Tokyo based, expat Cape Bretoner. Learning to live in a de-leveraging world. Better suited to the crusades. CFA & FRM charter holder. Disclaimer: @Firehorsecaper reminds investors to always perform their own due diligence on any investment, and to consult their own financial adviser or representative when warranted. Any material provided is intended as general information only, and should not be considered or relied upon as a formal investment recommendation.
Joined Jun 23, 2015
86 Blog Posts



We have had many first’s in 2016, with the latest being the long standing record for the highest gold:oil ratio ever recorded. Currently at a 37 handle, an elevated ratio of how many barrels of oil an ounce of gold can procure “normally” portends danger. Prior spikes have served as tombstones for rocky times in global financial markets. The gold leg of this ratio is holding in fine (neutral from a statistical perspective, over a decade observation period), especially in light of the seemingly never ending strength in the USD, over the last 18 months in particular. The gold:oil ratio over the 1968-2016 period now has a 4 handle, measured in terms of standard deviation. A betting man would argue that the ratio resolves itself largely via a rally in oil from here (gold typically rallies with oil,  although one would expect at a slower pace given the weak tether). VaR based stress testing does have its limitations, admittedly, but 4 sigma events are “rare”. In terms of daily observations, a 4 std. dev. move would be observed once every 43 year (twice in a lifetime). Many risk management models both test and report to a 99% confidence interval which equates (on a 1-tailed basis, typically the cpty’s “risk leg”) to a 2.33 standard deviation move. History does not repeat, but it certainly does rhyme. Standard deviation readings of this magnitude lead one to question the normality of the distribution being studied and on this metric oil is also the squeaky wheel. ‘Fat tails” can only explain so much in the end and despite both the geopolitical and technological developments bringing the nitrous to the supply side of the equation, global oil demand still exceeds 1,000 gallons a second. Gold mining stocks have not been this cheap, on traditional valuation metrics, since gold was $300 per ounce. There appears to be a thumb on the scale. Place your bets. JCG

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In the midst of today’s maelstrom, Anheuser-Busch InBev SA/NV (bond ticker ABIBB) launched the 2nd largest corporate bond deal ever. Proceeds are to assist with the formerly announced SAB Miller acquisition. From initial sizing talk of $30bln, they printed $46bln across 7 maturities with an order book in excess of $110bln:

3 year fixed, $4bln at T+85 (US Treasuries +85bp). 5 year fixed, $7.5bln at T+120. 5 year FRN, $7.5bln at 3mth L+126 (Libor +126). 7 year, $6bln at T+150. 10 year, $11bln at T+160. 20 year, $6bln at T+190 & 30 years, $11bln at T+205.

The bonds were trading 5-10bp tighter across all maturities in the gray market late pm NY time. As they say, feed the ducks when they are quacking! There is no convenient lay-away plans for bonds. There will be a liquid repo market in the various tranches of this bond deal given the size for accounts that want to impart leverage, but the bulk of the buyers will be cash buyers.  Assets had to be sold to make room for this giant high grade (ABIBB is single A rated) bond issue. A portion of the sales effected were equities and an asset allocation shift of this magnitude may be behind some of the equity market downdraft evident on the day.

The North American high grade CDX Index (125 equal weighted credit default swaps on investment grade entities) widened 4bps to close at 102.8bp today. This is the first close above 100bp since 2012. JCG

Note: The largest ever bond issue, $49bln, was launched in Sept. 2013 by Verizon (8 tranche deal). VZ printed off a smaller order book of $101bln.

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The South African Rand (ZAR) did not have a good 2015 (down 25% versus the USD), but the 2016 kick-off has been especially unkind. There was an fx flash crash in early Monday trade in excess of 9% to just under 18.00 per USD  in the cross before ZAR recovered to mid 16’s to be only down 2.3% on the day. A move of this magnitude is very rare (last seen in 2008 on this currency cross). South Africa has a population of 52mm and has the 2nd largest economy in Africa (US$350bln GDP), behind Nigeria. South Africa is China’s largest trading partner in Africa and export to China make up 37% of South Africa’s exports. Beijing is 11,700km (7k miles) from Johannesburg yet you can fly direct 3 times per week. Hundreds of Chinese companies, both state-owned and private operate across South Africa.

Mrs. Watanabe (Japan retail) has been given the blame for the poor ZAR positioning where stops were hit and margin calls ensued. We will see when the tide goes out who is naked, but if retail is behind it, big lumps. Tokyo Financial Exchange reported that margin trade positions in ZAR had doubled over the last 6 months to over 260k contracts. I can confirm Japan retail involvement in the cross, but the scale seem too large to not involve professionals (CTA/macro funds). Jan. 11th was also a Japanese holiday today, “Coming of Age Day”, making the 7am Tokyo time downdraft even more peculiar.

Unconventional monetary policy (QE) has resulted in medicated markets across the globe, but fx is the one area where market views can still reverberate as the transfer mechanism is more direct. FX turnover is >$5tln per day, it is a 24-hour market and >90% of turnover is speculative in nature (approx. 7% trade related). Central banks are the classic non-profit maximizing market participant. As we have seen with the PBoC and China’s attempt to slow the pace of depreciation in the RMB, fx intervention can only go so far. The South African Reserve Bank (SARB) have fx reserves of approx. $50bln (less than 1/2 of China’s,GDP adjusted). The other tools at SARBs avail are being employed to stem the downdraft where we saw a 25bp rate hike to 6.25% in Nov. 15′ with a more meaty 50bp expected before the end of Jan. 2016. Other factors are at play as well in the case of South Africa. The President, Zuma fired his Finance Minister, Nene in December which sent the ZAR reeling 5% when unknown van Rooyen was briefly appointed (the post now manned by Gordhan who held the post 09′-14′).

The markets that really matter of course in this high stakes game are the US and China. The tectonic plates are large and moving in opposite directions with the Fed expected to hike another 25bp by the end of Q2 16′ and the PBoC expected to cut the RRR (Reserve Requirement Ratio) up to 3 times by 50bp on each occasion over the same time frame. There will be tsunami waves. Trade accordingly. JCG

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Few topics elicit more controversy that the merit of gold/precious metals in ones investment mix. In a measured fashion (i.e. 3-5% portfolio weighting), I think there is a place for it. GLD was up almost 3% the week of January 4th, in year of our Lord 2016, the worst starting week in global financial markets on record, ever.

The risk diversification merit of gold is sometimes overlooked as the “gold bugs” can be quite overbearing in their views (as in butterfly net crazy), causing people to dismiss the asset class outright. In sizing what is a reasonable allocation, a good starting point is the estimated value of all gold above ground which is $7 tln (171,300 tonnes, a 68 ft. cube for those visually inclined) divided by global household net worth of $250 tln gets you to a 2.8% weighting. Annual production is a scant 2860 tonnes (1.7% of the gold market) versus 20% under “official control”, making the actions of the worlds central banks more important, on balance, that mine supply. The largest central bank gold holdings at present are the US (8133  tonnes, 73% of their fx reserves), Germany (68%), IMF, Italy (66%), France (66%), China (2%) and Russia (14%). India is the 11th largest holder  (6%). China’s, in particular, has been adding voraciously but gold still makes up < 2% of their foreign currency reserves, versus a global average of 10%.

Gold is very topical is Asia and it is highly prized as a store of wealth. Of global demand, China accounts for 29%, India is 25% and the USA is 5%. Almost all excess refining capacity for the last several years has been expended converting “good delivery” LBMA 400 troy ounce (12.4kg.) bars to the 1kg format preferred in Asia. China is also the largest gold producer at 450 metric tonnes (16% of global production).


Ray Dalio agrees, in moderation, and his $189bln Bridgewater fund owns Barrick (ABX), GoldGorp (GG) and Silver Wheaton (SLW). As as aside, the combined market cap of these three is approximately the same as Tesla (TSLA).

GDX, Market Vectors Gold Miners ETF is a good option to garner exposure to gold mining equities (mid and large cap) which offers a levered play on the price of bullion. GDX has a 17.5% weighting in Dalio’s three favoured names noted above and include a who’s who of the sector (53% in the top 10 names). GDX is large ($4bln+), liquid and has a 53bp MER. My current gold allocation is a bit underweight at 2% of assets and is invested in Fidelity Select Gold Portfolio (FSAGX). FSAGX is small (<1bln) and more expensive (90bp), hence if GDX was an available option it would be my ETF of choice. GDXJ, Markets Vectors Junior Gold Miners is another option for those seeking the higher beta exposure to juniors/small cap exploration focussed players.

Choosing individual gold mining names can be perilous given the high degree of idiosyncratic risk. One name that John Hathaway, CFA Co-Manager of Tocqueville Gold Fund, consistently recommends is NovaGold (NG). NG’s primary asset is a 50% share (Barrick owns the other 1/2) in the Donlin gold project in Alaska, which is hands down the best potential new mine in the world. In terms of scale (39mm + ounces, 27+ year mine life) jurisdiction (USA baby) and grade, nothing comes close. The project is in the permitting stage and production will likely not start before 2019. Barrick offered $1.6bln for NovaGold in 2006 when gold was $600 an ounce. NG declined Barrick’s advances in 2006 and their market cap now stands at $1.35bln with $1,100 gold. The USA bought Alaska from Russia in 1867 for $7.2mm which equated to 2 cents per acre. The deal was nicknamed “Seward’s Folly” after then Secretary of State William Seward who penned the deal. Seward was accused of having bought snow but a short two years later in 1869 gold was discovered, as was oil decades later. While mining conditions are harsh this far North (pic of Agnico Eagle’s mine in Nanavut, Canada), I’d take them any day over Congo.


James Grant, publisher of Grant’s Interest Rate Observer refers to gold as nature’s own bitcoin and holding gold outright has become both easier and less costly over the last number of years. GDL, SPDR Gold Trust at >$20bln is the big daddy ETF in the category and the the most cost effective means for most investors to gain exposure to the gold price. Gold, in physical form can also be held in your IRA. The two providers in the USA that I recommend are APMEX and Gainsville Coins. In a taxable account, gold is taxed as a collectible (26% tax on gain).

The performance of both individual mining stocks and precious metals funds has been deplorable on 1, 3 and 5 year horizons. Barrick (ABX) is up 14% ytd 2016 but the 1 year is -20%, 3 year -35% and 5 year -26.5%. FSAGX 5 year -20%. TGLDX (Tocqueville Gold Fund) 5 year -21%. Wading in at this juncture is contrarian. Keep allocations light. JCG

Note: Alaska facts from Tim Marshall’s “Prisoners of Geography” (2015).

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Unless you are in a target retirement fund like Vanguard Target Retirement 2035 (maturity matching your target retirement date), you need to undertake a periodic review of your IRA (Traditional and Roth) and 401K investments. The New Year is a good time to review. While my IRA account will never rival Mitt Romney’s, I expect my legacy IRA (1/3 Roth, 2/3 Traditional) to throw off a good portion of my retirement income (2-3 times my cost of living adjusted Social Security) in just over 20 years time.

Q1 2016 @Firehorsecaper IRA portfolio & weighting: HEDJ (WisdomTree Europe Hedged Equity ETF) 17%,  DXJ (WisdomTree Japan Hedged Equity ETF) 16%, HDV (iShares High Dividend ETF, 3.8% yield) 16%, QQEW (NASDAQ 100 equal weighted ETF) 5%, PFF (iShares U.S. Preferred Shares ETF, 5.9% yield) 16%, BBN (Blackrock Taxable Municipal Bond Fund, closed end fund, 7.9% yield) 16%, DSL (DoubleLine Income Solutions Fund closed end fund, 10% yield) 9%, SLRC (Solar Capital Ltd., a high yielding BDC, 9% yield) 5%. Overall asset allocation 54% equity / 46% “alternative” fixed income.

ETF’s have taken off in popularity over the last few years and fees are typically much lower than comparable mutual funds. Many expect long-only mutual funds to go the way of the Dodo bird, over time. “Smart-beta” has been the a fast growing ETF sector and now stands at $400bln with traditional index ETFs at $1.8tln. Smart beta ETFs have attracted $65bln in assets in 2015 with a whopping $18bln (28%) allocated to Wisdom Tree’s DXJ (currency hedge Japan) and HEDJ (currency hedged Europe).

The largest ETF in the “Traditional”category is State Street’s SPY with $183bln in AUM. Perhaps more surprising than its size is the average hold period of less than a week. VOO is Vanguard’s S&P ETF offering and at $40bln it is growing for 2 reasons, i) Cost, 5bp vs 9bp for SPY and ii) Structure, SPY is a UIT (Unit Investment Trust) meaning units can not be re-hypothecated, whereas VOO is an ETF. Securities lending fees are passed through to the ETF holder and VOO is more capital efficient for institutional accounts as they can rely on cross-product netting for margining purposes with their PB (Prime Broker).

ETFs are increasingly being used by institutional accounts for asset allocation purposes. Good Harbor Financial LLC is one of the biggest ETF portfolio managers in the US which in 2014 moved to semi-monthly re-balancing from monthly to mask their often multi-billion dollar re-allocations between equity and fixed income ETFs (5-10bln across half a dozen ETFs).

The analytics for the DIY ETF investor have never been better in terms of diversity or cost. The one consistent criticism of DIY is that the steady hand at the wheel often heads for a puke over the side when the waves measure a multiple of your boat. For those willing to monitor more actively, there are sites like etfreplay.com (warning: more addictive than Minecraft for adults) which allows you to build, back-test and manage your own ETF driven investment portfolio. Monthly re-balancing ideally, but if you are in the best 4 of 12 ETFs you will rarely be trading more than 1-2 ETFs per month. Moving average filters (200 day moving average, or others of your choosing) direct you to ETF products like SHY (1-3 year Treasury ETF) when all hell breaks loose. There is also  etfdb.com which has both a free and paid version for research purposes. Note: Not personally affiliated with either, just a happy subscriber, as I am to IBC’s Exodus service.

Speculative trading is fun and can be lucrative, but most are not wired to handle the inevitable drawdowns inherent in the trading strategy for all your chips. Prudent asset allocation and the power of compounding are important drivers for your very long term investment goals. It is the hamburger versus steak trade, or for the vegans the iceberg lettuce versus arugula trade. JCG

Note: Citizen of the world asset allocation. A US based investor would typically exhibit more home country bias and have the equity component more USA weighted. The “go to” funds in the Vanguard family would include VTI (Total US Market ETF), VNQ (US REIT Index) and VYM (High Dividend Yield ETF) with upwards of 1/3 of overall portfolio weighting in VTI as a core holding.

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Solar is a big, and getting bigger, exponentially. 2014 saw 45 GW of capacity installed globally, 2015 will see 50+ GW and from 2017 onwards 70+ GW, as far as the eye can see. Coal’s cremation oven may be nat gas powered near term, but the PATH Act of 2015 which extends the US tax credits for “renewables” by 5 years puts a lot of wind in the sail of both wind ($35bln over 5 years) and  solar (+38bln) installations.

SunEdison, equity ticker SUNE, is the the world’s largest renewable energy development company. The company develops, finances, installs, owns and operates renewable power plants, delivering predictably priced electricity to its residential, commercial, government and utility customers. SunEdison is one of the largest renewable energy asset managers and provides customers with asset management, operations and maintenance, monitoring and reporting services.

As a play on the sector, I recommend owning SunEdison (disclosure: long equity & vetting purchase of Series A 6.75% Perpetual Convertible Preferred Shares). Other names that get discussed as if they are independent include TeraForm Power (TERP) and TeraForm Global (GLBL) which are publicly listed, SunEdison sponsored YieldCos. The YieldCo model was used by SunEdison to broaden the menu of securities available to yield starved end investors (MLP 2.0). In addition to 3rd party sales and warehouse drop-downs, the YieldCos give SunEdison another outlet for on-going deal financing. Of SunEdison’s $20.7bln in assets at the end of Q3 15′, $5.5bln are housed in TERP and $2.9bln are with GLBL. A confluence of events, including too much too soon in terms of planned growth (6 GW backlog), ill-timed acquisitions (Vivint, et al) and tightening financial conditions almost resulted in a “lights out” scenario for SUNE equity holders in Q4 15′. The stock recently traded sub $3 from a 2015 high of $32 and currently stands at $6.51 ($2bln market cap). SunEdison is a complex company for certain, and one must put in the hours to understand the subtle nuances, both stand alone and versus peers.

There are a few factors that could give new investors pause when considering allocating fresh capital to the renewables sector via SunEdison.

1.) Hedge fund involvement. Hedge funds are all over this trade, via various components of the capital structure like its the head table at a Robin Hood Foundation dinner gala.

Greenlight Capital’s Einhorn has had the longest standing involvement from the long equity side with a 4%+ stake in SUNE. David certainly has drunk his share of the cool aid on this story, some would assert via a funnel. A $34 sum of the parts valuation may need to get pared but even 1/2 that at $17 is a near triple from here. The interweb has his Q3 Shareholder Letter laying out why Greenlight remains long.

Appaloosa Management’s David Tepper recently disclosed a 9% + stake in TerraForm Power (TERP) via both equity and senior debt and is taking an activist role. Sifting through the two missives sent to date it is difficult to see Mr. Tepper’s end game, yet. SUNE, as Sponsor and an equity holder in TERP has little incentive to drop down lower quality assets to TERP. When assets are funded via SunEdisons 4 available warehouses via drop downs the company retains the right to buy the assets back within 5 years and the YieldCo has right of first refusal (via call rights). What is likely over time is that SunEdison creates a 3rd YieldCo, TerraForm Resi to house US residential renewable assets which Tepper sees, rightly so, as lower quality vis-a-vis commercial (typically investment grade), government (printing press) and utility (regulated) customers.

2.) The degree and swiftness of the recent stress evident in SunEdison’s debt security prices. SunEdison has total debt of approx. $12bln, of which $4-5bln is full recourse. SunEdison has $1.9bln Convertible Senior Debt. In August 2015 the company issued $650mm of Convertible Perpetual Preferred Stock with a par value of $1,000. The ticker for the prefs is SDSNP and the cusip is 86732Y208. The prefs closed last Friday at $424 (15.9% yield), up 8% from the previous close and well off recent lows of $200 (33.75% yield for those that caught the bottom print, with a going concern assumption of course). When the prefs were issued in August 15′ SUNE was trading at $14.68 and the initial pref conversion price was set at $17.62. The company has the right to convert holders to SUNE equity after Sept. 6, 2020 if SUNE trades at >130% of the $17.62 ($22.91) for 20 of 30 consecutive trading days.

3.) Short interest in SUNE >40% float. SUNE has a traded float of 271mm shares and 119mm are held short. Rather than naked shorts, I believe the bulk of the short positions were put on as a hedge against the convertible bonds, previously noted. Convertible arbitrage is meant to be a “market neutral” trade whereby you buy the convert and short the amount of shares you expect to eventually be converted into. Busted or broken converts, as they are also referred, is a speciality segment of the distressed market. The bonds tend to trade much more like bonds and less like an equity hybrid once the equity trades <50% of the conversion price. SunEdison’s earlier maturity converts have a conversion price in the mid teens and the most recent convertible prefs at $17.62. While not in the prudent category, trapped longs (of the convert) might consider covering their equity short and letting the convert run once the stock gets real legs on  an executable medium term strategy and the nitrous provided by the Path Act 2015 passage (soon to be forthcoming).

Those preferring to “buy the blob” rather than selecting individual names can buy the Guggenheim Solar ETF TAN which tracks the MAC Global Solar Energy Index (the top 10 names make up 62%). This is really the only game in town in terms of size (just shy of $300mm) and volume averaging 200k shares per day. I have some issues with TAN in that it only has a 37% USA domiciled solar weighting, and it includes Solar City (SCTY) at a 4.8% weighting. I’m in Chanos’ Kynikos Assoc. camp on SCTY, where he is short. He is offside on his SCTY short, but claims he would short more if there was sufficient borrow available. Chanos nailed the VALE short early (2012) from the mid 20’s in price terms and I rarely fade his high convictions short positions.

The US has a vested interest in being the global leader in the renewables space. The Department of Defence (DoD) is the biggest single energy user in the country (Army, Navy, Marine Corps, Air Force and Coast Guard) and is one of the largest consumers of energy in the world. Expect to see a wave of new government contracts in this space. Many green projects have been completed and more will be put to bid to both modernize and improve the efficiency of military installations both at home an abroad. Military housing, long privatized, but effectively credit wrapped through the Basic Allowance for Housing (BAH) annual appropriation from the US Federal Government is another large potential growth pocket. Even Mr. Tepper could get his head around that risk profile. JCG

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The Federal tax code of the US is complicated, >70,000 pages at last count (Trump thinks it is 700,000). After having briefly fully repealed their estate tax in 2010 the US re-instated, retroactively in 2011. The top Federal bracket is 40% for estates >$1mm. The exemption was set at $5mm which is indexed to inflation (standing at $5.43mm for 2015). Because of the high level of the exemption for Americans ($10.86mm per couple), only 0.12% of taxpayers (1 in 833 on passing) pay Federal estate taxes. In 2014, the IRS collected $17.5bln in Estate Taxes, less than 1% of total tax receipts which eclipse $3tln.

Foreigners (non-residents, also known as non-resident aliens for tax purposes) are often ensnared unknowingly in USAs “Death Tax” as it is widely known, as the exemption is a paltry $60,000 of US situs (the place to which for purposes of legal jurisdiction or taxation a property belongs) assets. Relief is available to those residing in countries with dual taxation treaties with the US, where in many cases an exemption equivalent to American levels are granted (albeit on a US situs to non US situs asset ratio in some cases).

What follows are some practical and legal solutions for the rest of us (non Americans without tax treaty benefits), naked of cover and massively long the global reserve currency US$. As always, please consult a professional in estate planning matters, as the sands are always shifting with respect to global tax policy.



Jack Bogle, as a supporter of passive indexing does not see the value of Financial Advisors (FAs) as being their stock picking acumen.  To Jacks mind, FAs should be utilized to marshal the best advice with respect to tax efficiency, risk management, estate planning and owning the appropriate amount of insurance. The inherently unfair thing about estate taxes is that the amount of estate tax paid depends on the quality of the estate planning advice received.

Minimize U.S. Situs Assets:

The rules on what constitute U.S. Situs assets are peculiar. US$ cash held is a Bank is not US situs and hence not subject to estate taxes. US$ cash held with a Broker-Dealer is US situs and subject to estate tax, making the home for both your emergency fund and the cash component of your investment portfolio clear. Put your US$ cash in the Bank. Tangible property (cash/collectibles) held in a US safe deposit box are US situs and subject to estate tax.

Equity investments (shares of stock) in a US Corporation are US situs, subject to US estate taxes. The largest investment houses such as Vanguard and Blackrock (i-Shares) have a ready made work around for those fond of garnering their equity exposure via low cost ETFs. The issuing domicile of the ETF determines the situs for estate tax purposes. Vanguard’s London Stock Exchange (LSE) listed S&P 500 ETF, VUSD is over $12bln in size and trades 1mm + shares per day. My favourite ETF is iShares IWDA, also LSE listed, which tracks the MSCI World Index of 23 developed markets (57% US weighted) with 1643 constituents. The added benefit of iShares IWDA is the dividends accumulate instead of attracting withholding taxes (wht). Foreign stocks listed on US exchanges (ADRs) owned by a non-resident are not subject to US estate tax.

US Treasuries are not subject to wht and are not deemed to be U.S. Situs for estate tax purposes.

Real assets – Real estate is US situs and subject to estate taxes. If it forms a large part of your estate putting a non-recourse mortgage on the property might make sense. I’d rent my clothes if I could …..just saying.

U.S. Qualified Domestic Trust (“QDOT”):

Setting up a trust is another solution which effectively defers US estate tax until other solutions arise (i.e. spend it, gift it, anything but pay it to Uncle Sam blindly). The cost, from a reputable provider, is less than most assume. This often packaged with a will, an irrevocable life insurance trust (ILIT) and a healthcare directive, all good things to address while we are healthy and mentally sharp.


Term life insurance, to cover the unforeseen, is a good idea. Someone in good health in their 40’s can purchase $1mm of 15-20 year term for approx. $800-$1200 per annum.  Structured properly, in concert with the above noted life insurance trust, the life insurance payout is both tax free and avoids probate.

Retirement accounts:

These assets pass to heirs via beneficiary forms so ensure your primary and secondary beneficiaries have been properly assigned.


It is not just seaweed that gets you to the ripe old age of 86 with aspirations of 114, financial peace of mind for you and yours counts for a lot too. JCG

Note: mm denotes million

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Jack Bogle is 86. He is an absolute legend, founder of Vanguard Investments and #1 proponent of passive index investing. It was disclosed today that Bogle-san personally has a higher weighting in bonds than equities for the first time (53% bonds/47 equities).  Let’s take a stab at calculating the duration of Jack’s portfolio. The duration of the US bond market is 8 years, hence the bond component estimate is a modest 4.24 year (0.53 * 8). Equities are a great inflation hedge, primarily  because they have a very long duration. For the US stock market, as a whole, is it approximately 50 (price/ dividend ratio, 100/2), contributing 23.50 year of duration to the portfolio, for a 28 duration aggregate. Math geeks can rightly protest this is too simplified, and it is (higher level math and many assumptions are required to fine tune) but the real # is higher, not lower, so simmer down.

This investment mix, assuming Jack is planning for his purposes solely (wait for PART II – Estate Taxes) takes his investment portfolio, from a duration perspective, to his 114th birthday. Not to burst anyone’s bubble, but Japan is the master of the supercentenarian lotto and women make up 87%+ of the 60,000 Japanese >100 years old. The oldest Japanese man presently is Yasutaro Koide (112) who resides in Nagoya, Japan.

Asset allocation has been shown to be more important that security selection over long periods of time. Bonds, as an asset class, are not “easy”, as anyone even brushing up against the high yield component this month can attest, but it is worth the effort. The merit of municipal bonds for US taxpayers can not be downplayed as “It is not what you make, but what you keep.”  Power to you Jack Bogle, we are rooting for you! JCG


i) Duration, in bond land, is the 1st derivative of the price/yield relationship (ratio of price/yield). The 2nd derivative, to be profiled in an upcoming post, is convexity (positive convexity is an awesome security feature). Generically, across asset classes, duration can be defined as the elasticity of the security price with respect to changes in the gross rate of return.

ii) If you found this post of interest, follow me on twitter @firehorsecaper as my 11 year old pointed out it is not cool to be following more people than follow me.

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Tough week to have to raise rates, but I think Yellen will hike. It has been 9.5 years since the last hike in June 2006.  The FOMC (Papa Gruff) has broad shoulders and can afford to get rates officially off the zero bound. As others have pointed out, much of the initial move is already factored into Fed Fund futures (approx. 75% at time of writing). The ECB (Baby Gruff), despite their most recent disappointment (bridge overload), remains in QE infinity mode, as does the BOJ (Mama Gruff). 12-18 months out EUR/USD at 0.95 and USD/JPY 140.00 are not out of the realm of possibility if both goats were to sit out an entire monetary cycle.

Much of the what has been playing out in the markets since the 2013 Taper Tantrum is grounded in divergent central bank policies. The DXY is near its highs. As fellow peanut gallery member dyer440 noted in his most recent “oil gambler” piece, oil has a very high statistical inverse correlation to the USD (75% over the last decade). All former lottery winner countries are getting taken to the mat quicker than a UFC featherweight title fight. The currencies moves have been extreme to the downside; BRL, ZAR, MYR, NOK, CAD, and AUD, all cannon fodder until further notice.

PBoC (Troll) has been under the bridge for a long time. The Chinese troll is not scary just because of his size in terms of dwindling appetite for iron ore and other base metals. Monetary policy could not be effectively managed in a fully closed system, but things are changing rapidly. I wrote a brief note Nov. 30th on  the most recent decision by the IMF to include China’s Renminbi as a component in the Special Drawing Rights (SDR) basket. China is joining the easing party. Having guided the Yuan to a 4 1/2 year low (spending nearly $700bln of their reserves to keep the pace “measured”), bigger moves are afoot. PBoC signalled its intent last Friday to change the way it manages the Yuan’s value and feel it is better measured against a baskets of currencies (much like the SDR they just got added to/ qualified for). The timetable is unclear with respect to implementation. This news falls well short of abandoning the loose peg to the Greenback, but all should take note, the Troll is not slumbering. JCG

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BTG Pactual, the once darling of the emerging market investment banking scene, appears to be in its death throws. Andre Esteves, ex-CEO, is wearing much wider pin stripes than he would like in Brazilian prison, with no day passes for Carnival. The arrest came on Nov. 25th (formal charges, accusing Esteves and Brazil Senator Delcidio do Amaral of obstructing a criminal investigation were laid Dec. 7th) as a result of the on-going Operation Lara Jato (Operation Car Wash), Brazil’s largest ever corruption case. Twelve + private companies, involving upwards of 100 individuals are accused of paying bribes to secure contracts with Petrobras, a publicly listed (incl. a US listing importantly, subject to the Foreign Corrupt Practices Act) company which Brazil owns a controlling stake.

Sete Brazil is a private company which was co-founded in 2010 by BTG Pactual, Brazilian banks and Petrobras (9%). Sete had 28 charter agreement with Petrobras, representing over $89bln (total backlog) with a 14.5 year duration. The total investment to build the 29 ultra deepwater rigs (with 5 different shipyards in Brazil) was $26.4bln.  We have all seen what has transpired in oil & gas land over the past year. A group of five Brazilian lender extended $5bln to Sete Brazil in June 2015 in an effort to stave off bankruptcy. The Sete rig plan has been cut to 18 (14 underway) with $3.6bln of the aforementioned loan still o/s with repayment pushed to 2016.

Others have pointed to the Andre Esteves arrest as  being the equivalent of Lloyd Blankfein, Goldman’s CEO being arrested, perp walked down Wall Street and thrown in Leavenworth. On some metrics, the scale of this story is bigger. It was most recently reported that Mr. Blankfein’s net worth is estimated at $1.1bln. Andre Esteves is also a self-made billionaire, recently reported to be worth $2.2bln (2 Lloyds), #13 in Brazil and #628 of Forbes 2015. Esteves owned approx. 23% of BTG Pactual equity and the all important Golden Share that gave him largely unfettered management control. Subsequent to Mr. Esteves’s arrest the “top 7”, as they are affectionately referred, have taken control of BTG Pactual. The Golden Ticket was shredded and Esteves’s common exchanged for preferred shares (exact terms not disclosed, but note pref shares rank ahead of common in a wind up). Challenges lie ahead. Both major rating agencies have stripped BTG Pactual of their former investment grade rating (now BB-/Ba2, both with negative outlook). Moody’s is a press release on Nov. 25th stated, “BTG Pactual CEO’s absence could hurt credit rating.” Over 1/2 of BTG Pactual’s BRL30bln (US$8bln equiv.) in funding comes form wholesale sources. A finger has been placed in the dike, as BRL6bln has been provided to BTG Pactual by Fundo Garantidor de Creditos, a private deposit insurance plan funded by the Brazilian Banks. Non-core assets are being sold to further bolster liquidity, with some success. Singapore’s sovereign wealth fund GIC purchased BTG Pactual’s 25.6% stake in Brazilian hospital chain Rede D’Or BRL2.38bln (US$618mm). BTG is also looking to sell BSI, the Swiss private bank they bought less than 6 months back, with CS and Julius Baer said to be potential bidders. BTG Pactual’s USD bonds, BTGPBZ 4% 01/16/20 have lost about 44% of their value in recent weeks, falling from $90.00 to $50.00 (dipping into the $40’s). BTG Pactual equity also fell by 50% over the same period but appeared to have a floor at BRL15.00, until today. The stock is down another 12% to BRL13.22 in early trade today.

A billion here, a billion there, and pretty soon you’re talking real money. 12/09/15 Moody’s placed Brazil’s Baa3 issuer, bond rating for review downgrade. Moody’s does not see a turnaround likely in 2016 for Brazil. Investment grade ratings are hard to achieve, and it appears even harder to maintain. JCG

Note: USD/BRL (US Dollar / Brazilian Real) exchange rate stands at 3.75 at the time of writing, down 44% over the last year (2.60 on 12/09/14).

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