Tuesday, February 19, 2008
Daytrading Update
This is my equity curve from simulated trading of the Australian share price index futures since the beginning of the year. It's looking pretty consistent now, and I'll probably take it live after our wedding and "honeyweek" coming up soon. Of course, there is still huge room for improvement. I'm only capturing a fraction of the profits possible from trading a single contract. But at least they are profits.
Monday, February 18, 2008
U.K. Stock Research - Listed Private Equity
Digital Look is a great source for research on UK stocks. Far better than Yahoo's offering. I haven't invested in the UK yet, but been looking up info on a couple of companies and was recommended to check this site out by a poster on a Yahoo message board.
I was using the site today because of the takeover of a listed Australian private equity fund by the London listed Bear Stearns Private Equity Limited (BPLE). IPE is edging up today, presumably in reaction. BPLE itself looks like an interesting investment. I'll add it to the watchlist. My main concern is the Bear Stearns name. The biggest position is in a Bear Stearns private equity fund (8%).
I was using the site today because of the takeover of a listed Australian private equity fund by the London listed Bear Stearns Private Equity Limited (BPLE). IPE is edging up today, presumably in reaction. BPLE itself looks like an interesting investment. I'll add it to the watchlist. My main concern is the Bear Stearns name. The biggest position is in a Bear Stearns private equity fund (8%).
Why is Our Net Worth Falling?
As you'll see from Net Worth IQ, our net worth has been falling in the last few months, despite a small bounce this month in US Dollar terms. Are we spending too much? Or is it due to poor performance in the financial markets? Let's look at the numbers:
These numbers breakdown our net worth into cumulative retirement contributions and non-retirement savings (current savings) as well as retirement and non-retirement account profits. I've posted a a chart of these data before, when things were heading in a very positive direction. Here's a chart of the current data:
Net worth reached a peak of almost $US478k in October and declined by $40k from then till last month. Looking at retirement contributions - I added about $10k in the last few months of my job in the US. Since October, Snork Maiden's employer has contributed about $3,000. So we are doing OK there. I made almost no net non-retirement savings, however, in the first half of 2007. Savings jumped by $10k in August due to merging my finances with Snork Maiden's and beginning to spend on the move to Australia. We spent down another $10k in September on the move. Since then we have begun to rebuild savings to $148k last month and this month $155k with the addition of the inheritance.
Of course if we add Snork Maiden's net worth in August to my savings in July we would come to $158k. The move to Australia probably cost us about a net $12k.
Both retirement and current profits peaked in October 2007. The Australian Dollar reached its peak in that month and the reversal in November partly reflects the weakening of the Aussie. Since then net returns on retirement accounts have been zero. But non-retirement accounts have lost $26k since November. Our retirement accounts are currently more conservatively than our non-retirement accounts.
So the fall in net worth since October is entirely due to some retracement in the Australian Dollar since that month and poor investment performance in our non-retirement accounts. We are living approximately within our means since settling down in Australia.
These numbers breakdown our net worth into cumulative retirement contributions and non-retirement savings (current savings) as well as retirement and non-retirement account profits. I've posted a a chart of these data before, when things were heading in a very positive direction. Here's a chart of the current data:
Net worth reached a peak of almost $US478k in October and declined by $40k from then till last month. Looking at retirement contributions - I added about $10k in the last few months of my job in the US. Since October, Snork Maiden's employer has contributed about $3,000. So we are doing OK there. I made almost no net non-retirement savings, however, in the first half of 2007. Savings jumped by $10k in August due to merging my finances with Snork Maiden's and beginning to spend on the move to Australia. We spent down another $10k in September on the move. Since then we have begun to rebuild savings to $148k last month and this month $155k with the addition of the inheritance.
Of course if we add Snork Maiden's net worth in August to my savings in July we would come to $158k. The move to Australia probably cost us about a net $12k.
Both retirement and current profits peaked in October 2007. The Australian Dollar reached its peak in that month and the reversal in November partly reflects the weakening of the Aussie. Since then net returns on retirement accounts have been zero. But non-retirement accounts have lost $26k since November. Our retirement accounts are currently more conservatively than our non-retirement accounts.
So the fall in net worth since October is entirely due to some retracement in the Australian Dollar since that month and poor investment performance in our non-retirement accounts. We are living approximately within our means since settling down in Australia.
Sunday, February 17, 2008
Inheritance from Germany
My mother just told me that our share of the proceeds from the sale of a property in Eastern Germany that our family jointly inherited with others came through finally to her bank account. She'll send on £4,000 to me (and £4,000 to my brother). For some reason she decided to keep £595, though originally we agreed that she'd pass all the money on to her two children. The amount is less than I expected we'd receive from this property - only about as much as we received from the first of the two properties. The main thing is that this saga that has been going on since 1995 I think is finally complete. Legal processes can be very slow. Our family lost this property when they fled Germany in the 1930s. The house served as an orphanage for some years. When I visited in 1998 it was derelict. So all we received was the value of the land - it was in a suburban area on large grounds. For 45 years after the second World War the communist government in East Germany wouldn't deal with any property claims. So it was only after the fall of communism that any compensation could be received. This is one reason I'm not much of a fan of property as an investment. I'm planning to invest the money in the US as part of our policy of reducing exposure to the Australian Dollar. The Man investment also will reduce Australian Dollar exposure.
Friday, February 15, 2008
Foreign Investment Fund Rules
In my post about the Man fund I'm thinking of investing in, I briefly mentioned Australia's foreign investment fund (FIF) rules. I think I now understand exactly how these apply.
The point of the rules is supposed to be to reduce tax avoidance. Without these rules, I could channel all my savings into an offshore hedge fund. If the hedge did not pay out distributions but instead retained all earnings there would be no distributions to tax under the regular tax code. Then I could retire and move out of Australia and because Australia only really taxes Australian residents rather than Australian citizens I could avoid ever paying Australian tax on the funds earnings. The solution the Australian Tax Office came up with is to require investors in foreign investment funds to pay tax on the unrealised gains of their foreign investment funds annually. The problem with this is that it eliminates the possibility of applying the lower long-term capital gains tax rate to these investments and also requires you to pay tax now on income you may only actually be able to receive in the future.
Luckily there are plenty of exceptions to this draconian legislation that incidentally provides nice protection to Australian fund managers whose funds are not subject to such a tax rule.
First, pretty much any investment in a foreign company or fund that is not registered or listed in Australia qualifies as a foreign investment fund. Yes, all foreign shares are counted as "foreign investment funds". But all "active businesses", US regulated investment funds, and foreign employer sponsored retirement plans are exempt (i.e. unlisted hedge funds and non-US investment funds of all types are not exempt). If you have less than $A50,000 of such foreign investments (including retirement plans) you are also exempt from the legislation. All my existing foreign investments are exempt (US mutual funds, US stocks, Belgian stock, and a US employer sponsored retirement plan (403b at TIAA-CREF)). I have well over $A50,000 of such investments.
But unfortunately the Man fund is not exempt as it is an unlisted fund based in the Cook Islands. There is, however, another exemption that can be used. If less than 10% of your total FIF investments (not counting employer sponsored funds) are of the non-exempt variety then those non-exempt ones are also exempt - this is called the "well balanced portfolio exemption". We have about $US59k in FIFs not counting my 403b. This means that currently we could invest up to $A7,000 in the Man fund and not be affected by the FIF legislation. Of course I could increase my exempt FIF holdings by using every last dollar of cash and available margin in my foreign accounts and then be able to invest more in the Man fund :)
What I don't understand is why they don't make this fund offered to Australian investors, an Australian resident fund.
The point of the rules is supposed to be to reduce tax avoidance. Without these rules, I could channel all my savings into an offshore hedge fund. If the hedge did not pay out distributions but instead retained all earnings there would be no distributions to tax under the regular tax code. Then I could retire and move out of Australia and because Australia only really taxes Australian residents rather than Australian citizens I could avoid ever paying Australian tax on the funds earnings. The solution the Australian Tax Office came up with is to require investors in foreign investment funds to pay tax on the unrealised gains of their foreign investment funds annually. The problem with this is that it eliminates the possibility of applying the lower long-term capital gains tax rate to these investments and also requires you to pay tax now on income you may only actually be able to receive in the future.
Luckily there are plenty of exceptions to this draconian legislation that incidentally provides nice protection to Australian fund managers whose funds are not subject to such a tax rule.
First, pretty much any investment in a foreign company or fund that is not registered or listed in Australia qualifies as a foreign investment fund. Yes, all foreign shares are counted as "foreign investment funds". But all "active businesses", US regulated investment funds, and foreign employer sponsored retirement plans are exempt (i.e. unlisted hedge funds and non-US investment funds of all types are not exempt). If you have less than $A50,000 of such foreign investments (including retirement plans) you are also exempt from the legislation. All my existing foreign investments are exempt (US mutual funds, US stocks, Belgian stock, and a US employer sponsored retirement plan (403b at TIAA-CREF)). I have well over $A50,000 of such investments.
But unfortunately the Man fund is not exempt as it is an unlisted fund based in the Cook Islands. There is, however, another exemption that can be used. If less than 10% of your total FIF investments (not counting employer sponsored funds) are of the non-exempt variety then those non-exempt ones are also exempt - this is called the "well balanced portfolio exemption". We have about $US59k in FIFs not counting my 403b. This means that currently we could invest up to $A7,000 in the Man fund and not be affected by the FIF legislation. Of course I could increase my exempt FIF holdings by using every last dollar of cash and available margin in my foreign accounts and then be able to invest more in the Man fund :)
What I don't understand is why they don't make this fund offered to Australian investors, an Australian resident fund.
Israeli Finance Comedy
This guy is funny, he also has a video in English. Israel is an important location for high tech startups.
Looks Like We're Going Down Again
This would be wave 3 of 5 in my Elliott Wave count. It arrived a couple of days earlier than I expected. I sold NNDS, BWLD, and RICK (NNDS and BWLD for gains and RICK at a loss). I also sold short LAZ. My US portfolio now consists of the following:
AAPL
BRK.B
BTF
FF
FLIP.OB
HCBK
HSGFX
LAZ (short)
LTR
LUK
NCT
PSPT
SAFT
TFSMX
I didn't feel confident enough to add more short positions into options expiry on Friday, which I had thought would be a positive event for stocks due to the number of outstanding puts.
AAPL
BRK.B
BTF
FF
FLIP.OB
HCBK
HSGFX
LAZ (short)
LTR
LUK
NCT
PSPT
SAFT
TFSMX
I didn't feel confident enough to add more short positions into options expiry on Friday, which I had thought would be a positive event for stocks due to the number of outstanding puts.
Wednesday, February 13, 2008
Man OM-IP 3 Eclipse
This is a hedge fund investment I am considering. The kind of thing that is not available to individual investors in the US but is available here in Australia. UK-based Man Group is probably the largest managed futures manager. This product is a structured investment that consists of four elements:
1. An 80%+ investment exposure in AHL, Man's main managed futures program. This is a system trading one hundred plus global futures markets. In the last 10 years it has returned 16.1% per annum (5 years, 12.3%, 1 year, 20.6% as at October 2007 - the MSCI returned: 8.8%, 20.2%, and 24.8% respectively - Moom: 10.8%, 26.1%, and 34.6%). So it outperforms stocks in bear markets and underperforms in bull markets. Examination of periods of drawdown in the Australian stock market, show that the program always made money in those periods.
2. A 20%+ investment exposure to the RMF Commodity Strategies program. This program invests with 30 hedge fund managers investing in commodities via futures and stocks. In the last three years it returned 18.4% p.a. (MSCI: 20.7%, Moom: 20.6%) and in the last year 13.2% as at October 2007.
3. A 20%+ investment exposure (yes there is moderate leverage in the scheme) to the RMF Asian Opportunities fund of managers. This program invests with 14 hedge fund managers specializing in Asian investments. In the last three years it returned 16.4% p.a. and in the last year 24.3% as at October 2007.
Though all three of these programs have quite high month to month volatility, their maximum drawdowns are lower than the stock market - they have a smoother equity curve in the long-run, year to year. Of course, this being a hedge fund, the fees are sky-high: 2% and 20% for AHL and 1.5% and 10% for RMF, plus brokerage of 3% per year plus an initial load of 5% (CommSec will rebate 80% of the 4% sales commission they will receive), plus another 0.5% overall to Man, plus 0.25% to Commonwealth Bank p.a and some other small fees. But all the returns quoted above are after fees (not the 5% load presumably).
4. A capital guarantee provided by Commonwealth Bank of Australia. When the investment matures in eight years they promise to pay back at least $A1.00 per initial $A1.00 investment. The most you can lose, therefore, is the interest on your money (assuming positive real interest rates) - which is quite a bit over eight years of course. They will also lock in each year half of any new net profits into the guarantee. So say the fund makes 10% in the first year. Then the guarantee will rise to $A1.05 per share and so forth.
Advantages Opportunity to invest in a high alpha (relative to the stock market) diversifying investment of a type that retail investors usually have limited access to. The managers are high quality.
Disadvantages The investment is relatively illiquid. Prices are quoted once a month and shares can be redeemed monthly. Until 2011 there is a 2% fee for exiting the fund. The capital guarantee only applies for shares redeemed in 2016 at maturity. Taxation is not so favorable either - according to the prospectus the long-term capital gains tax rate will apply to the capital guarantee but all gains above that will be taxed as an unfranked dividend - i.e. at ordinary income tax rates. There is also the potential for Australia's draconian foreign investment funds (FIF) legislation to apply. These rules require you to pay tax on unrealized gains in foreign investment funds annually - there are lots of exceptions but this isn't one of them. But if you have less than $A50,000 invested in such funds you are also exempt. So I think, from my reading of the rules, I should be exempt.
What do you think? Would you invest in this?
P.S.
How would this investment be funded? It can be funded using a Commonwealth Securities margin loan with a 70% lending ratio. After all my recent purchases I only have $5515 in cash available on my margin loan. But I could easily invest $10,000 in this fund and still have a buffer before I'd get a margin call as the 70% loan ratio means the cash available will only be reduced to $2515. Though that is beginning to cut things close. But, on 13th March I should receive $A16,400 from Primary Health Care for my Symbion shares. So there isn't going to be any problem in funding either $10k or $20k for this investment. Longer term I want to reduce the size of my margin loan as margin interest is expensive compared to other sources of leverage. We'll have to wait for some of my recent trades to payoff first though.
Tuesday, February 12, 2008
Symbion, Allco, and Clime
Seems that the Symbion (SYB.AX) takeover story finally comes to an end today. Primary Healthcare (PRY.AX) announced that Monday their interests in the company including conditional acceptances exceeded 52%. Tomorrow was the deadline for reaching 50.1% and if reached declaring the takeover unconditional. I sent in my acceptance a few days ago when this deadline was announced. When I get the money I'll apply it to paying down my margin loan. Allco (AFG.AX) is apparently in talks with Macquarie Bank (MQG.AX). I bought more AEP.AX - a fund managed by Allco a few days ago. The fund is trading way under net asset value. I can't see any reason why it should lose value if Allco went under. In fact the fund managers have not been spectacular to say the least. So losing Allco management shouldn't hurt. One reason I guess the price has gone down is that shareholders have sold it to meet margin calls generated by the fall in other shares (which is part of the story of the fall in Allco itself's share price). Anyway, it's now fallen more than 10% below my recent price. Do I buy more? This seems a low risk trade, but maybe there is something I don't know. So I'm unwilling to overexpose myself to that risk.
Clime Capital (CAM.AX) share price fell steeply yesterday as one of their largest investments - Credit Corp (CCP.AX) fell 75%. This was after CCP announced that they were downgrading their profit forecast by about a third and initiating a strategic review. The chairman also resigned. But given the size of the profit downgrade the market's reaction seems overblown? The forward P/E is now just 3 if the company's forecast is realized! I ended up buying more CAM yesterday because I had a lowball limit order in place. Unfortunately, not lowball enough. The stock fell another 10% after that. The manager of CAM, Roger Montgomery is a Buffett worshipper. In Buffett's pre-Berkshire days he would often take large concentrated positions in companies and Montgomery does the same. Montgomery has been convinced that CCP was a good investment and after the price fell from $9 or so to $4 he was buying more. Maybe he's right, but this kind of result will make potential investors wary of investing with Clime (they also have unlisted products) if they are going to continue taking concentrated positions. I'm also an investor in the management company CIW.AX and it also fell steeply yesterday.
So it seems I'm not having much luck with my Australian stock investments. I guess, like Montgomery, I think I'll be right in the end.
Clime Capital (CAM.AX) share price fell steeply yesterday as one of their largest investments - Credit Corp (CCP.AX) fell 75%. This was after CCP announced that they were downgrading their profit forecast by about a third and initiating a strategic review. The chairman also resigned. But given the size of the profit downgrade the market's reaction seems overblown? The forward P/E is now just 3 if the company's forecast is realized! I ended up buying more CAM yesterday because I had a lowball limit order in place. Unfortunately, not lowball enough. The stock fell another 10% after that. The manager of CAM, Roger Montgomery is a Buffett worshipper. In Buffett's pre-Berkshire days he would often take large concentrated positions in companies and Montgomery does the same. Montgomery has been convinced that CCP was a good investment and after the price fell from $9 or so to $4 he was buying more. Maybe he's right, but this kind of result will make potential investors wary of investing with Clime (they also have unlisted products) if they are going to continue taking concentrated positions. I'm also an investor in the management company CIW.AX and it also fell steeply yesterday.
So it seems I'm not having much luck with my Australian stock investments. I guess, like Montgomery, I think I'll be right in the end.
Monday, February 11, 2008
Portfolio Construction
Currently our portfolio is allocated like this:
I've explained these different categories previously. Basically "beta" contains mutual funds that are likely to be highly correlated with either the stock or bond market, while "passive alpha" contains funds that are expected to have a lower correlation with general stock market movements and financial stocks whose underlying business is not directly investing in the stock market index. Hopefully, these "passive alpha" investments will generate alpha - a risk adjusted excess return. I call these passive alpha because this is an attempt to earn alpha by investing with other managers rather than through my own trading efforts. Industrial stocks are individual non-financial companies, trading is cash and any very short-term trading instruments, liquidity is cash not dedicated to trading (mostly in Snork Maiden's accounts), asset loans is our rental deposit and car primarily, and borrowing includes margin loans, credit cards etc.
At the moment about 25 percentage points of the portfolio is in stocks within the "beta" category and 43 percentage points are in bonds. When we reach what looks like a bottom in the stock market to me, I plan to switch out of all the bond-heavy funds into stock beta investments. We'll do this by investing in CREF's Global Equities Fund (instead of their Bond Market Fund) and investing in Colonial First State's Geared Share Fund (rather than their Conservative Fund). We'll also shift some of our holdings of the Conservative Fund into CFS's Future Leaders, Developing Companies, and Imputation Funds.
For those who've questioned my judgment that the market is close to a bottom, I'm not planning on buying US stocks in a big way. I will also add individual US stocks in a small way as I did around the 22 January bottom. On the buying list are: IBKR, XLF, BWLD, SSRX, RICK, GOOG, PBD and maybe SHLD, AAPL, and NCT.
I plan on maintaining this same rough allocation between passive alpha and beta, but the beta funds will include a large chunk of a leveraged fund - the Geared Share Fund (geared = leveraged in Australian lingo). In the longer term I plan on having a portfolio beta of about one with a big chunk of passive alpha investments. The goal would be to achieve 10% returns from the stockmarket beta in the long-term and hopefully 10% or so of alpha for a 20% total return. If you use leverage, you can be fully exposed to the stockmarket while also trying other strategies. A simple version of this is the increasingly popular 130/30 funds. A much more sophisticated approach is followed by Bridgewater Associates. What I am attempting is somewhere in between.
I've explained these different categories previously. Basically "beta" contains mutual funds that are likely to be highly correlated with either the stock or bond market, while "passive alpha" contains funds that are expected to have a lower correlation with general stock market movements and financial stocks whose underlying business is not directly investing in the stock market index. Hopefully, these "passive alpha" investments will generate alpha - a risk adjusted excess return. I call these passive alpha because this is an attempt to earn alpha by investing with other managers rather than through my own trading efforts. Industrial stocks are individual non-financial companies, trading is cash and any very short-term trading instruments, liquidity is cash not dedicated to trading (mostly in Snork Maiden's accounts), asset loans is our rental deposit and car primarily, and borrowing includes margin loans, credit cards etc.
At the moment about 25 percentage points of the portfolio is in stocks within the "beta" category and 43 percentage points are in bonds. When we reach what looks like a bottom in the stock market to me, I plan to switch out of all the bond-heavy funds into stock beta investments. We'll do this by investing in CREF's Global Equities Fund (instead of their Bond Market Fund) and investing in Colonial First State's Geared Share Fund (rather than their Conservative Fund). We'll also shift some of our holdings of the Conservative Fund into CFS's Future Leaders, Developing Companies, and Imputation Funds.
For those who've questioned my judgment that the market is close to a bottom, I'm not planning on buying US stocks in a big way. I will also add individual US stocks in a small way as I did around the 22 January bottom. On the buying list are: IBKR, XLF, BWLD, SSRX, RICK, GOOG, PBD and maybe SHLD, AAPL, and NCT.
I plan on maintaining this same rough allocation between passive alpha and beta, but the beta funds will include a large chunk of a leveraged fund - the Geared Share Fund (geared = leveraged in Australian lingo). In the longer term I plan on having a portfolio beta of about one with a big chunk of passive alpha investments. The goal would be to achieve 10% returns from the stockmarket beta in the long-term and hopefully 10% or so of alpha for a 20% total return. If you use leverage, you can be fully exposed to the stockmarket while also trying other strategies. A simple version of this is the increasingly popular 130/30 funds. A much more sophisticated approach is followed by Bridgewater Associates. What I am attempting is somewhere in between.
Friday, February 08, 2008
SPX Elliott Wave Interpretation
Obviously this interpretation is somewhat subjective but it's not based on looking at this chart alone. If this is right we should see some upside in the next few days followed by more downside. The ultimate bottom would be still 3-4 weeks off. I don't think it will be a lot lower than the wave 3 lows. E-Wave suggests the lowest it will go is about 1225-1230. If that is exceeded we need a whole new wave count.
There is a risk of missing the bottom here. I've posted a lot of bullish stuff recently. But I think I will wait till the next bottom on the weekly chart before taking on a lot more risk.
Thursday, February 07, 2008
Realised Gains
As promised, I computed realised trading gains for the last two years:
I could take this back further - the data is coming out of the spreadsheets I use to prepare my tax returns. This data does not include retirement accounts. Going forward, this will be the measure of trading performance. The basic story is that at the beginning of 2006 I quickly built up $10k in profits and then promptly blew it up in June. I rebuilt it again in the next three months blew some up that Autumn, rebuilt and then held onto my securities gains during 2007. In late 2006 I started trading futures. Built up about $9k in profits by the end of June. Then proceeded to blow most of it up in the last seven months. The mean monthly gain over this period has been only $540 and the t-statistic that tests whether that is significantly different to zero is only 0.77. At the end of June I was looking at an average of $1165 and a t-statistic of 1.20. So I was fairly optimistic that my trading was heading in the right direction when I decided to move to Australia.
The challenge is to get things heading back in a good direction in the next few months.
I could take this back further - the data is coming out of the spreadsheets I use to prepare my tax returns. This data does not include retirement accounts. Going forward, this will be the measure of trading performance. The basic story is that at the beginning of 2006 I quickly built up $10k in profits and then promptly blew it up in June. I rebuilt it again in the next three months blew some up that Autumn, rebuilt and then held onto my securities gains during 2007. In late 2006 I started trading futures. Built up about $9k in profits by the end of June. Then proceeded to blow most of it up in the last seven months. The mean monthly gain over this period has been only $540 and the t-statistic that tests whether that is significantly different to zero is only 0.77. At the end of June I was looking at an average of $1165 and a t-statistic of 1.20. So I was fairly optimistic that my trading was heading in the right direction when I decided to move to Australia.
The challenge is to get things heading back in a good direction in the next few months.
Allco Equity Partners
Allco Equity Partners (AEP.AX) stock price has tumbled to yesterday's $A2.23 (The IPO price was $A6.00!). The most obvious reason for this is their investment in 204.4 million shares of IBA. The share price of IBA has fallen from 92 Australian cents on December 13th to 62 AU cents yesterday. A loss of AUD 61 million to AEP. But in the same period, AEP's market capitalization has fallen by AUD 133 million. On top of this it was already selling at a discount to net asset value. I suppose the price has been pushed down this far due to the negativity surrounding its parent Allco Finance Group (AFG.AX). But AEP has no borrowings and there is no reason for it to collapse even if its manager AFG went out of business. This is one stock I plan to add to in the near future. I sold half my position at $A3.96 on 31st October. In retrospect, I should have sold the lot :)
Wednesday, February 06, 2008
W-2 Arrived
My W-2 arrived today all the way from the US (together with statements from Ameritrade and HSBC). So soon I can do my US taxes. My records should be good enough to fill in the investment side of things - given the IRS doesn't have any record of my investments and transactions in Australia, accuracy down to the penny is not necessary. Hopefully, this will be my last US tax return. As I was only a temporary resident in the US on an H1-B visa I now revert to a non-resident alien. Taxes are deducted at source on my dividends and I don't need to pay capital gains tax or tax on interest in the US. If I had gotten a green card I'd have had to submit US tax returns and be subject to full resident US taxation until I fell out of permanent resident status. Which is why I didn't go ahead and complete the green card process.
I'll also do Snork Maiden's taxes. Her W-2 arrived at her former office in the US. It should be forwarded to us soon. The Australian tax year ends 30th June and taxes are due sometime in October. So we'll have this fun all over again later this year :)
I'll also do Snork Maiden's taxes. Her W-2 arrived at her former office in the US. It should be forwarded to us soon. The Australian tax year ends 30th June and taxes are due sometime in October. So we'll have this fun all over again later this year :)
January 2008 Report
All figures are in US Dollars (USD) unless otherwise stated. This month again saw falls in net worth due to negative investment performance, though our performance was not as bad as the market.
Income and Expenditure
Expenditure was $3,970 - exceptional expenses included expenses on the upcoming wedding - core expenditure was $3,323. This included $231 of implicit car expenses - depreciation and interest. Our core expenditure has been remarkably consistent over the last three months.
Non-investment earnings ($3,598) mainly consisted of Snork Maiden's salary. Her previous employer finally stopped paying her. Snork Maiden's retirement contributions from her employer were $872 - there were three contributions this month for some reason (but only two salary payments!).
Non-retirement accounts lost $11,713 with the rise in the Australian Dollar offsetting $3,739 of what would otherwise have been a loss of $15,452. Retirement accounts lost $405 but would have lost $2,938 without the change in exchange rates. This difference is due to the strong exposure to bonds in our retirement accounts and the stronger exposure to equities in our non-retirement accounts. Trading contributed $577 in my Roth IRA account and $82 to the non-retirement result.
Net Worth Performance
Net worth fell by $US10,905 to $US437,702 and in Australian Dollars fell $A23,167 to $A488,125. Non-retirement accounts were at $US225k. Retirement accounts were at $US213k. So we made negative progress on our first and third annual goals.
Investment Performance
Investment return in US Dollars was -2.70% vs. a 8.17% loss in the MSCI (Gross) World Index, which I use as my overall benchmark and a 6.00% loss in the S&P 500 total return index. Non-retirement accounts lost 4.94%. Returns in Australian Dollars terms were -4.64% and -6.98% respectively. In currency neutral terms the portfolio lost 4.10%.
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. This month most of the most negative numbers are unlisted and listed Australian funds, while most of the best gains are from short-term trades or new positions.
Progress on Trading Goals
Asset Allocation
Using the simple method of adding up the betas of each individual investment weighted by their portfolio allocation, at the end of the month the portfolio had an estimated beta of 0.58. Using a regression on the last 36 months of returns gives a beta of 0.75 to the MSCI or 0.65 to the SPX. Alphas are 0.52% and 4.65% respectively. A more sophisticated time series method yields a beta of 0.65 and alpha of 10.1% for the MSCI index. There is less difference in the estimate of beta this month between the different methods. This maybe suggests that the Australian Dollar was less correlated with the stock market this month.
Allocation was 34% in "passive alpha", 68% in "beta", 2% allocated to trading, 8% to industrial stocks, 5% to liquidity, 3% to other assets (including our car which is equal to 2.9% of net worth) and we were borrowing 20%. Our currency exposures were roughly 59% Australian Dollar, 31% US Dollar, and 10% Other (mainly global equity funds).
Summary
At the end of the first month of the year we are on track to achieve two out of our five goals (2: Positive Alpha and 4: Gain in Ameritrade/IB Accounts).
Income and Expenditure
Expenditure was $3,970 - exceptional expenses included expenses on the upcoming wedding - core expenditure was $3,323. This included $231 of implicit car expenses - depreciation and interest. Our core expenditure has been remarkably consistent over the last three months.
Non-investment earnings ($3,598) mainly consisted of Snork Maiden's salary. Her previous employer finally stopped paying her. Snork Maiden's retirement contributions from her employer were $872 - there were three contributions this month for some reason (but only two salary payments!).
Non-retirement accounts lost $11,713 with the rise in the Australian Dollar offsetting $3,739 of what would otherwise have been a loss of $15,452. Retirement accounts lost $405 but would have lost $2,938 without the change in exchange rates. This difference is due to the strong exposure to bonds in our retirement accounts and the stronger exposure to equities in our non-retirement accounts. Trading contributed $577 in my Roth IRA account and $82 to the non-retirement result.
Net Worth Performance
Net worth fell by $US10,905 to $US437,702 and in Australian Dollars fell $A23,167 to $A488,125. Non-retirement accounts were at $US225k. Retirement accounts were at $US213k. So we made negative progress on our first and third annual goals.
Investment Performance
Investment return in US Dollars was -2.70% vs. a 8.17% loss in the MSCI (Gross) World Index, which I use as my overall benchmark and a 6.00% loss in the S&P 500 total return index. Non-retirement accounts lost 4.94%. Returns in Australian Dollars terms were -4.64% and -6.98% respectively. In currency neutral terms the portfolio lost 4.10%.
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. This month most of the most negative numbers are unlisted and listed Australian funds, while most of the best gains are from short-term trades or new positions.
Progress on Trading Goals
Asset Allocation
Using the simple method of adding up the betas of each individual investment weighted by their portfolio allocation, at the end of the month the portfolio had an estimated beta of 0.58. Using a regression on the last 36 months of returns gives a beta of 0.75 to the MSCI or 0.65 to the SPX. Alphas are 0.52% and 4.65% respectively. A more sophisticated time series method yields a beta of 0.65 and alpha of 10.1% for the MSCI index. There is less difference in the estimate of beta this month between the different methods. This maybe suggests that the Australian Dollar was less correlated with the stock market this month.
Allocation was 34% in "passive alpha", 68% in "beta", 2% allocated to trading, 8% to industrial stocks, 5% to liquidity, 3% to other assets (including our car which is equal to 2.9% of net worth) and we were borrowing 20%. Our currency exposures were roughly 59% Australian Dollar, 31% US Dollar, and 10% Other (mainly global equity funds).
Summary
At the end of the first month of the year we are on track to achieve two out of our five goals (2: Positive Alpha and 4: Gain in Ameritrade/IB Accounts).
Retest Underway
A new downtrend has started in the stockmarket that will test the low established in the week of 21st January. It is likely that at this coming low I will go massively long, unless indicators are telling me otherwise. My moves, up till now, have been very small in comparison. Take a look at the chart of GOOG - there are a nice 5 waves down since the beginning of 2008. The NDX now appears to be catching up in a 5th wave down. From an Elliott-Wave perspective, it's likely that the move from July to August 2007 is a three-wave wave A. We then have wave B from August to early November and since then wave C; with us now in the final wave 5 of C. We can apply the same interpretation to the SPX, except that wave C already got underway in October. The entire formation is an expanded flat. I long suspected that something like this was occurring since July, but didn't know how big each wave would be. Of course I could still be wrong, I don't use E-Wave as a primary method of predicting the market but just one way of putting what is happening into a framework.
My bigger picture is that this move is just wave 4 since the 2002 low and not a major bear market. Expect a bigger correction heading into the four year cycle low in 2010. But expect a bull market before that. Expect most people to be wrong.
The only move I made was buying some XHB puts yesterday. I'm not in a daring mood.
My bigger picture is that this move is just wave 4 since the 2002 low and not a major bear market. Expect a bigger correction heading into the four year cycle low in 2010. But expect a bull market before that. Expect most people to be wrong.
The only move I made was buying some XHB puts yesterday. I'm not in a daring mood.
Tuesday, February 05, 2008
January Trading Results
Results for January are mixed but not bad. Any way I want to measure things I beat the market massively. The MSCI All Country Gross Index was down 8.17% and the S&P 500 Total Return Index down 6.00%. I'm not sure of my overall portfolio returns yet but they were much better than that.
Computing trading returns somewhat arbitrarily, as I have been doing resulted in a $658 gain for the month. My three US trading accounts gained $735 (1.55%) and there is still $5980 to go till I reach breakeven across those three accounts, which is one of my annual goals. In future, I'm not going to break out a trading rate of return separately from my portfolio return as I've decided that the numbers get to be meaningless as I invest more of my cash for the long-term and trade with borrowed money. I'll report the overall portfolio returns, the gain in dollars on my three US accounts, maybe the percent return on my Interactive Brokers account (-8.37% this month) and my realised short-term gains for the month (-$1803).
Bottom line: I made progress on goal 4 (achieving breakeven) and continued to slip back on goal 5 (making money from trading). That is if you measure the latter goal in terms of realised short-term gains. Soon, I'll put together a realised gains series for the last couple of years to get a better picture of how I'm doing. Here is the net equity in my three US trading accounts:
This view shows that the slump since June 2007 is nowhere near as bad as the trading results I've been reporting show. In fact, at this point I am up slightly on that month and if we measure from the big loss in July 2007, I'm not doing bad at all. Especially, when compared to the market. What has been happening is the positions in these accounts that I have considered to be investments have done well, while my short-term trading has gone badly. This shows the importance of diversifying across different styles.
Computing trading returns somewhat arbitrarily, as I have been doing resulted in a $658 gain for the month. My three US trading accounts gained $735 (1.55%) and there is still $5980 to go till I reach breakeven across those three accounts, which is one of my annual goals. In future, I'm not going to break out a trading rate of return separately from my portfolio return as I've decided that the numbers get to be meaningless as I invest more of my cash for the long-term and trade with borrowed money. I'll report the overall portfolio returns, the gain in dollars on my three US accounts, maybe the percent return on my Interactive Brokers account (-8.37% this month) and my realised short-term gains for the month (-$1803).
Bottom line: I made progress on goal 4 (achieving breakeven) and continued to slip back on goal 5 (making money from trading). That is if you measure the latter goal in terms of realised short-term gains. Soon, I'll put together a realised gains series for the last couple of years to get a better picture of how I'm doing. Here is the net equity in my three US trading accounts:
This view shows that the slump since June 2007 is nowhere near as bad as the trading results I've been reporting show. In fact, at this point I am up slightly on that month and if we measure from the big loss in July 2007, I'm not doing bad at all. Especially, when compared to the market. What has been happening is the positions in these accounts that I have considered to be investments have done well, while my short-term trading has gone badly. This shows the importance of diversifying across different styles.
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