Simulated SPI Trading

When I get worried about something I tend to do some research on the issue to reassure myself that it's not a real problem. So in this spirit I am doing some simualted trading of the Australian Stock Index Futures known as "the SPI". SPI stands for "share price index". It is based on the ASX/S&P 200 index (top 200 Aussie stocks). One point on the index is worth $A25. So the contract size (around $US130k) is almost double the size of an SPX E-Mini contract or more than 3 E-Mini NASDAQ (NQ) contracts. The required margin is roughly equal to that for two NQ contracts. The commission is $A5 a contract which means it's actually cheaper to trade.

I just want to see how this works before trying it for real. Executing the order is seamless using Interactive Brokers even though you are making a trade in a different currency in a different country. The account screen is more complex due to the introduction of a second currency. Seems that the current profit or loss is displayed in Australian Dollars but the margin contributed is displayed in US dollars. The current total account liquidation value is still displayed in USD. The exchange rate looks very favorable. So it's no harder than trading the US market in theory except where it comes to accounting for the profit and loss of closed trades.

Soul-Searching

I envy people who seem to know what they want out of life. I'm confused. When I'm trading instead of focusing on my job and on academic research I feel guilty. And when I'm not trading I feel bad I'm missing out on making money. I think grad school is a brain-washing process where students are persudaed that nothing is more worthwhile than academic research - at least for many it is. On the other hand society tells us it is important to make money. And when my trading works out I feel good about it. These different feelings are coming to the fore as decisions on the future are coming up. I'm scared by the huge roll of the dice coming up. But not taking the gamble would make me terribly regretful too. Maybe I just think too much. Tomorrow evening Snork Maiden will be back - that will certainly make me feel better.

I recently commented on this post and there was an interesting follow up discussion. My thinking at the moment is that I will need to continue some dimension of my academic career just as Brett is both trading and practicing psychology unless I end up entering the financial industry full time or finding some other occupation. Or is it academics that is making me unhappy? Can I unlearn this behavior and "live in the moment"?

Doing My Taxes

Finally getting around to this. One advantage of moving to Australia will be simpler tax rules and forms though at higher income levels the tax rates are higher. But there are lots of loopholes. Australia does not require any information on individual transactions or to specify how much income came from what specific account or security. There are no state income taxes either.

Following up on my post on foreign accounts, I just noticed you don't need to admit to owning a foreign account if you have less than $10,000 in those accounts. That would reduce the numbers who ought to file considerably. I also notice for the first time that I am meant to file some form with the Treasury Department due to owning a foreign account with more than $10,000. If you don't file you could be subject to a penalty of $10,000. I've never filed and never been fined. Guess that now I noticed it I'll file it.

It's a lot trickier filing a U.S. tax return when you have foreign accounts as you don't get those 1099 forms for them and you have to work out how to classify all the different payments in US terms. Also you need to claim back foreign taxes paid.

What I am noticing so far is that my dividends received have almost doubled since last year ($6199 vs. $3254) and my interest received is ten times higher ($2303 vs. $216.18).

6:43PM

Finally completed my Federal return. I owe $400. I guess there will be a small penalty for late payment. Miscalculated when I asked for the extension thinking I would be getting a refund. The state return is always pretty quick. After we decide on moving I'm going to run some scenarios of whether I should up my withholding, pay estimated taxes or just pay the interest next April. Due to my increased 403b contributions my withholding is currently less than last year but probably my investment income will be up on this year (I hope). To avoid estimated taxes or interest for not paying them I will have to withhold at least as much as this year's tax bill.

Dinner and then on to my state return.

11:51PM

I owe the state $1260 including a $14 penalty :( The penalty is based on the difference between my withholding and last year's state tax bill. Last year I had a big Federal Tax Refund and a very small state tax bill.

Thinking About the Future

Is something some people think I do too much of. Too much thinking about possible outcomes can result in "analysis paralysis". However, I find the big decisions easier to make than small ones.

Probably I will be giving up my position as a tenured professor fairly soon. The only scenario where I won't is if my university offers Snork Maiden a position that is acceptable to her and I decide to stay too. I think this has a very low probability. However, if they did make a decent offer we would have a very hard decision to make. Giving up a tenured post is a big financial sacrifice in terms of pretty certain future money and also the prestige in the academic community that goes with it. I probably won't give up academia altogether. Independent scholars (someone like Stephen Wolfram comes to mind) usually have a harder time getting their ideas recognized though it does help if they have had a conventional academic career first (Wolfram did). I might arrange a visiting fellowship or research associate position at a university where Snork Maiden ends up - the Australian job isn't at a university but my former employer is just across the street.

I've never had a dream of retiring and not working. What I have wanted is to have choices and now finally I can choose pretty much anything. But choices are pretty scary. Anyway, for the forseeable future I need to actively trade or have some kind of non-investment income, so the choice to "retire" isn't really there. So I am also thinking about how I will trade in different locations. Time zone matters a lot in trading. If I was in Australia I might trade the US market in late afternoon through the close in the Australian summer (the close is at 8AM Eastern Australian time then) and then the Australian market open at 10AM. The "model" is based on changing positions at the close each day so I could set up these positions with stops then as well as playing earnings releases. In the winter I would trade the macro news and market open (11:30PM Australian time - news at 10:30PM on). Probably I will wake up early anyway in the summer though I tend towards being a nightowl. I might mix and match depending on the news flow etc. The western US is a case of getting up early in the morning :(

Why not trade the Australian market instead? I think commissions are still way too high for daytrading individual Australian stocks. Trading the SPI futures - Aussie stock index futures - is possible but the big moves are set by Wall Street. I will have to see if I can model this adequately to make a profit. It's now possible to trade options online in Australia which would work out cheaper than trading the actual stocks. Exchange traded warrants were available to trade online when I used to live in Aus but they often are not very liquid. But I don't think I have any edge in trying to short-term trade individual Australian stocks. I will probably do some experimentation and see what I can learn.

Another idea I have is to interest a fund manager to work with me in developing an automated version of my trading system. I have some ideas here. Then I can forget about the clock :) Or maybe working with a trader in a different time zone.

More broadly I have a concern about how to spend the rest of my life in a meaningful way. Trading and investing is fun and makes money but it's not so meaningful to me in terms of improving the world which I still dream of doing. Should I focus more on the academic track? Partly I am frustrated with academia because progress seems so slow and so controlled by conservative gatekeepers.

Shanghai Volume

This chart is from Maoxian's blog. It just shows volume of the Shanghai A shares. It does not include the Shenzhen market which is smaller or the dollar denominated B share market. The latter market has been extremely volatile recently. The Chinese market suffered a severe bear market that ended in 2005 and has since boomed crazily as everyone knows. Earnings of Chinese firms are supposedly growing very fast but the P/E ratio on the A share markets are higher than in the B share markets or of Chinese stocks listed on the Hong Kong (H shares) or New York markets. But I didn't realize how low the volume was in the previous boom-bust cycle compared with today. Volume on the Mainland Chinese markets is now similar to that in the US stock markets even though at the official exchange rate the Chinese economy is much smaller than the US economy and fewer firms are listed.

Persistent Overbought State Clearing?

It's looking like the market will begin a new upswing about Wednesday next week. It's also looking like the persistently overbought rally we've been in the last couple of months, where downwaves are very limited in duration is coming to an end. I don't know if the next wave down will be bigger than the current one, or whether we'll enter into a more volatile sideways market. But it does look like that the strong low-volatility rally is at an end. At least that is what I can tell from the model. Other indicators both technical and macro-economic would suggest that this is just the beginning of a bigger correction. I'm looking forward to some day getting the "upcoming correction" behind us, so I can establish some new long-term investments in higher beta stocks and funds. Today I was a bit early in covering my positions but still got some nice gains. I couldn't believe how strong the decline was. Especially, after the headfake after the housing numbers were released. The bond market slumped in reaction but by the end of the day is back to flat. The initial reaction was that home-sales were up strongly and that meant yields would head up. But then people seemed to notice the steep fall in average house prices. Home-sales were only up because prices were down strongly.

Australia

Snork Maiden was offered the job in Australia. But she still needs to do a phone interview with the guy in Arizona next week. Looks like she'll have some time to make a decision on the Australian offer. If offered the Arizona job is probably better career-wise. Anyway, the countdown to some real decisions has started. I'm happy for Snork Maiden but the main emotion just now is feeling rather nervous about making the right decision for us. Life will be easier if there is no offer from Arizona :)

Ditto

Yes it (SPX) failed for a third day in a row to close at a record high after trading higher intraday. The model switched to short in the early afternoon after Greenspan's comments about China likely to see a substantial stockmarket correction seemed to catalyse the downward move in the US indices and the stochastic fell below 80. I'm now back to positive for the month on trading even thought he model is still seeing its first negative month in a long time and some idiotic trades I made earlier in the month. This is fun if I can keep it up. I doubt this is the beginning of a major decline in the market as yet, because the model is still in the persistent overbought state which means that down moves are likely to be short-lived.

My current trading position is:

Short 3 NQ contracts
Short 1000 QQQQ shares
Long 3 SPY 157 June Puts
Short 100 IYR

In other words the notional underlying value is short just over $200k of stock.

S&P 500 Fails to Close at Record High

for the second day in a row. Today and yesterday the SPX traded above it's record closing high from 2000 but closed below it. The NASDAQ closed up. I seem to be bouncing back on trading. I finally am exceeding $6000 in profit from futures trading in my IB account. Been going sideways for a couple of months there. The model is still long and I am getting more mentally aligned with trading the model. Platinum Asset Management (PTM.AX - they manage PMC.AX which I am a shareholder of among many funds) IPO-ed today. The IPO price was set at $A5.00 in the prospectus on an a priori basis. No book build. No institutions could buy. It opened at $A8.50 today. Now that is nice! Unlike Interactive Brokers :( PTM.AX has an 87% return on stockholders equity! Funds management can be a very profitable business...

Anyway, reflecting on the SPX touching on its all-time highs... the rate of return on the SPX before any fees etc. has been around 2% per year (the dividend yield) since the all time high in March 2000. That's more than 7 years. Something to think about when you read the next blogger talking about the 12% rate of return on the SPX... You can do better than that 2%. The MSCI World Index has returned around 4%. I've returned around 8% p.a (and that's after all the fees I've paid). There are funds out there that have done better than that. Of course they are not "low cost index funds".

OTOH if you've been dollar cost averaging since March 2000 your average returns will be considerably better - on the SPX something nearer 5% p.a.

Bureaucracy

On May 16th the U.S. Consulate in Sydney mailed a letter to my lawyer here in the U.S. with the date for my interveiw for green card visa. Just one problem (well more than one). The date: 8:00AM on May 20th. Not only is that date passed, even if I was in Australia it would be hard to meet it as first I need to visit one of their approved doctors for a checkup as well as pay various fees. And that was Sunday morning, which makes it look like either a mistake or an error (wrong month?). My alwyer says they send out these ridiculous appointments all the time, so perhaps it is simply a placeholder and they expect you to negotiate a real appointment with them? I'll pick up the packet of info from her on Thursday when she holds her regular "office hours" at our university's human resources department. Then I'll need to schedule an appointment with the consulate.

The appointment will have to be in several months time as I haven't yet done the criminal background checks in all three countries I've lived in apart from the US. I will ask them if I need to do the ones other than Australia when I reschedule as those two were places I lived more than 10 years ago and their procedures are real hassles. I've delayed doing them, partly because they are huge hassles and partly because I still don't know where Snork Maiden will get a job. The Europe job now seems to be out, but we are still waiting to hear on the Australia one. Meanwhile she has an interview with one in Arizona on the phone from Beijing. Her interviewer will actually be in Europe. This guy was my department head in my first academic job in Europe (now he is in Arizona). Would be funny if Snork Maiden's first academic job is working with the same guy I worked with on my first academic position!

So I've told my friends in Australia that either they will see me when I come to pick up my visa or when we move to Australia. Either way it should be in the coming year!

Financial Disclosure

Ron Paul's financial disclosure statement. Apart from cash, he mainly owns real estate, gold stocks, and bear funds. A surprising (to me) statistic I saw in the Weekend Edition of the Wall Street Journal (print version) was that only U.S. 282,000 tax returns reported owning a foreign account. Non-resident taxpayers don't need to report this, but H1-Bs are supposed to file as U.S. residents. Another big group with foreign accounts must be U.S. expatriates who also have to file as U.S. residents, wherever they are in the world. Then there must be plenty of green card holders who retained or opened accounts in their home country. Add to them the U.S. citizens who opened a foreign account but live in the U.S. which this article was discussing and the number would have to be bigger than that? I think someone isn't being honest. I didn't realize I was in such a tiny minority by checking that box.

Private Equity

Thought I'd follow up my recent investment in a listed private equity fund with some thoughts on private equity. It certainly is "flavor of the month" - the latest headlines generated by Daimler effectively paying Cerberus to take 80% of Chrysler off its hands. Private equity investment means various things but essentially means investments in companies that are not listed on a stock exchange.

According to the Federal Reserve, business equity constitutes on average 17% of households' net worth - more than the 6% or so accounted for by direct stock ownership. If we assume that 70% of the holdings of mutual funds and retirement accounts are also in stocks we get the same 17% of net worth accounted for by stocks as by business equity. This means that if you are ony invested in publicly listed stocks you are missing around half the businesses out there by value! Being diversified across stocks does not mean you are diversified across equity investments! The average household also has 32% of net worth invested in a primary residence but only 6.4% in other property.

Aside from starting your own business how can you invest in private equity? It's certainly hard to get a stake in someone else's private firm without the right connections or being an accredited investor. Managed private equity investments fall into two classes: venture capital and buyout funds. Generally these are only open to accredited and qualified investors. The nearest equivalent in the US to AEP is Leucadia National. They buy businesses, turn them around and sell them. The company is often compared to Berkshire Hathaway. The difference is that Berkshire does not resell the businesses it buys and it buys successful not distressed companies. A big element of Berkshire is acquiring private companies. Owners who want to sell their company phone Warren up and do deals if he is interested. I have one BRK/B share currently. Leucadia is on my watchlist but seems pricey at the moment. It is a stock I would buy in a stock market correction. Another option, and way to get some more investment ideas is Powershares listed private equity ETF. Its biggest holding is... Leucadia National. You can also wait for the Blackstone IPO. But it is likely to be pricey. Several of my holdings are in the business mainly of acquiring privately held companies - these include CIF.AX, CIW.AX, and FLIP.OB.

Private equity has a reputation for extraordinarly high returns. Buyout firms have high returns due to their use of leverage. Without leverage they likely wouldn't do much better than listed equity investments. In other words the returns come from a high risk exposure. Venture capital firms that get things right can achieve extraordinary returns. Google is just one of the famous cases. Investing in start-up companies is of course tremendously risky, so a high expected return might make sense - there are a lot of total losses as well as tremendous successes. You have to understand exactly what kind of listed entity you are investing in. Don't assume that "private equity" is some magic bullet that will generate high returns.

ETF Cheat Sheet

This ETF cheat sheet is very helpful. This one only covers the US market. Bespoke plans on coming up with a cheat sheet for international ETFs (traded in US but invested internationally) very soon. I use ETFs for trading purposes. Currently I'm long QQQQ (and QQQQ calls) and short IYR. If I was starting investing from scratch at this point I might use ETFs for the beta part of my portfolio. But there are still very few ETFs available in Australia where most of my money still resides and there were none when I started out. I don't have this option available on either my 403b or my Australian superannuation account.

P.S. The model is now forecasting an uptrend in the market for at least the next week.

P.P.S. I should have followed this guy's advice today!

Allco Equity Partners

This evening I am buying 4000 shares of Allco Equity Partners. They are trading for $A3.87 per share so that is an allocation of about 3% of net worth. This is a listed private equity fund. It was involved in the failed bid to take over Qantas Airlines and its price has fallen precipitously since. It now is trading at a substantial discount to book value as well as to net tangible assets, and actually to the cash the company holds. The IPO investors paid $A6.00 in installments for their shares. Tim Boreham of the Australian newspaper alerted me to this investment back in April.

Update

Today went pretty well. I started the day with some horribly losing positions and closed them for a profit (kind of - by making one much bigger I covered it for a profit based on the average price of contracts I had sold :)), did another quick trade and established some new positions near the close (still short). Interactive Brokers even closed up for the first time! I got my check for $A11.5k from the Powertel takeover, stuck it in an envelope and will send it back to Australia tomorrow (why couldn't they just transfer the money to our brokerage accounts?).

Taking Over a Mutual Fund

An interesting story concerning the manager of the TFS Market Neutral Fund, which I am invested in. Marketers and managers of funds can belong to separate companies sometimes for purely financial/legal reasons and sometimes to bring in specialist outside managers to enhance a marketer's offerings. The company marketing the fund gets to choose the management. The interesting point in this article, is that though in the US mutual fund investors are called "shareholders" (in Australia, unitholders) they don't seem to get any say in choosing the manager. At regular companies, private or public, the shareholders can vote to change board members (in theory - in practice it's rare for stockholders of listed companies to vote out a boardmember nominated by other boardmembers) - who get to hire the manager. Another possibility is for the company to be taken over or for an "activist investor" like Carl Icahn to buy a stake in the company, get himself or a representative elected to the board, and then attempt to change things.

None of these options are open to mutual fund shareholders. It is true that the management or marketing company can be taken over and transactions of this sort are common. But it's not possible to target a single fund. Closed end funds which trade on stock exchanges are another matter. Activist investors have been known to demand that a closed end fund convert itself to an open end fund (regular unlisted mutual fund). The reason for this is that closed end funds often trade at a discount to net asset value (NAV). By converting to the open end format the price will jump to exactly NAV and then the activist investor will get out for a profit (some time I should do a post on premia and discounts for closed end funds).

Anyway, after this long preamble, TFS Capital wrote to Phoenix Investment Counsel who run the Phoenix Market Neutral Fund (EMNAX) and proposed that TFS take over its management. EMNAX has negative alpha and beta and has lost money over its history. Amazingly enough somebody still has $53million invested in it. TFSMX has positive alpha and beta and has made good returns and has around $140million now in assets. Anyway, the fund is not going to take TFS up on its offer, though its good publicity for TFS I guess ;) And it gets me to think about the best ways to structure managed investments and reward or punish managers.

P.S. the letter.

Chinese Stock Market Update

Shanghai opened down and Hong Kong up on Sunday night just like I expected. But then the Shanghai market quickly reversed to the upside. The composite index ended up 0.61%. The B-shares index rose 9.54%. B-shares are denominated in US Dollars and are open to foreign investors. Hong Kong closed up 2.5%. H-shares (mainland companies listed in HK) rose 5.4%. Nothing seems to be able to stop the A-share bubble going onward and upward.

Market Update

The bull market remains intact - the model is indicating that overbought conditions will persist next week. We might be very close to the final top in the market - some of my E-Wave counts support the possibility that we are in the final wave up from the 2002 bottom - and the likelihood of recession remains strong as long as the yield curve remains inverted and now the economy's growth rate has slowed to 1.3%. However, the wave pattern has kept extending and extending and both these indicators made me too bearish too soon. In the meantime the Chinese government is going to let domestic financial institutions invest in foreign stocks for the first time. EWH - the Hong Kong ETF - and FXI - the H-share (mainland companies listed in Hong Kong) ETFs both rose steeply on Friday. The Hong Kong market should rocket up on Monday. On the other hand the Shanghai market could then suffer a correction. Shanghai shares are extremely overvalued compared to the shares of Chinese companies listed in Hong Kong and Shanghai but it has been difficult for foreign investors to trade in the mainland stock markets or PRC investors to invest in Hong Kong or the US. Arbitrage between the markets was, therefore, not occurring. I won't, therefore, be surprised to see a pullback in US stocks on Monday morning in reaction, especially after the strong rally in the US on Friday. In all likelihood it would be a buying opportunity given the state of my model a strong correction here doesn't seem likely. I just ran a scenario where the Friday rally completely reverses - in this case the overbought condition will likely come to an end and we will be set up for a bigger correction in a week or two.

Drawdown

That's what traders call it when they are losing money and their account is going down... I'm down 15.9% on my trading capital so far this month or a loss of $4292 so far. That's $476 down per trading day on average. The model is down 2.86% so far this month and when the model is doing poorly I tend to do terribly. Actuallly when I fit a trendline to a chart of my returns on the Y axis and the model's returns on the X axis I am still above the trendline for this month (technically I have a positive residual this month in this regression - alpha is very negative and beta of my returns vs. the model is near 3).

I don't seem to be able to do anything right tradingwise at the moment. I missed the big downswing yesterday because I was too busy and the model was long. Today the model is short and I'm trading and the market is going up! Supposedly, according to the media, the market is rising because the PPI figures released this morning showed inflation was under control. Therefore, may the Fed will cut interest rates sooner rather than later. Initially both bonds and stocks rose. But then bonds began to fall all day long and ended up down. This means of course that the yield on bonds rose. So if bond yields are rising how can stocks be rising on hope of a Fed rate cut? So I lost on both fundamentals and technicals today.

I need to stop the bleeding to avoid blowing up all my trading profits all over again. I'm going to have to change my strategy a bit I think. One problem that is getting me stuck in losing positions is mixing up different time frames. I am thinking of putting different trades in different accounts. In one account I will do trades purely according to what the model says to do. Then in the other account I will do discretionary trades - mostly these trades will be in the same direction as the model - for example, my overnight trades. I could get in or out of those trades without worrying whether I should hold the position because the model might turn out to be right, as I'll have another model driven position anyway. This might be easier to manage mentally. We will see.

Google World Update

I now found that most large US cities have some realistic building models as do some famous world cities - I checked out Sydney, Hong Kong, Rome, Jerusalem, Mecca, Melbourne, Beijing, Shanghai, Kuala Lumpur, Singapore. They're all cool (though some like Kuala Lumpur only have one building) except Jerusalem where the Dome of the Rock is modeled way too large and looks ridiculous. None of these cities have the generic grey buildings that fill in the rest of the space in the US cities. Austin, Texas just has the Capitol and two highway billboards! Very peculiar :)

My trading is awful this month so far. Everything I do seems to go wrong. Actually the model was on the long side today but I hadn't read things right and went short after the FOMC announcement when the market intially went down. But then the market went up and I lost again...

Magazines Meme

Clifford tagged me with the magazines meme. So here goes:

1. Barrons - I have a subscription and read it online now.
2. Scientific American - subscription
3. The Atlantic Monthly - once paid to read an interesting article online and ended up in a supercheap subscription which I kept.

They cover my main interests. In the past I had a subscription to the Economist but I find reading too many of their arrogant articles gets annoying. I read the New York Times online most days. Some days I buy a hard copy newspaper - could be NYT, Wall Street Journal, or even Financial Times. I also receive academic journals from the various academic societies I belong to.

Google Earth's Latest Cool Feature

As I mentioned that I was obsessed with Google Earth, I have to share with you the latest cool feature I discovered. Many of the buildings in southern Manhattan are now full color 3-D models! Previously all buildings had blank grey realistic shapes in that area and in several other US cities. Only the area south of Central Park and some parts of Jersey City and Brooklyn are modeled in 3-D New York. But this shows the potential and where this kind of virtual Earth technology will go eventually. Google is on my watchlist of stocks to buy for long-term investment on a pullback. I've made some money trading it in the past. Right now, though, the chart appears to be heading down:

Passive and Trading Income

I was wondering where I was at so far this year (first four months) regarding passive (nothing to do with "passive investing") and trading income:



My definition of passive income is money that arrives to me without me doing anything to realize it - so long-term capital gains from selling a stock isn't counted and unrealized gains certainly aren't. Also not included is anything that happens in a retirement account. But I am counting the net profit from cash takeover, like the Powertel takeover by Telecom NZ, in passive income. The other categories of passive income should be obvious. Projecting for the year I should receive bigger mutual fund distributions in June and December and a similar size one in September. I expect to receive about the same amount again in dividends and we could multiply interest by three. There is one takeover maybe in the works, but the payout will be about $1500 in net profit. So I could project about $23k for the year. Trading is very hard to predict. Maybe I'll triple the numbers or maybe I'll blow up like I did to some extent last year. If I tripled the numbers I'd have $33k for the year. With expenses of $25-30k per year (and not counting stuff like health insurance that my employer mostly pays for now in that) and considering taxes I'm just on the edge of "financial independence". But I can't afford to make too many mistakes or I'd start cutting into my capital.

Interactive Brokers IPO Prices at $30

So I have been allocated 200 shares! Looks like they'll start trading on Friday.

Passive Investing and Entrepreneurship

Many personal finance bloggers and personal finance gurus are in favor of passive investing. Invest your money in the market portfolio rather than trying to beat the market through selecting investments and trading. The logic behind this advice is that the sum of all "alpha" - risk-adjusted above market returns - is zero - unlike in Lake Wobegon, not everyone can be above average. The assumption is that the the above market returns are either distributed randomly or are flowing to the Goldman Sachs and Warren Buffetts etc. of this world. It is true that the majority of mutual funds have negative alpha. So why not minimize costs and invest in the market portfolio at the lowest possible?

In thinking about trading as a business an idea came to me.

Many of the same people who are opposed to trading and are in favor of passive investing also strongly favor entrepreneurship and starting your own business. But on average all businesses make the average rate of return on capital. Some are very successful and some fail. Why does it make sense to invest in your own business if it doesn't make sense to be selective in investing in other businesses through the stock market?

Junk Stocks, Bad Trades, and Complicated Security

Several themes today.... I bought 25,000 shares in FLIP.OB, aka FTS, this morning. Yes it's a penny stock. Literally. I bought at 1.84 cents a share spending $467 in total including commissions. This trade would have cost about $80 in commission using Interactive Brokers instead of $7 with Ameritrade! Unlike many or most bulletin board stocks with similar charts, FTS actually makes money. It even has free cash flow. And it is selling at about 3 times FCF or a P/E of 2. I'm willing to make a small bet on this stock - maybe something is actually really wrong and the stock goes to zero or maybe it increases 4 or 5 times over in the near future to reach a more reasonable P/E. Risking less than $500 to make maybe a couple of thousand sounds OK to me. The company is a retailer of cellphones, satellite dishes etc.

Talking of junk stocks, the administrators of Croesus Mining (CRS.AX) poked their head out the rabbit hole they've been hiding in for the last few months. They say that they are now focusing in the next three months on recapitalizing Croesus. So this stock still might trade again one day, though likely at a value similar to FTS :)

Trading very badly today and giving back the profits I made in the last couple of days. The stockmarket remains extremely strong and overbought. The model gives short signals which can be profitable but they are reversing very fast at the moment and I haven't been nimble enough to get out before the uptrend resumes.

In a collaborative effort with my Mom on the other side of the world we managed to access her new account with a well-known global investment bank. This involved her working a special card reader, an access card, and a pin number and me entering numbers into the computer here. It reminded me of movies where thieves are trying to get into some fiendishly complicated safe. Any moment they might set off the alarms :) It's nice to know the money is secure!

April 2007 Report

All figures are in US Dollars unless otherwise stated. This month saw very strong performance, which has been the case for the last several months.

Income and Expenditure



Expenditure was $3525 - more than take home pay ($3,299) due to spending on my brother's upcoming visit to the US. 403b contributions totaled $1,792 and Roth contributions $333.33 as usual. Non-retirement investment returns were again very strong this month ($10,363). Retirement investment returns were also nicely positive ($5,615). The rise in the Australian Dollar again contributed significantly to returns.

Net Worth Performance
Net worth rose by $US17544 to $US423,791 and in Australian Dollars gained $A7451 to $A509,058. The Australian Dollar again rose this month resulting in a relatively large gap between performance in the two currencies. Non-retirement accounts reached $US232,779. Retirement accounts also saw nice gains to $US191,012.

Investment Performance
Investment return in US Dollars was 3.93% vs. a 4.48% gain in the MSCI (Gross) World Index, which I use as my overall benchmark and a 4.33% gain in the S&P 500 index. Non-retirement accounts gained 4.65%. Returns in Australian Dollars terms were 1.11% and 1.87%. The markets were extremely strong this month. My U.S. Dollar returns beat the indices year-to-date and over the last 12 months:



The contributions of the different investments and trades are as follows:



The returns on all the individual investments are net of foreign exchange movements. Foreign currency gains appear at the bottom of the table together with the sum of all other investment income and expenses - mainly net interest. Trading worked out well in the end despite some setbacks along the way. Trades around the Google and Apple earnings reports made good contributions. I again had a positive result for QQQQ/NQ trading ($527). The biggest gain was from a balanced mutual fund - the CFS Conservative Fund. Symbion began to run up in anticipation of the May 1st merger bid. Everest Brown and Babcock suffered a loss this month as the fund of funds sold off in response to the rights issue.

Progress on Trading Goal
Trading in my US accounts netted $3,248 a 10.8% return on trading capital. The model gained 6.4% while the NDX rose 5.4%. My goal for the year is to end up with at least as much in my three accounts - regular trading, Roth IRA, and IB - as I've put into them. The accounts in total gained a net $3,249 and I have now achieved $12,297 of the annual goal of about $19,000. Since the beginning of the year the trading capital gained 56.1%, the NDX has gained 6.3% and the theoretical model gained 36.5%.

Asset Allocation
At the end of the month the portfolio had a beta of 0.04. 41% of the portfolio was in stocks, 42% in bonds, 13% in cash, and loans totalled -9%. The remainder was in hedge fund type and real estate investments, futures value etc. Looking at asset allocation the way I prefer, 25% was in "passive alpha", 66% in "beta", 8% allocated to trading, 7% to industrial stocks, 3% to liquidity, and I was borrowing 9%.

Separately Managed Accounts

I logged into the smaller of my Mom's new accounts for the first time since we started investing with a certain manager of separately managed accounts. Separately managed accounts are similar to mutual funds but the funds are not pooled - instead of owning shares in the fund you own the actual shares directly. This gets around the negative tax issues associated with traditional open-ended mutual funds. In traditional funds you pay the pre-tax net asset value of the fund for a share in the fund. When you buy shares in the fund might have tax liabilities due to selling stocks or receiving dividends during the year before you bought in. You have to pay these taxes when at the end of the year capital gains and dividends are distributed to you even though you didn't benefit from those gains or dividends. Also, when investors redeem shares the manager has to sell stocks generating capital gains whose tax liabilities are distributed to all shareholders. The flipside is that growing funds like TFS Market Neutral tend to have lower tax liabilities. Anyway, none of these issues apply to separately managed accounts.

But what surprised me is that when I logged in I saw all the individual stock positions in the account just as if it was a regular investment account. This is an excellent manager, and I'll probably get some investment ideas for myself by checking out their picks.

Symbion Again in Merger Talks

Symbion Health (SYB.AX) is again in merger talks. There is a bid from Healthscope (HSP.AX) and a couple of private equity firms that values the company at $A4.30 per share. The firm would be dismantled and the path labs etc. merged with Healthscope in return for Healthscope shares and the pharmacy etc. division would be purchased by the private equity guys for cash. I will be due long-term CGT on the latter and I believe no tax on the scrip for scrip portion. So I'm planning to hang on and see what happens here.

In related news, Powertel, which was acquired by Telecom NZ was delisted today. From the merger scheme document seems we'll be sent a paper check (for $A11,500 in my case), which I'll then need to mail straight back to Australia. I am thinking to use $A1500 towards paying off my margin loan and then wiring $A10,000 back to the US. The check will likely not be mailed till May 9th. In the meantime I'm recording this as a receivable.

That's Insane

Said Snork Maiden. This was when I told her the difference in commissions between trading a stock index futures contract on the Sydney Futures Exchange through Interactive Brokers and trading the same nominal amount of actual Australian stocks at the lowest online rate offered by Australia's biggest online brokerage. $A5 vs. $A186. The latter reflects trading $A155k of stocks at a 0.12% commission. Going short through the latter broker involves additional commissions. Another way to significantly lower costs is to trade warrants (options on stocks issued by investment banks that trade like stocks on the ASX) or options rather than actual stocks. Because the face value is much lower you pay less commission. But you can't always get the exact warrant you want and trading options requires phoning a broker and paying much higher commission rates.

Trading Result for April

April turned out to be a good month in the end. I made $3278 from trading in my three US accounts. That's about a 10.9% rate of return (per month not per year!) on capital deployed. The NDX rose 5.4% and the model gained 6.4%. Based on my trading since June 2006 I would be predicted to make about 4% when the model returned this amount and so I had a nice positive residual driven by Google and Apple trading. My accounts have gained $12,200 from trading in the same period. So I estimate conservatively that I can make $15k or so per year from trading. Together with passive income from dividends and distributions I'm close to earning enough income (not counting long-term price appreciation) outside of retirement accounts to meet my expenses. There are no guarantees that the recent good trading results will continue as none of the test statistics are very statistically significant yet.

New Short: Salesforce.com

An article in Barrons this weekend suggested that Salesforce.com (CRM) would be a good stock to short. As usual I checked out the financials. It has a forward P/E of more than 60 and free cash flow is significantly below earnings. Analysts are forecasting rapid earnings growth but some have recently downgraded the stock. The chart also looked vulnerable to decline. The stock has an extremely high beta of 4.58. If the market goes down in the next few days then it will go down more. Salesforce was also mentioned here over the weekend. Wallstrip recently ran a positive show on it. Not sure how long I will hold the short. I'll play this one by nose or is that ear :)

Barrons also suggested shorting ACP, Carl Icahn's firm. It opened today steeply down. The bid-ask spread was so big though that I didn't want to get in. I'll monitor this one and see if a bounce is worth shorting.