what will they do when they find out she is dead?'
report her account to frauds division or report her to the credit bureau, maybe
'Do you think God will be mad at her?'
'Did you just get what I was telling you - the part about her being dead?'
you'll have to speak to my supervisor.'
on the phone:
'I'm calling to tell you, she died in January.'
Citibank : 'The
account was never closed and late fees and charges still apply.' (This must
be a phrase taught by the bank!)
'You mean you want to collect from her estate?'
you her lawyer?'
'No, I'm her great nephew.'
you fax us a certificate of death?'
'Sure.' (Fax number is given )
After they get
system just isn't set up for death. I don't know what more I can do to help.'
'Well, if you figure it out, great! If not, you could just keep billing her.
I don't think she will care.'
the late fees and charges do still apply.'(What is wrong with these people?)
'Would you like her new billing address?'
'Odessa Memorial Cemetery, Highway 129, Plot Number 69.'
that's a cemetery!'
'What do they do with dead people on your planet?
This column is about my personal search for the perfect
investment. I don't give investment advice. For that you have to be registered
with regulatory authorities, which I am not. I am a reporter and an investor.
I make my daily column -- Monday through Friday -- freely available for three
reasons: Writing is good for sorting things out in my brain. Second, the column
is research for a book I'm writing called "In Search of the Perfect
Investment." Third, I encourage my readers to send me their ideas,
concerns and experiences. That way we can all learn together. My email address
is . You can't
click on my email address. You have to re-type it . This protects me from software
scanning the Internet for email addresses to spam. I have no role in choosing
the Google ads on this site. Thus I cannot endorse, though some look interesting.
If you click on a link, Google may send me money. Please note I'm not suggesting
you do. That money, if there is any, may help pay Michael's business school
tuition. Read more about Google AdSense, click
here and here.