Optimally Using Multiple Indicators

I've tried estimating a single model for both the NDX and SPX. The rationale was that taking itno account the correlation between the indices would use more information and, therefore, provider better signals for trading both indices. The results though were disappointing. Almost all indicators were almost exactly the same as those generated by my current individual NDX and SPX models. One exception - my furthest forward forecast for the SPX was severely degraded. Of course, this model fits the data better than my individual models. But it generates equal or poorer indicators. This is the usual situation in technical analysis. A simple moving average is not a good statistical model. But might be useful as a technical indicator.

But I am finding that using the raw predictions of the SPX and NDX models together is already leading to better decisions (BTW the model is long with Thursday being the likely start of the next decline). The next research exercise is working out how to use the two model signals together in an optimal way. For example, is it best to only take trades when both models indicate the same direction? It is easy to backtest this in an Excel spreadsheet (All my backtesting is done in Excel - I don't use anything more fancy - specific trading software wouldn't be able to run my model anyway).

P.S. I ran the tests - only taking a trade when both models (SPX and NDX) give the same signal actually makes NDX trading performance worse. Something more subtle is needed...

Sold Half My IBKR

In after hours following the earnings release. I've long wanted to reduce my position for a decent price. I may buy back later if the price falls. The results look good. Otherwise, I managed to screw up what started as a good trading day with an ill-judged intraday futures long position that I didn't close fast enough. I missed the chance to get out with a 3 point gain and then things deteriorated rapidly. I'm not much good at these day trades without a model based plan and shouldn't try to do them. In the end I got out without severe damage but it's making it harder for me to come up with a positive month's trading for a change. I've made a bad trade in GOOG and now stupid ones like this and an AMZN trade which isn't working out. Now I see that after hours the futures went back to my entry price! The upside is I'm no longer afraid of the market. Even if I'm not trading very well at all.

Trading Update and Travel Finance

Fifteen minutes is a tricky thing. It caused me to miss Apple's spectacular post earnings rise yesterday. But I still captured some of the effect by being long QLD (levered NASDAQ 100 ETF). I'm now beginning to regularly update both NDX and SPX models. This provides more information and makes it easier to make decisions when just looking at one index leaves one rather uncertain about what to do. Amazon earnings have pushed the market down after hours. The model is long though. After a large positive gap opening up on Tuesday a negative gap for Wednesday is likely. A good trade idea is playing the gap closing.

I'm now going to resort to a withdrawal from my Australian margin loan as the quickest way to get the money for the car and then juggling things around afterwards. I am supposing these various cards have limits on foreign transaction size which is what is causing them to be rejected. Snork Maiden's cards were now rejected by the bank for making a cash advance too. Beware if you are planning on travelling overseas and using credit cards for big bills. Or get some super-platinum card that you know won't have a problem. Just make sure it is widely accepted (i.e. not Discover or something, even American Express is less widely accepted than Visa and Mastercard). Maybe travellers cheques still have a role to play?

P.S. Australian margin loan money is on its way to us - we should have it Friday and the car soon after.

Fifteen Minutes

Not of fame but of volatility. Something that I am gradually (and painfully) learning is it often pays to wait 15 minutes after news is announced or the market opens to make a trade. During those 15 minutes the market is often very volatile. Often the initial market direction after news is announced is opposite to its eventual direction: a so-called "headfake". In many cases, after fifteen minutes, market direction is much clearer. I'm thinking about Google earnings releases, FOMC announcements etc as volatility inducing events. Of course, if there isn't such a period of volatility you may miss the move. You miss out on making money, but at least you didn't lose any.

Similarly, I've recently discussed when to trade the market open. A well known strategy in the US markets is to trade a breakout from the range of the first 15 minutes of trading from the market open.

What do you think?

Choosing a Superannuation Asset Allocation

I checked out the "product disclosure statement" a.k.a. prospectus for Snork Maiden's superannuation fund a.k.a retirement account. One interesting point is that under the "superannuation choice legislation" you can opt out of the employer sponsored fund for a private provider but then instead of contributing 15.4% of pay (North Americans with employer "matches" will be envious of this number) the employer may only pay the legally required minimum of 9%. The employee can contribute between 2% and 10%. I am supposing the default is 2% - I will find out when I get to see a pay stub. We will stick with 2% for the moment. 17.4% is a very high rate of contribution as it is. Though when I worked in Australia before our required total employer-employee contribution was 21%!

On asset allocation I am thinking to allocate 90% to the default Trustee Choice and 10% to the "Sustainable Option". The sustainable option is managed by AMP and invests in Australian Shares selected according to various ethical and environmental considerations, both positive and negative. The Trustee Choice is allocated:

Australian Shares: 30%
International Shares(hedged) 22%
Long/Short Equities: 5%
Property: 15%
Cash: 2%
Bonds/Fixed Interest: 16%
Market Neutral Strategies: 10%

This is fairly typical of current endowment or pension fund allocations - 52% allocated to equities, and about 15% to each of hedge funds, bonds, and real estate. For those concerned about management fees they are 0.77% on the Trustee Choice plus an average 0.05% in performance fees and 0.51% for the Sustainable Option. No, there are no index fund options, but I expect a chunk of the Australian and International Share exposures are index tracking.

There is an "Aggressive Mix" that cuts out the bonds, slightly reduces the hedge funds, and increases straight equity exposure to 70%, but I prefer to go for more diversification.

Payment Difficulties

We got our Australian credit cards (credit limit $A3,000) and immediately put $A1,550 of the outstanding balance for the car onto it. We need the card to buy car insurance etc. so we can't max it out. I then attempted to put the remaining $A7,000 on two of Snork Maiden's US visa cards. They didn't work. Neither did my HSBC credit card. In other words, none of our US credit and debit cards apart from my Citibank Credit Card (which I made the initial $A200 deposit with) worked in this dealer's machines. There's nowhere near enough available credit on that one card though to complete the deal. So plan B is for Snork Maiden to go to the bank on Monday and attempt to get a cash advance on her HSBC debit card. If that doesn't work, Plan C is for me to do a wire transfer from one of my US brokerage accounts (free transfer but borrowing on a margin loan) to our bank here and then go to the branch of our bank in the dealer's neighbourhood and take out the remaining $A7,000 in cash and take it round the corner to them and get the car. I'll then set up an ACH transaction on my brokerage account to repay the loan from Snork Maiden's HSBC account. The wire transfer might take a little time to actually show up in our account here, which is why we are trying the cash advance first. However, the wire transfer approach is cheaper as it avoids the transaction fees on using credit or debit cards overseas. HSBC's debit card fee is though only 1% until November 5th when it rises to 3%.

Biggest Purchase Ever

After some more to-ing and fro-ing and a couple of car inspections we bought the red car. It was either that one or the next model up from one year newer. The mechanic said to get the red one. Snork Maiden bargained them down around $A2,500 and we had a deal. We just need to pay for it now. Of course most of our debit cards either had a low daily limit or turned out completely invalid on the dealer's terminal. This is common for foreign credit cards (in our case US cards) by the way. A good reason to have several cards when travelling overseas. So we went round the corner to the bank and withdrew $A8,000 in cash. The most cash I've ever handled for my/our biggest purchase ever. My biggest previous single purchase was my shipment of my stuff here to Australia ($US4,185). Snork Maiden did buy a car previously for $US6,000. We still need to piece the rest of the money together. So the dealer still has the car. When we got home (after letting down the other dealer) there was a letter from our bank about the Australian credit card we applied for. Alas the card itself was not yet there. Snork Maiden will receive her first pay on Monday. Now we could just go ahead and give them the numbers for our US credit cards. But Snork Maiden thinks we should save as much of the 3% fee on foreign transactions as we can. Which in this case does add up to quite a bit. And then there is the question of whether we should use Australian Dollars or US Dollars.

Pro Forma Earnings :(

I got messed up by this again today. I decided to play the Google earnings announcement. Up pops the EPS number on the Dow Jones newswire: $3.38 per share. OK, that's below the $3.78 analyst consensus. And the stock was falling. I never rely just on my own interpretation of any news numbers I also watch what the stock, or index, or bond price, or currency is doing. So I go short. But then GOOG reverses and moves up and I get out at a loss. Actually, GOOG beat the analyst consensus. $3.78 was the pro-forma number - I knew that - $3.38 was a GAAP number. Why don't the newswires actually publish the numbers that analysts are tracking? I've seen this time and again. Stocks swinging one way and another as traders seem to be confused about which number is which.

The only positive thing I can say is I lost less than I made last time I played Google earnings.

Couple of Trades

Did an NQ trade tonight (Wednesday morning in the US) that got back what I lost last Friday. This was an "overnight trade" though it involved more of our night time than the American night-time :) I bet on the opening gap closing following the release of the CPI and housing starts numbers at 8:30am US time. Eventually it worked, though rather better in the SP500 than the NASDAQ. Now I've gone long QLD, the levered NASDAQ 100 ETF. The model is long. Upcoming market moving news is the Federal Reserve's Beige Book at 2:00pm US time. It's looking like maybe I should have waited for the NASDAQ gap to close too!

More Test Driving

Today, Snork Maiden got to drive a Holden Commodore (employer's car), a Ford Taurus (1997 model), a Holden Vectra, and a Ford Falcon (2004 Futura model). The verdict: the Falcon is best. We have another deposit down. So now we've gone from one extreme to another sizewise. It's a bit over our initial budget too, but after the $A20,000 initial loss in value and so depreciation after this should not be a lot higher on a 2004 model than a 2002 or 2000 model. It is highly reccommended in online reviews. Main concern is the high fuel consumption of this 4.0L 6 cylinder car. It looks exactly like the one in the picture, even down to the colour. There aren't any palm trees on the lot though :)

Trading Strategies

I'm putting together a suite of several different trading strategies. Diversification is good as it leads to more stable returns. Here are some candidates:

1. Trading the "model": I'm planning on making very small trades initially. My approach will be to buy 100 QLD shares are hold them (QLD is a two times levered QQQQ fund). Then when I go short, short 1 NQ contract. This will mean my long and short exposures will be roughly half an NQ contract or 400 QQQQ shares. Very small trades. Over time I'll increase the trade size as my confidence increases. Then the QLD position will play the function of eliminating the model's slightly bearish stance. My own trading has typically had an even more overly bearish stance as measured by my beta to the market. Eliminating the negative beta raises the Sharpe Ratio of the model strategy. These trades are systematic technical analysis based trades.

2. "Overnight trades": These trades may be either in the model direction or against it. As the market is typically less volatile during the US overnight these trades would increase my exposure. Trades would be typically put on at the US market close (when we change our clocks here and that will then be 8am Canberra time) or around the Australian open and closed either soon after the European session opens in the Australian evening or around the US open depending on opportunities. These are discretionary, opportunistic trades based on news and technicals to some degree and some degree based on the model.

3. SPI: This is the Australian "Share Price Index". I'm currently doing simulated trades on the Interactive Brokers platform to get an idea of the best way to trade this. The Australian market tends to follow the US lead on the whole. Trades will probably be made near the market open here. The futures open 10 minutes before the actual market. But the market itself takes 10 minutes to open all stocks, with each stock opening in alphabetical order over those ten minutes. So there is a lot of uncertainty about market direction until 10:10am. When is the best time to place a trade? These trades are similar to the overnight trades in nature.

4. Closed-end funds: I have a couple of longer term trades of this type currently open. The idea is to buy a closed end fund when it is selling at particularly steep discount to the fund assets and sell when it is near or above intrinsic value. This is a strategy used by the TFS Market Neutral Fund. I am trading Australian funds. This is trading on fundamentals. Though I also have technical indicators here.

5. US Earnings: I've made money trading US stocks after hours after their earnings release. I'm planning on giving Google a shot this Friday morning our time. I bought a new battery for my alarm clock to wake up in time. During our summer this will be easier as the US market close will be at 8am. "Daytrading" the news.

Accounting for a Car

I've been thinking some more about how to account for a car in net worth and spending following my discussion with commenters on this post. From an economic perspective we shouldn't really account for a car differently just because it was financed in a different way. Buying a car with cash means losing a say 5% return on the cash (i.e. risk free return) while buying using a loan means paying out 10% in interest say. The 5% and 10% are the opportunity costs of buying a car using cash or a loan. The loan is more expensive. But there is still a cost to using cash. If we treat the 10% interest as spending we should treat the lost 5% interest as spending too. So I propose accounting for a cash-bought car in the following way:

1. Put the current value of the car on the net worth balance sheet.

2. Calculate spending on the car (not including the actual cash expenditures on maintenance, insurance, taxes, and petrol etc.) as the interest on the outstanding value + the depreciation in the value that month.

This will have the effect of adding the lost interest to our measure of investment rate of return for the month. From the point of view of measuring investment performance it will be as if we still have that cash but spend the interest and some of the capital each month on transport.

For a car bought with a loan, in theory, you should only include interest on the loan and depreciation in your measure of spending each month. Principal repayments are saving, not spending (the same goes for buying a house on a mortgage).

A leased car is easiest - you can just count your lease payments as spending (ignoring the downpayment).

What do you think?

The Secret of Technical Analysis

I understand technical analysis to be any method that attempts to predict market moves based on past price and volume action rather than fundamentals. This includes the use of charts and also more sophisticated modelling. Most finance academics believe that securities follow simple random walk paths and technical analysis cannot predict anything. Now, much technical analysis probably isn't much use, its practitioners haven't tested the trading results based on it in a statistically valid way. The reason many traders probably make money is the use of stops. They stop their losing trades before they lose too much and let the winners run. Trend following approaches are similar. You will hear this advice very often when you start to study trading. In this case entry points can be more or less random. The profit-making assymetry is all in the stops.

In the last few days I've been researching various ideas I've had for improving my trading models. So far I haven't found anything better than I'm currently using. Some of the models fit the data better but aren't any better for trading. In fact they are worse. This is the secret. Models that fit the data well and have high levels of statistical validity are often not much use for trading. The type of models that no self respecting econometrician would choose are actually the best for trading purposes. This a major reason why academic finance rejects technical analysis in my opinion. The models they optimize to the data aren't actually useful for trading. But it is non-optimal models that can actually generate profits.

Test Drive

We almost bought this car. As I write we have a 24 hour deposit on it. But after reviewing lots of websites we decided against it. We were offered $A15,000 + stamp duty for a February 2006 model that had driven 14,000km and was still under the manufacturer's warranty. 1.6l engine, automatic transmission and most of the amenities you expect on a modern car. The passenger seat seemed as roomy to Moom as a much larger car as we zoomed up ANZAC Parade and onto Limestone Avenue (that's where the Australian National War Memorial is at the foot of Mount Ainslie). Moom reckoned the driving position was just about acceptable to him too. But stumbling out of that position his trousers caught on some huge lever attached to the driver's seat and it snapped right off. "Don't worry: we'll get it fixed under warranty". But we began to wonder how good a car was where that could so easily happen. Earlier we test drove a Toyota Echo.

Here Moom's knees were almost knocking against the dashboard on the passenger side. The ride was harsh on the bumpy Australian road. It looks like we'll go for a much larger car a few years older. The downside of large cars is their high urban fuel consumption. Petrol costs nearly $US5 per US gallon here. We don't expect, though, to spend time stuck in traffic jams. A Holden Commodore gets about 21 mpg in urban driving and 34 mpg in highway driving. It has a 3.8l V6 engine. Maybe we don't need to go to that extreme. But Moom didn't seem to fit into a Mitsubishi Lancer for example.

I also testdrove the Australian medical system on Friday. The doctor took the documentation I brought from my previous doctor in the US and took all of it and what I said at face value. He checked nothing. Then he charged me $A60 for the visit on top of whatever Medicare (the government) gave him. He did prescribe me 400 days of medication for a condition I have and said to come back when it was near finished! Maybe he'd do some tests then...

So far this month we're spending roughly in line with Snork Maiden's salary (she hopefully will get paid this week). This means that whatever I can make will go towards increasing net worth or non everyday expenditures, which reduces the pressure to make winning trades, probably a good thing.

Made a Trade

And promptly lost. But everything wasn't bad about this trade. The model was short and I went short. I waited for the index to rise to what seemed like a high point first and I got out correctly too though there was a chance to get out with a $20 profit instead which I missed.

This was the first day that the model was indicating short following the sharp intraday reversal on Thursday (US time). But I felt that the market might instead rebound some. So I didn't go short early in the day and waited for an opportunity. This seemed to arrive following the US PPI release at 8:30AM New York time. Non-core inflation was unexpectedly high and bond futures dived as traders assumed the Fed would be more reluctant to cut interest rates (or even might raise them again). But core inflation came in close to expectations and a strong retail report was also released. Stocks reaction was to rise and this is where I went short on the assumption that the bond market was right. Also Oscar recommended shorting the ES (SP500 mini contract) around this price level (though I was trading NQ).

Initially the trade appeared to pay off, then things reversed, then just after the open the market pulled back again but I didn't get out and then it soared about 15 minutes in and I bailed. It kept rising from there, so I was right to get out.

I'll keep doing some research on new models and get ready for another trade...

P.S. The model was stopped out two days in a row. This did happen before in late July (that was when it was long and stopped out twice, this time it was long and then short and stopped out) and before that on 24-25th January. It didn't happen at all in 2006. The model is also down on the month to date and underperformed the market in September. Trading conditions are tough for my "style".

Can't Pull the Trigger

Or press the button, or whatever. I've been tracking the market closely for a few days now, keeping the model updated etc. Last night in the US (US daytime) the market suddenly reversed in the afternoon and switched the model to short mode. But I still dont seem to be able to place a trade. I've been looking at the SPI futures market (Australian Share Price Index) this morning and have seen a couple set ups (really I should have been short from the open) and I can't make the decision to do that either. The upside is I'm at least not making bad trades against the model. Last night we met with one of my friends again (funny that both times we met so far it rained and those were the only serious showers since we've been here). He said: "You had better do something big soon". He was kidding, but maybe not really.

Buying a Car?

Looks like some of the cash I discussed yesterday will go towards buying a car. We've been debating how much needs to be spent on a car. We don't need it for commuting at the moment as we live within walking distance of Snork Maiden's office. So it would be mostly used for shopping and "leisure" trips. Grocery shopping could be done more cost effectively using taxis if we don't want to carry the stuff as there is a taxi rank a block from the main food stores in the City and we live less than a kilometre from there anyway. But buying a car does seem to be inevitable. Given we don't need it for commuting, Moom thinks the car does not need to be extremely reliable. On the other hand it shouldn't be so decrepit that we are always spending money on fixing it. Snork Maiden would like a car that is newer than her previous one so we could keep it several years. What is the optimal amount of money to spend on a car? The car is likely to be something like a Toyota Corolla or Mitsubishi Lancer. The question is how old a model to buy. Then there is the question of whether to pay cash or finance it. I don't yet know what interest rates are available for buying used cars here in Aus.

I think I will treat a car as pure consumption and not include it in net worth. Financing may not make the most financial sense unless the rate is ultra-low but would make the dollar hit psychologically easier to take by spreading it out over time.

I don't think I mentioned that we don't have any phone service here for the last day and a half. Snork Maiden phoned the phone company (the ubiqitous TRANSACT) from work and they told her it was our phone, no problem with the line. So she brought her work phone home and it didn't work either... I'm less and less impressed with these guys.

Allocating Cash

We are about to receive a refund from Snork Maiden's employer of moving expenses. They've agreed to pay more than originally proposed - a total of more than $A8,000. We will now have about 8% of net worth in cash outside of trading accounts. This is while we are borrowing almost 16% of net worth on an Australian margin loan at just over 9% interest. We only have about 3.5% though in Australian Dollars cash. The options are to:

1. Put most of this refund into a high interest money market account (about 5.5% interest) as an even larger cash buffer than we currently have (about $A7,500 in there currently and dividends and mutual fund distributions pay into this account).

2. Use it to reduce our margin loan. This has a higher certain return. We can always withdraw money from this account later though this probably requires sending a fax.

3. Transfer it to the US, buying US Dollars on the assumption that they are undervalued. This is possibly a high return (4.5% interest plus or minus change in value of the US Dollar) but risky.

Maybe we should do a little of each?

I still haven't placed any trades since we moved here. I now have the model up and running. In September and so far in October the model has underperformed the market. It doesn't do well in strongly overbought rallies as it has a somewhat bearish bias. So this has been as good a time as any not to trade. The last couple of days the model has been long and correct and the potential gain was $US400 per NQ contract. I didn't trade because the NDX seems exceptionally overextended relative to Bollinger Bands (i.e. the index is beyond 2 standard deviations from a moving average of the index) and my older "autoregressive model" is indicating a turning point is near. The model was short last Friday and would have been stopped out. The index rose 2.1%. I am waiting for the first good short opportunity. I have been doing some work on my modelling - continuing my earlier attempts to see if I can get a better edge in placing overnight trades (our daytime). I've come up with some regularities but nothing that seems reliable enough for systematic trading. The overnight sessions are less volatile but less correlated with the model than the intraday sessions. The two - overnight and intraday - have little correlation with each other. Perhaps it is best just to blindly place trust in my model and follow its signals. If I can actually do that.

I Didn't Hear it on the Grapevine

This morning I couldn't access the internet at all. After playing with all kinds of hardware and software settings for maybe an hour I phoned our ISP's technical support line. Our ISP is called "Grapevine". Eventually I get through to a technical support person who quickly comes up with the problem - our account was suspended because they didn't have a direct debit order with a signature lodged. This was somewhat unsurprising in retrospect. We first signed up for ISP service at their "storefront" on 21 September. When we moved into our apartment on 28 September they had no record of this transaction at all. So I signed up over the phone all over again. I provided my bank account details but wasn't told I needed a signature. So I went into the storefront again this morning. Oops, I didn't have my bank account number with me - I assumed they had it and all they needed was a signature. So I had to go home again.... and come back again. I also paid this month's payment in the store and was told that the service would be turned on again right away. When I was finally back home again, I tried it after about 3 hours. Nothing. Another phonecall, this time to billing. Another long wait on the line being bombarded with messages about water conservation (Grapevine is owned by ACTEW/AGL/TRANSACT which stands for ACT-Electric-Water-Australian Gaslight.... covers all utilities). No record of me having paid this morning. Anyway, she agreed to unsuspend our account till 26th October. I'm now going to pay our rent online before anything else goes wrong!

After being here a few weeks and seeing the country again in a fresh light, Australia seems somewhere between the United States and somewhere like Sweden. Superficially it looks a lot like America but with sharper average design standards. But then there is a feeling of a bit more scarcity than one is used to in superabundant North America. Many reasonable prices, but many outrageous ones. Recent noted high prices - a busride costs $A3 - it was $US1 in my former city. Postage to the US - $A1.95 vs. $US0.80. Rather restrictive shopping hours for most stores. The typical size of a coffee. Of course, ACT planning is reminiscent of Sweden. The US is often criticized as the country of unhealthy eating. But here, organic food is decidedly unmainstream - very expensive and only sold in very small specialist outlets. Fast food restaurants do not offer diet drinks. In fact I haven't seen a diet drink. I guess they must exist here.

On the investing front, I see that Symbion and Healthscope are both halted, so they must be about to announce a new transaction to supercede the previous one. Word is that this will involve selling Symbion assets for Healthscope shares which will then be distributed to Symbion's shareholders after which Symbion would presumably be wound up. Such a transaction would not require the approval of a 75% super-majority of shareholders. I'm thinking of reducing my position in Allco Equity Partners. Following the approval of the IBA-iSOFT merger which AEP will fund the company will have little cash remaining. Therefore, it is no longer the simple "Graham style" play of buying shares for less than the net cash per share, which was my original reason for buying in.

September 2007 Report

All figures are in US Dollars (USD) unless otherwise stated. This month saw very positive investment performance in USD terms, due to the sharp rise in the Australian Dollar (AUD). Underlying performance was also positive. Trading results were negative - I only traded during the beginning of the month before our move. Spending, not surprisingly, was at record levels. Net worth rose in USD terms but fell in AUD terms

Income and Expenditure



Expenditure was $11,812. My previous highest monthly expenditure was $10,174 in August 2002 when I moved from Australia to the US. We can attribute $9,582 to move related expenditure. We also paid $A744 ($US659) in rent for part of the month. Taking out the move-related spending and adjusting the rent to a full month's rent we would have spent $US3,263. For comparison this is roughly double my individual expenditure last month after removing moving-related expenditures and the cost of the laptop I bought that month. So spending is actually very much under control at this point. Snork Maiden earned a total of $2,336 from her previous job, her moving sale etc.

Non-retirement accounts gained $16,520 but would have gained only $1,943 if it were not for the sharp rise in the Australian Dollar. Retirement accounts gained $13,273 but would have gained only $1,474 if exchange rates had remained constant. These gains are both at record levels. In AUD terms both account types lost money for the month.

Net Worth Performance
Net worth rose by $US20,008 to $US458,963 and in Australian Dollars fell $A20,020 to $A518,309. Non-retirement accounts were at $US249k. Retirement accounts were at $US210k.

Investment Performance
Investment return in US Dollars was 6.79% vs. a 5.40% gain in the MSCI (Gross) World Index, which I use as my overall benchmark and a 3.74% gain in the S&P 500 index. Non-retirement accounts gained 6.83%. Returns in Australian Dollars terms were -1.74% and -1.68% respectively. YTD I'm up 20.9% (USD) vs the MSCI with 14.1% and the SPX with 9.3%. My non-retirement accounts are up 26.0%.

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 losses appear at the bottom of the table together with the sum of all other investment income and expenses - mainly net interest. Mutual funds made nice positive contributions as did a few US individual stocks. Australian listed funds and stock indices generally lost money.

Progress on Trading Goal

US based trading lost $1083 or 5.9% of trading capital. The model and the market both gained but I don't have the exact figures at the moment. My Ameritrade and Interactive Brokers accounts were at $55,873, down $100 on the month, against the goal of $64k. So negative performance on my goals in this area.

Asset Allocation
At the end of the month the portfolio had a beta of 0.54. Allocation was 35% in "passive alpha", 65% in "beta", 4% allocated to trading, 6% to industrial stocks, 8% to liquidity, and we were borrowing 18%. Our Australian Dollar exposure rose to 61% partly due to the rise in the Aussie. The move reduced "liquidity". We will reassess this level of liquidity when things have settled down some more from the move to Australia.

A More Realistic PPP for Australia

PPP means purchasing power parity. At least that's what it means in economics. There are the regular market based exchange rates between currencies and then there are theoretical exchange rates which if we could buy and sell foreign currency at those rates rather than the actual rates a given basket of goods would cost the same real amount of money in every country. Anyone with international experience knows that things are very expensive in Switzerland and very cheap in China or India. This means that the Swiss Franc, Yuan, and Rupee do not trade at PPP exchange rates to the US Dollar. If they did, things would cost the same amount of US Dollars in each of the three countries.

Researchers at the University of Pennsylvania pioneered the estimation of PPP exchange rates and further work has been done by the World Bank and others. This research involves collecting the prices of a large basket of goods and services. The Economist magazine pioneered a very simple alternative - recording the price of a Big Mac hamburger in each country. The difference between the price in USD at existing exchange rates and the price of a Big Mac in the US indcates whether a currency is over or undervalued. According to the February 1st edition of the index a big Mac costs $US3.22 in the US and $A3.45 in Australia. This implies a PPP exchange rate of 93 US cents per Australian Dollar. As the Australian Dollar is trading at 88 US cents, it is still undervalued. Though services are cheap in Australia, goods are generally more expensive. A more realistic indicator might be the price of a coffee at Starbucks. A grande coffee of the week costs $A2.75 and the "coffee of the day" cost $US1.75 last time I checked though it could be higher in expensive locations like NYC or airports. But this exchange rate is just 64 US cents, making the Aussie Dollar wildly overvalued. Other drinks on the Starbucks menu seem to have similar implied exchange rates.

It is difficult to see how the US dollar could "collapse" in the long-term in the face of these kind of facts. Australia is probably not expensive when compared to most northwest European countries. In the short-term currencies are more driven by interest rate differentials. In the long-term PPP eventually has some effect though richer economies' currencies tend to remain overvalued relative to poorer countries' currencies.

Two Weeks in Australia

We've been here more than two weeks now and the frenzied phase of getting a household set up is winding down. We returned the hired car for the second time today after snagging a couple of good deals in Fyshwick, the industrial suburb where Canberra's planners have dumped everything that would appear in a stripmall in a usual American or Australian city in one convoluted maze of streets removed from their "beautiful creation". Snork Maiden starts work tomorrow (today was Labour Day in this part of Australia) and Moom will be tying up some of the bureaucratic and technological loose ends after walking her over there.

We've spent a huge amount of money in this time as well as in the leadup to the move. Still, it is likely that our US Dollar net worth increased this month due to the steep rise in the Australian Dollar. Needless to say our net worth measured in Australian Dollars took a plunge.