New Computer, Google Analytics, Market Direction

The finance person in my former department told me yesterday they want my laptop back (not sure what they plan on doing with a Mac laptop in a PC oriented place - though I have one former colleague who is another big machead who maybe could use it - the forward cursor key doesn't work but otherwise it is a fairly new computer). So I went to buy a computer at the Apple Store at our huge regional mall last night. Cost $2159 including tax the base model MacBook Pro. You can buy one of those white plastic Mac "consumer" laptops with a smaller screen for not much more than half this price. But the MacBook is the most beautiful computer ever built I think and I was using one up till now. If I bought the cheaper model I would be annoyed every time looking at the thing that I didn't get the MacBook Pro :) Besides, for trading, the bigger the screen the better. Maybe I can deduct it as an investment expense in my Australian taxes next year?

I signed up for Google Analytics. This is the first time that I have any analytic capability on my website beyond the Clustermaps application. Expect some geeky reports coming up!

Obviously I was right to close all remaining shorts yesterday morning. The strength of the rally switched the model to long. This is my current Elliott-Wave scenario:



There is a lot more upside coming if this is correct.

Covered Real Estate Shorts

Kept the Beazer puts though. Thought about putting a hedge on the US portfolio (BRKB, FLIP, HCBK, IBKR, NCT, RICK, SAFT) for the rest of the day but the odds seem in favor of more rallying today so I didn't. Off to a couple of meetings with grad students - the first is trying to sort out one of my students committee going forward after I've left. There is not much enthusiasm to take her on. The other is a farewell lunch with grad students.

Golden Bear Day

Today was a great day for being a bear. However, I closed all my index shorts towards the end of the day. The market closed at the low of the day and near the low of the last five days and so there is a good chance of a bounce tomorrow though the model is still formally short. Also there is a very nice 5 waves down from Friday's top. I did keep my real estate related shorts (LEH, BZH, IYR, TOL). The Case-Shiller house price index reported today - all cities that they cover are now down year on year. The Fed released the minutes of the last FOMC meeting, which essentially said nothing much. There was also a consumer confidence number which just met expectations. Basically the technicals are pointing down and so the market is going down. I don't know if we are immediately heading to a new low or whether this is wave B of a B wave that started with the August 16th low or what. I'd think we need more time before retesting the August 16th low based on the weekly charts, McClellan Summation, and past experience. But you never know. There's also a chance that we won't retest it but I'd rate that pretty low.

Glad I'm not Teaching

Today is the first day of the semester at my former university. I'm glad I don't have to teach today. Maybe some day I'll come back to it. But I need a break from it and academia in general. I've been doing academic research for 20 years since I worked on the project when I was an undergrad that became my first published paper. I'm burnt out. I'll keep doing a little of this at my own pace. For example, right now I'm working on reviewing a paper for a journal. But I'm also rejecting a lot of review requests. That's nothing new for me as I was getting requests to review far more papers than I could.

Sold Ansell

I just sold my 500 shares of Ansell @$A12.59. The stock spiked up 4-5% today and I'd been wondering recently whether to hold onto it. Some people are bullish on the stock but recently it has been negatively affected by fluctuations in the price of latex and the stock price has been pretty volatile. The company has a consistent growth plan and has been acting on it. I first bought the stock six years ago when it was in the middle of restructuring as a value/turnaround play. The company was formerly known as Pacfic Dunlop and produced everything from tires to clothing. The new focus was on gloves - surgical and industrial and condoms. The investment has been very successful yielding a total profit of $A9300 over those six years. Looking at the chart the stock has gone through five major waves a typical Elliott Wave signature of a complete bull run. Today the price was hitting the recent highs from several weeks ago after a dip as low as $A10.85.

When you are using margin as I am you need to evaluate each investment against your margin loan rate, which is currently 9.25%. I'm not certain that this investment can return more than that going forward, I'm bearish in the near term on the general stock market. I've had a great run in the stock and decided it was time to say goodbye. Yes I'll have to pay long-term capital gains tax though that is quite a way off. And because I have bought the stock and sold some now and then, only $A1500 is liable for tax, while I save the interest on all $6250 that I sold. And I received the dividend as the stock just went ex-dividend a couple of days ago.

Trading Psychology

Every time I "blow up" I get to work on both my model and my psychology. I try to find tweaks to the model that would have given me a more definitive signal. For example the problem this time was that at the start of the Friday session the model was saying to be short at the close. But that was based simply on one of the stochastics I follow (slow(5,3)) crossing over (which is one of the sell rules when we are overbought - a state where the stochastics are above 80. But if the market rallies that signal is negated. And that is exactly what happened. So based on that indicator there was no sell on the close signal at the end of the day. But I have other indicators to signal when to sell in the overbought state. One of them is based on the forecast of the stochastic for the next day and its moving average. Direct forecasts of the stochastics are generally poor indicators - not a lot better than a random walk in the one step ahead forecast. But when there is very strong momentum in the market they have enough time to eventually give the correct forecast. Anyway, I tweaked this indicator and backtested it and this seems to work much better. It is saying sell on Friday's close. So overall I would say one could take a short position but cautiously.

But the other half of the story is that no indicator said I should go short before the market close on Friday! My impatience in wanting to be contrarian and bearish as soon as possible is what got me into a classic bear trap when what I saw as a head and shoulders formation over the last three trading days did not play out as expected. So the other half of the work that needs to be done is on my psychology. There are lots of good resources in print and online on trading psychology. These are some of the websites I know about:

The Other 2%
Afraid to Trade
Trader Feed - Brett Steenbarger's website.
Trading Psychology - Bruce Hong's website.

Keep Losing Money

I seem to have developed something like a death wish regarding my trading accounts. I know exactly what to do, and then do the exact opposite. And keep losing money. I don't understand it, but something is emotionally wrong.

I know that I feel most comfortable going against the trend, being outside the mainstream and the consensus. It might come from being an outsider in many ways growing up. But this is a very destructive tendency in trading. Especially, going against the model I created myself! If I could stop this delusion, I could make a lot of money at this.

Closed my Chase/Amazon Credit Card

I hadn't used it at all for a while and think a credit line on my remaining US credit card accounts of $10,500 is perfectly adequate. So why not just leave it open? Well they keep sending bills, many of which include convenience checks which I carefully cut up and throw away. I don't want those to get in the wrong hands. There was no option online to redirect mail to Australia. And what would I want that stuff for in Aus anyway? I might go through all my store cards I've collected and cancel those too. Once I got through the touchtone options it was all over at Chase in a minute. Very painless. I'll still have HSBC and Citibank credit cards.

New Trade

Shorted 100 LEH (Lehman) @ 58.99. Don't know how long I'll hold this one, will see how things develop.

PS 12:38PM

Another new one: Bought 2 Beazer $15 puts in my Roth IRA. I also reshorted IYR.

Craigslist Works - Fast

Snork Maiden advertised her car on Craigslist at 4pm this afternoon and by 6pm she had a buyer! And this is for a ten year old Subaru in a state saturated with Subarus. Agreed price $3300. I think she paid $6000 about three years ago from a dealer.

At my end, I've now worked out all my address changes and did a few already online. Will print the ones requiring hardcopy letters tomorrow and send out. A couple of financial institutions didn't allow a country outside the US on their online interfaces. TIAA-CREF specifically say to phone them about that. Chase credit cards don't mention it, though they do have a link to enter foreign phone numbers! I may close the Chase/Amazon card anyway. I'm not using it a the moment and don't need 3 US credit cards. Also I no longer care about my US FICO score. I plan to keep my HSBC and Citibank credit cards for the moment. Of course, the best address change form was on the website of the Association of American Geographers (it had better be!). It even had the Australian states on the menu together with US ones and Canadian provinces. I probably won't renew my membership though when it comes due...

Otherwise, more stupid trading today (against the model). I don't know how much pain I need to suffer until I learn my lesson.

Clearing Up

Today I did a final clear-up at my old office - erasing all my files off the computer, taking a bunch of files that were still there home, and handing in my keys. They already had the name of the visiting professor who will be teaching in my place on the door, but no sign of him. He got his PhD in our department a few years ago and has been teaching temporarily at various colleges and apparently doing some journalism too. I also helped a faculty member understand a bit about how to maintain our online working paper series which I was in charge of. He's not too computer savvy (in his 60s) but with some help I think he can get on top of it and learn some stuff about servers, using Acrobat, and editing webpages.

Today, exactly 17 years ago, I first came to the United States. Now I am in the process of leaving again (for the third time). I know it is a cliché, but it is amazing how time flies.

Real House Prices in Australia

Following up from yesterday's post I downloaded data on the Australian consumer price index and computed series for real (inflation adjusted) house price indices:



These series, like those I posted yesterday are for established houses only (not new houses). I used the specific consumer price indices for each city. The next graph shows the real year on year rates of change in hosue prices:



The average growth rates over the entire period for each of the cities is as follows:

Sydney 3.0%
Melbourne3.0%
Brisbane 4.0%
Adelaide 1.3%
Perth 5.0%
Hobart 2.7%
Canberra 2.3%

But as we can see readily from the charts the average rates for 1986 to 1999 were much lower than this:

Sydney 2.3%
Melbourne 0.5%
Brisbane 0.4%
Adelaide -2.7%
Perth 0.6%
Hobart -2.0%
Canberra -1.5%

Only the boom from the beginning of 2000 lifted the real rates of price change into the black for all cities. EnoughWealth's comment that the real rate of increase for Sydney is between 2-3% is accurate, but it's not true of other Australian cities if we assume that the 2000 boom was an anomaly. Based on the 1986-1999 period and what has been seen historically in US housing markets I'd bet that the true long term rate for other Australian cities is less than 1%. In the next few years I'd expect it to be even lower as prices revert to the mean trend. Of course I could be wrong and the other cities might instead continue to perform like Sydney. Theoretical this could happen if the supply of desirable locations is restricted in the future. When supply of land is restricted we should expect land prices to rise at the same rate as the rate of economic growth. This is what appears to be happening in Sydney. But desirable locations are not as restricted in the other capital cities.

Australian House Prices

I put together this chart of house prices for the six Australian State Capitals and Canberra from the official government data:



There is also data available for Darwin but it was too erratic and Darwin is so small that I dropped it. And I also computed the year over year rates of change:



Next, I'll try to come up with the real changes in house prices adjusted for inflation in the prices of other goods and services. That will give a better idea of what we might expect in the future. General inflation was much higher in the late 1980s than recently and so the average rate of house price appreciation over this period is misleading I think.

After the initial subsidence in prices around 1990 there was an "echo boom" that was more noticeable in some cities, particularly the smaller ones. And, again, recently the rate of price increases subsided or prices fell absolutely (in Sydney in particular) but now we are in a new period of house price inflation, especially outside of Sydney. The echo boom in Perth is much greater than the initial boom there. This is entirely related to the boom in the mining industry.

I've noticed that there is a four year cycle in the US housing market, just as there is in the US stock market. It seems this same four year cycle could be present in Australia, superimposed on the longer 16 year cycle. By this interpretation, we are now near the peak of a four year cycle and should see a reduction in the rate of increase in prices over the next couple of years. 2009-10 could be a good time to buy a house.

Quant Fund Meltdown Autopsy

The autopsy of the quant fund meltdown in the last weeks is beginning. In this article, Clifford Asness of AQR is quoted as saying: “We have a new risk factor in our world.” What is that factor? - some stocks are heavily owned by similar funds and others are heavily shorted by the same funds. This is an example of the "fallacy of composition" in economics. Something that works for one player at the microlevel does not neccessarily work for everyone at the macrolevel. For example, some traders have skill and are profitable but not all "traders" can profit (of course, if hedgers lose speculators could all win). Here one small fund could liquidate and exit the market profitably but not all can do this simultaneously.

TFS Capital has been looking at what factors were most responsible for the recent fall in value of quant long-short funds. They have put out a press release on their research. They identify short-covering rather than selling of long positions as the primary factor. And the stocks with the highest "short interest" - the most shorted saw the biggest moves. In other words it was a classic "short squeeze". I guess one could theorize that if a long-short fund liquidates all its positions it would be selling the long positions into relative strength as these are stocks that were identified as being good investments. Long term investors likely wouldn't panic and also sell these stocks due to the price falling a little. On the other hand covering its short positions would cause a scramble by other short-sellers to cover too. The good thing about identifying this factor is that the level of short interest in each stock is published monthly and could be included in a quantitative model. I guess one could try to track the holdings of similar hedge funds on the long side, but these are published quarterly with a lag so that data is less useful.

The bottom line is that many of these funds will rebound in value from this debacle and will have learnt from the experience and improved their strategies. In retrospect this "black swan" looks very predictable. But things are always easier in hindsight. For the individual investor it means that some of these funds are likely good values for investment now and also that if you are shorting stocks yourself monitor very closely any stocks which have high short interests.

Fed Cuts Discount Rate by 1/2 Percent

The Fed made a "surprise" cut in the discount rate - the rate it lends to banks at - of 1/2 percent this morning. The stock futures went crazy to the upside (NDX up 40 points). Interestingly, 10 and 30 year bonds futures fell sharply indicating expectations of higher future inflation. The Fed has not moved their main target the Federal Funds Rate. Yesterday, 90 day T-Bills were trading at yields in the mid 3% range. I think this is due to some money market funds having problems due to investing in short term corporate bonds that have fallen sharply in value or mortgage related instruments. Even those yields are rising today. Interesting that the Fed chose options expiry day to take this action...

Leaving Retirement Account with my Employer

I decided to leave my 403b account with my employer and invested in TIAA-CREF. Often I read about how this is a bad idea. But TIAA-CREF is a good (and cheap) fund manager. And foreign employer sponsored retirement accounts are exempt from Australian taxation as long as distributions are not taken. Distributions are subject to regular income tax just like a 401k or 403b is treated by the US IRS. A US IRA is (mostly) taxed just like a regular taxable account by the ATO (Australian Taxation Office).

The retirement specialist told me that retaining the account with them does not preclude rolling over the account at some later date to an IRA. Also they allow all of the distribution methods that TIAA-CREF facillitate. Not all employers do. And apparently there is no paperwork to complete.

Carry Trade Unwinding

The "carry trade" is where investors borrow in low interest currencies and invest in currencies with high interest rates, pocketing the spread. The main low interest rate currency has been the Japanese Yen and one of the main high interest currencies the Australian Dollar (AUD). In recent months the Australian Dollar soared higher and higher and the Yen mostly lower. In the current financial crisis the process is reversing and the Aussie has fallen around 10 US cents from its peak. It's down 3.5 US cents overnight, which is a massive move in a currency:



This is having a massive impact on my net worth measured in US Dollars as around 2/3 of my net assets are in AUD related investments. At this point in the month my rate of return on investment is -9.7% and net worth has fallen $US 47,000 from last month. In AUD terms, though, the return is -1.6% and net worth is off only $A 12,000. In USD terms this is the worst drawdown since the big bear market in the early part of this decade. But in Australian Dollar terms it is nothing remarkable. I lost more in June 2006 for example: -3.3%.

I am sufferring some big losses on investments, however, especially in the Everest Brown and Babcock Hedge Fund of Funds (EBI.AX) and the management company (EBB.AX). The latter has halved from its peak. I really should have sold some when it was so overvalued. I guess irrational exuberance and a dislike of paying taxes overtook me.



As for the fund of funds itself - it trades as a closed end fund on the Australian Stock Exchange and so the stock price can trade at a discount to NAV which is only announced monthly. Undoubtedly some of the hedge funds in the portfolio have suffered losses in the current market conditions. But I doubt this justifies the steep fall in price relative to the end of July net asset value. NAV was $A4.06 on July 31st. Yesterday, the fund traded as low as $A2.48 before ending up.

Many people claim they wish to emulate Warren Buffett and buy like crazy when prices are below intrinsic values. I have been doing some of that in recent weeks but have been wary that prices could fall lower. So I haven't been "buying like crazy". It's hard in practice to actually put such a plan into action when the time comes.

Wednesday Effect

The model was signalling to go long tomorrow. However, today is Wednesday which tends to be an up day in the markets. I was just searching for the link where I read about that statistically significant effect but I can't find it. Anyway in the last few years the market tends to go up on Wednesday. So I added a rule, that if the model is short on a Wednesday and Thursday is predicted to be long then I should go long on Wednesday. It improves the results. Just going long on Wednesday willy nilly, however, reduces returns. The reason for this is that on about half of all Wednesdays the model will be long anyway and that is a substantial part of the Wednesday effect. On the other half of Wednesday when the underlying model is short it is sometimes right and sometimes wrong. The times it tends to be wrong is when the signal is turning to the long side at the end of Wednesday anyway.

PS 4:25PM

The Wednesday effect obviously didn't work today though early in the day it looked like it was and I went long and made a profit. Then I went short, ditto. Then I went long near the close and the market kept falling. Then my internet connection went haywire :( I was stuck in the losing position and couldn't get out of it. When things were back to normal I was down more than 10 NQ points. There was a post-close bounce of sorts... deciding what to do now.

Buy: Symbion Health

The ACCC (Australian Competition Commission) approved the merger of Symbion Health (SYB.AX) and Healthscope (HSP.AX) today. Yet Symbion's share price is languishing below the implied value post takeover. Healthscope's price would have to fall considerably to make Symbion's current price a fair value. I guess people are concerned about just that and whether the whole deal will fall through in the current credit constrained environment. Another potentially disturbing factor is the stake that Primary (PRY.AX) has been building in Symbion. Anyway, I decided to do a bit of merger arbitrage and double my position in Symbion. At this point this is shaping up to be my worst month in terms of investment return since April 2005 when I suffered an 8.6% loss. That event got me to be more proactive again in investing in trading after letting things ride for a while. It was a great ride in the two years up to that point but this loss was a reminder that risk hadn't gone away. Apart from the generally negative direction of the markets I am being hit by the fall in the Australian Dollar and by the debacle in quantitative long-short fund strategies which is affecting several of my holdings directly or indirectly. In Australian Dollar terms this month is not particularly bad so far (but still negative).

Tourist Visa

I got my tourist visa or rather "visa waiver" and am back in the US in Snork Maiden's town. They asked me a lot of questions and I showed them my outbound itinerary to Australia, my resignation letter etc. I was the last one back on the bus. That's a relief. When I arrived some Egyptian guy was waiting and he was still waiting when I left. Next step in the moving plan is dealing with all the administrative stuff like changing addresses with financial institutions etc. I'm thinking now to exit my apartment at the end of August (I'll give them some excuse about visas) and fly back here and then on September 12 fly back to my hometown - I have a hotel booked for that night there anyway - and then on September 13th fly out to Australia. The flight would be cheaper than rent and utiltiies for another month. We can't reschedule the flight to leave from here (Snork Maiden town).

On another note, volatility in the stockmarket has now declined to a level where I am much more comfortable trading again. It hasn't been a matter of the daily moves but the intra-hour volatility or intra-5 minute volatility even. Now it is much easier to figure out where the market will be heading in the next few minutes. I am beginning to try more trades and make more money at them again.

Montreal

I'm in Montreal. I took the Greyhound Bus up from Burlington, VT this afternoon. I told the Canadian Immigration agent the whole story - how I was an H1B, quit my job, and was planning on re-entering the US tomorrow. She took my I94 (the little form that gets stuck in foreigners' passports when they enter the US) and let me in to Canada. So, so far, so good. This is actually my first blog post from outside the US. Haven't been out of the US or off the east coast for a while now. Since December 2005 actually. I usually travel more than this. The hotel I'm staying at is called: Hotel Montreal Espace Confort. It is just around the corner from the bus station on Rue St Denis, which is one of the nicer streets in Montreal. I'm not a big fan of Montreal - this is my fourth visit here. I get hung up on the language issue. If I speak English people often seem grumpy and annoyed and if I try to speak French they speak back in English. I can't win. I liked Quebec City more. France itself is a whole other story at least away from Paris. Most people I met there were happy I was trying to speak to them in French. Anyway, the hotel is very new, clean, modern design, and a good price in a good location. If you are happy to share a bathroom you can get it for $C50. I paid $C89 for a better room. There's an even more frugal option for this exercise - do the round trip by bus in one day - it's only 2 1/2 hours each way. But I didn't feel like doing this and thought it best to leave the country on the day I officially quit and then come back the next day in case there were any complications.

Submitted New Resignation Letter

I just now e-mailed in a new resignation letter with a resignation date of 13th August. I also e-mailed HR to ask if there is anything I need to do regarding my H1B. I want to keep it with TIAA-CREF for the moment. I booked a hotel in Canada for Monday night and will take the Greyhound bus up there. Tuesday, I will try to return to the US as a tourist. We will see what will happen.

Back to Visa Issues Again

The HR Department at my university won't approve my leave due to concern that immigration will take a "dim view" of it. The head of HR gave two options: Appoint me to a fixed term appointment from 1 July 2007 to 13 September 2007 or that I resign retroactively from 30 June and do the "B Visa", which practically means leaving the country and trying to re-enter again as a tourist. The problem with the first option is that I might need a new H1B. So now I've e-mailed the lawyer again on that. If it does need a new visa, it's not a practical route. Likely I will end up having to try to go to Montreal and back... At least now all the stuff I want to ship to Australia is on its way and Snork Maiden would "just" have to drive 150 miles each way to pick up the rest of my stuff if I got stuck outside the country. Everything else could be handled from there.

EBI Management Ponder a Buyback

I'm not the only one who thinks this investment is a bargain:

7 August 2007

ASX RELEASE

Everest Babcock & Brown Alternative Investment Trust (EBI)

EBI applies to ASIC for relief to conduct buy-back

Following the announcement of an unaudited net tangible asset backing per unit (NTA) of $4.06 as at 31 July 2007, the responsible entity of EBI announces that it is considering conducting an on-market buy-back of EBI units. It has today applied to ASIC for the appropriate relief.

As at close of 6 August 2007 the market price of an EBI unit was $3.18 being a 22% discount to the July NTA and EBI believes that a buy-back would be an efficient use of capital which would generate unitholder value.

Any buy-back is subject to ASX consultation, ASIC relief and potentially (depending on size) unitholder approval. At the time ASIC relief is obtained, the responsible entity of EBI will review the discount between the EBI unit price and its NTA and will determine its next course of action.

************************************************************************************************

The current undervaluation started with the botched capital raising in April. The capital raising raised the desired funds but resulted in a loss of net asset value to those who did not participate. This included me - I wasn't allowed to participate because I was a foreign investor. The loss of value as a result of the capital raising was very unfair. The stock price plummeted even further. More recently as hedge funds have changed from being the investment du jour to being very out of favor the discount to net tangible assets (NAV) has widened considerably.

Two More Buys

I bought one share of Berkshire Hathaway B (BRKB) @ $3615 and one hundred of Safety Insurance (SAFT) @ $33.26. I thought that Berkshire had another great quarterly report and it was time to double my position. SAFT is a stock I noticed a long time ago and occasionally checked in on but never bought. The negative for this stock is its position as a regulated insurer in the Massachusetts market is coming to an end. The positive is that the P/E is very low and the stock is trading at about book value. The big sell down in recent months has followed other financials and I expect is due to fears that the stated book value is not the true value of net assets when all assets are actually marked to market. It doesn't seem though that this firm's investment portfolio is signifcantly affected by these kind of issues.

Buying at a 28% Discount to NAV

Just bought another 2000 units of EBI - the listed Australian fund of hedge funds - at $A2.92. Today the manager announced that NAV for the end of July was $A4.06 per unit and the fund lost 0.25% in July. They also emphasized that they don't have any investments in mortgage funds. I guess investors might be concerned that the fund is structured using a total return swap. But otherwise this 28% discount to NAV seems a bit overdone.

House Prices and Interest Rates

Mortgage borrowing conditions are getting much tougher and interest rates, especially for large mortgages, seem to be going up. An interesting paper on Irish house prices uses a new approach to model the relation between interest rates and house prices. Most previous macro approaches (including my own published research on house prices - I worked as a real estate market analyst back in 1990) found a small effect for interest rates. They contrast this research with the "finance approach" which takes a very similar approach to my recent blog posts in comparing house prices to rents and alternative investments. The finance approach finds a strong effect for interest rates but can't model the effects of demographics etc. The new approach which combines elements of both finds that if interest rates had been 2% higher in Ireland than they were in fact, then house prices would have been 22% lower. A 25% cut in house prices in high end markets does not seem too extreme. It's already happened in some places like Florida.

Weekly Trading Report

In the first three days of this month the NDX is down 0.7% and my trading accounts down1.1%. The model is up 0.52% because it would have stopped out once the market fell 1.25% this afternoon. I'm losing money at a slower rate than last month, which I guess is a good thing :P

Looking forward to Monday a lot of people seem to expect the market to continue to fall or even crash 1987 style. From my modeling this seems rather unlikely. My best analog for Monday is January 29th this year where the stochastic fell but the market ended up slightly. This is my working E-Wave scenario, which is rather bullish for early next week:



i.e. there should be a "C wave" up following the B down, which would likely exceed the top of the "A wave". On Tuesday the Fed has a chance to say something. This could be a critical juncture for the market. Unfortunately I won't be able to trade at that time.

My Interactive Brokers account was down $603 or 3.53% for the week if I don't count the open position I had over last weekend. If I do count that position then I was up about $400 this week. For the week the market was down 1.9% and the model up 0.2%.

I updated an analysis of the performance in this account relative to the NDX using weekly data:



As you can see from the chart I have a negative beta to the market - actually a beta of -1.6. I'm too bearish - ideally I would have a zero beta as this is meant to be a market neutral strategy. My weekly alpha is 2.6% which is where the regression line crosses the y-axis. This alpha has a t-statistic of 1.59 which is significant in a one-tail test at 5.9%. On average I made 2.1% per week while the NDX went up 0.3% per week. Taking into account volatility the NDX had a Sharpe Ratio of 0.69 while the account had a Sharpe Ratio of 1.37. Here again is the data, which shows why I persist in the face of recent negative performance. I know I can outperform the market with a fairly low probability that my results are just random.

On the net worth front I am down $16,500 already this month. $11k of that is due to investment/trading performance. The rest is mostly the moving bill.

Trying too Hard to Make Money

I'm still trying too hard to make money and end up geting into lower probability trades with too large a position and losing. This week my account has been swinging up and down erratically as I make money and then try to make more and instead lose more. But I feel like things are getting under control. At least I know what I am doing wrong. Alternative investments continue to be hit hard. On a more positive note, the movers came this morning. We had planned on doing a "priority load". First load all my boxes of books and stuff and my custom made desk and then see if another two pieces of furniture would fit in the dimensions of the lift van (the huge crate my stuff will be packed into that will be placed inside the shipping container with other people's lift vans. The guys decided they would and so we are plus one futon on what I thought we'd be taking to Australia. Of course I gave them a tip!

Snork Maiden said that one of her friends was impressed by how easily I walked away from my past - for example quitting my job and giving up on the green card quest. It certainly wasn't easy but I try to rationally decide what is going to make me happiest in the long-run and I think the plan we are now embarking on has more good possible outcomes than not doing it. Maybe my training as an economist helps. Many people seem to do things because that is what everyone else is doing or it is what they have always done up till now. Of course, in many areas of life it makes sense to use "rules of thumb" to make routine decisions. But the big choices in life are worth deeper thought.

Is That a Hedge Fund? Ouch!

Anything that might be a hedge fund, mortgage fund, or have leverage is getting sold. In some cases this is somewhat rational. Case in point: Newcastle. This is a mortgage fund run by a hedge fund company. They do have sub-prime loans and lots of leverage. But subprime loans are a minority of what they have and they have sold off a lot of what they bought in CDOs (but retained some of the worst bits). The majority of their mortgages though are commercial mortgages. Cramer listed NCT in his "dirty dozen" and a Citigroup analyst downgraded the stock yesterday. It's dividend yield has gone up to 16%. Today, the company will report its second quarter earnings. Hopefully, they will give some forward guidance.

Less rational is the selling of the Everest Brown and Babcock fund of hedge funds listed in Australia. This stock is a closed end mutual fund invested in around 20 hedge funds via a total return swap that includes leverage that is equivalent to taking on a one to one margin loan for each dollar invested. The last reported net tangible assets was $A4.07 a share and last night the stock closed at $A3.05. The company has announced that the funds they invest in have no exposure to the subprime market. The yield is 22%.

Roadmap for the Correction

This is my best guess of how to interpret what has happened so far in the SPX and what might happen next, based on my idea that the correction needs to run for a while longer. Until the economy looks really much worse, though, it's hard to see a much steeper decline. I ripped this chart off of Macro Man's blog and then modified it.

PS

I did OK trading today up $300 or so. It all came in the final rally.

July 2007 Report

This is my net worth and investment performance report for July. All figures are in US Dollars unless otherwise stated. This month saw the first negative investment performance in 10 months (in USD terms), bad trading results, and a small decline in net worth.

Income and Expenditure



Expenditure was $2,113 - this month there were no moving expenses. Current non-investment income mainly consisted of a refund from the IRS. I'm no longer receiving a salary or making retirement contributions. Non-retirement accounts lost $1797 but would have lost $3923 if it were not for the continued lift from the Australian Dollar. Retirement accounts gained $288. I've introduced a new entry this month: "retirement tax credits". As I've explained, I measure all investment performance on a pre-tax basis including my Australian supperannuation account. Unlike US retirement accounts the returns on Australian retirement accounts are taxed at source but at a concessional rate. In order to compute the actual gain in my superannuation account after tax to get the change in net worth I need to take out the tax paid. This month the account lost in Australian Dollar terms so the tax adjustment is negative.

Net Worth Performance
Net worth fell by $US356 to $US444,932 and in Australian Dollars lost $A6615 to $A517,784. Non-retirement accounts were at $US244k. Retirement accounts were close to $US201k.

Investment Performance
Investment return in US Dollars was -0.34% vs. a 1.50% loss in the MSCI (Gross) World Index, which I use as my overall benchmark and a 3.17% loss in the S&P 500 index. Non-retirement accounts lost 0.73%. Returns in Australian Dollars terms were -1.48% and -1.91% respectively.



The S&P 500 is barely beating a savings account so far this year.

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. I can't see any patterns at all in these results - the best gains and worst losses both came from futures trading.

Progress on Trading Goal.

Asset Allocation
At the end of the month the portfolio had a beta of 0.59. Allocation was 34% in "passive alpha", 64% in "beta", 6% allocated to trading, 6% to industrial stocks, 6% to liquidity, and I was borrowing 16%. My Australian Dollar exposure was steady at 62% from 69.5% in January.

Trading Results for July

I lost $3067 in trading in my US accounts. That's 13.61% of the capital allocated to trading. That's the second worst performance since I started recording this data in July 2006. In October 2006 I lost $5952 which was 14.33% at the time. The theoretical model gained 3.22%, which is a weak performance. I tend to perform poorly when the model performs weakly:



The NASDAQ 100 index declined 0.11% in July. The S&P 500 Index feel about 3% and MSCI World Indices fell around 1.5%. Seems like my overall investment return will be only slightly negative for the month in US Dollar terms.

Volatility

I was doing well trading this morning and was up about $400 and then for some dumb reason tried to trade again this afternoon. Things went crazy when American Home Mortgage imploded and I lost About $1000. Bad day to end a bad month of trading. I don't have the final figure yet but it's probably going to be the second worst in the last 13 in both dollar and percent terms and ends a run of 6 profitable months. The only consolation is that it was worse even a few days ago and I did manage to claw some back. These latest losses also were at least when I was trying to trade according to the model more or less. The less is because I really shouldn't try to position myself according to the model in a new position till near or after the close of trading as the model has only been tested based on placing trades at the close (and overnight trades).

Investment returns for the month will also be negative. That's not surprising as the stock market has gone down. And, therefore, net worth is down too.

Some good news today, is that Snork Maiden got her Australian visa approved. It has been such a pleasure working with Australian immigration compared to dealing with US immigration. No lawyers required. Everything can be done online. There are online updates on the state of your application etc. Last night though we got a message that the visa was approved but would be granted on September 25th. We are flying to Australia on the 13th and arriving there on the 15th. So we e-mailed the person who had e-mailed us to inform us of the approval. It probably helped that Snork Maiden's employer had checked with immigration earlier that this entry date would be OK and we attached that e-mail. The same day the message came back that the visa would be valid from the 11th instead. This is just another planet from the experience of people applying for US visas. On the other hand, Australia is extremely tough on illegal immigrants of which there are not many.