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.

Big Picture Update

A good article about where we currently seem to be in somewhat longer term market cycles. I am also looking for the market to go down after a Thanksgiving rally to a bottom at a similar level to the August 2007 low. In fact I am looking for the final leg of this big triangle to play out:



Support for this idea is provided also by the McClellan Summation:



The stochastic on this chart has plenty of space to fall yet... There are likely several weeks till the bottom is reached. The NYSE McClellan Summation presents an identical picture.

At that point I am thinking to make a major change in strategy and significantly increasing the beta of my portfolio as well as buying financial stock funds like FF and XLF. If the market gets back to the August lows the atmosphere is likely to get very bearish - when everyone agrees on something in the investment world it is probably wrong. Everyone currently thinks the US Dollar will fall and the Australian Dollar Rise. Until very recently they've been right. I've been taking the contrarian bet to a minor degree. 61% of my assets are in Australian Dollars and I aim to reduce that to 50% over time - so I'm not making any big bets on the US Dollar rising - on the other hand we've tried to avoid spending our US Dollars and I haven't converted any of them into Australian Dollars since March 2006. In fact I bought US Dollars in April and May 2007.

Effect of Exchange Rate Fluctuations on Returns

My recent net worth reports have shown huge fluctuations due to the volatility in the Australian Dollar-US Dollar exchange rate. Returns are strong in US Dollar terms when the Australian Dollar is rising - even though this is making us poorer in Australian Dollar terms. Each month I calculate the contribution to investment returns from the change in exchange rates under the heading "Forex" in my income and expenditure table and my table of returns on individual investments. In the last few days the Aussie has plummeted resulting in strongly negative investment returns for the month to date. This table shows just how much difference changes in the exchange rate make:



Stripping out the exchange rate results in lower average returns for the year so far (12.8% vs. 20.7%) but greatly lowered volatility and hence a higher Sharpe Ratio, which is a measure of the excess return (above a 5% hurdle in this case) divided by the standard deviation of returns. Both Sharpe Ratios exceed those for the MSCI and SPX total return indices. The SPX has risen less than the 5% hurdle so far this year (3.1%) and thus has a negative Sharpe Ratio. The MSCI has returned 12.8% at this point. A large part of that return is due to the fall in the US dollar. This is a global index measured in US Dollar terms. So really I'm doing neither as good, nor as bad as it might seem. I'm probably really beating the MSCI but not by as much as the crude numbers suggest. I've had two negative months - but both have come in the second half of the year, which has made me feel a bit despondent but the two indices have had four or five negative months.

Here is the same data for the more visually oriented:



BTW I haven't seen any comments in the personal finance blogosphere (obviously there's plenty on trading blogs) so far about this month's so far sharp fall in the indices. I guess it will come soon.

Following up from yesterday's blog. Actually, the model has been doing fine this month so far with only one stop-out so far (Friday). But I've been scared to get back on board due to its poor performance from the beginning of September to 2/3 the way through October. There were heaps of stop outs in late July and early August too. I wish there were a futures contract smaller even than the NQ (NASDAQ E-Mini) and I would be trading it overnight my time (US day time).

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.

Financial Disclosure

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

Money Arrives

The money arrived in my HSBC savings account today, even though 25 April is a public holiday in Australia (ANZAC Day). HSBC charge another $US25 fee. So I paid 1.4% in total for the transfer. I could get the percentage cost down for the next transfer if I borrowed some money on my Aussie margin loan to bring it up to the maximum $A10k allowed per transfer or waited longer for $A10k to accumulate in cash in my money market account (CMT in Aus-speak). I didn't trade today due to a bunch of awkwardly timed meetings, but it would've been a great trading day....

Token Arrives

The "token" arrived from Commonwealth Bank in a bright yellow box with real Australian stamps stuck to it. Inside is this tiny electronic device:



Very cute. I registered it and shifted money to my account from a money market account in Aus ready for the actual transfer to the US. Everyone seems convinced the USD is going down - including a colleague who teaches international economics that we went to dinner with together with a bunch of students from her class yesterday - so a contrarian move seems to be the right thing to do. Anyway, I'm only moving my dividends and distributions back to the US at this point. Not a huge amount of money. Snork Maiden was here to give a presentation in the class yesterday that was like a mini-preliminary-job-interview. But there isn't a position here for her at the moment. Today maybe we will hear if she got offered the job in Europe. In the meantime she got a phone interview lined up in Aus for a couple of weeks time.

Organizing

That's the theme of the moment.

1. Have everything I need to fax in the stuff to set up the transfers from my Australian account to my US accounts. But seems there is a need for a security calculator - two factor authentication. We'll have to see if they'll send that here to the US. The representative told me they will phone me after I fax them.

2. Almost have all the forms and info for the next stage in my green card application - getting police records from the 3 countries I've lived in apart from the US. Britain wants me to mail them original IDs with my date of birth and name! I think Aus looks easier now they finally sent me the forms. Israel wants me to come in person to the consulate in NYC - that will have to wait till next month.

3. Ameritrade e-mailed Snork Maiden yesterday and said that we didn't sign one of the forms for her Roth IRA. If she can get it faxed to them by today maybe we can get the 2006 contribution in. Though you only need the postmark on the letter with the check, apparently the account must be open before the deadline too to make a 2006 contribution. Hopefully, she can sort this out today, though it is a big hassle. I understand this. I have been procrastinating on these police records.

4. Looks like my brother is going to come visit us, so when that's fixed some travel planning.

5. Snork Maiden had a phone interview yesterday with a university in Europe. By next Tuesday we should know if they want to hire her.

I haven't been doing any trading the last couple of days, though I could have made some money yesterday if I did because I would have been long. Will wait till I feel comfortable. This is going to be a busy couple of weeks though as the semester nears it's end.

P.S. 1:55PM

We failed in the race to make a 2006 contribution to Snork Maiden's Roth IRA. Ameritrade are giving her a lot of trouble because she is still on a foreign student visa. We told them that she is now resident for US tax purposes but they want us to mail in a signed copy of the W8-BEN, fax the signed application form, and send a photocopy of bank statement! Anyway there was something they said couldn't be faxed. Anyway, we can now wait a while to see if a 2007 contribution is going to make sense.

P.P.S. 9:14PM

Commonwealth Bank e-mailed me to tell me I was approved for online international money transfers. Another one says they are sending me the "token" - a calculator used in two factor authentication. Let's see when it arrives.

Can You Get at Your Money?

This is the kind of problem that people that move internationally have. A little while ago I began to receive most distributions and dividends from my Australian investments as cash payments rather than having them reinvested. Now I want to begin transferring them to the US. At the moment the distributions are accumulating in a money market account in Australia, so they are earning interest and the Australian Dollar so far continues to rise. My regular checking account in Australia allows online international wire transfers. Initially the limit for a transfer is set at zero and you need to phone the bank to raise the limit. Last night I phoned them and things were going well until the representative asked me for my Keycard number (this is an ATM card):

"Umm", I said, "I don't have one of those as they wouldn't send me a new one when the old one expired because I don't have an address in Australia."

The truth is that I didn't want to bother my friend there with having to send me a card which I wasn't really going to use at the time. I could have used his address. The representative then told me last night that I need to download a change of details form and send a fax including that, two copies of my signature and a photocopy from my passport. I couldn't find that form on the bank's website and so now e-mailed the bank to send me one electronically. Maybe I'll end up phoning again. But it looks like we can sort this out and begin transferring money bank to the US. I have done transfers from my bank here back to Australia. But to do them I needed to go into the branch, let them photocopy my passport etc. I even transferred money to China that way.

I'm just feeling a little worried this morning that if I move out of the US again I won't be able to get my hands on my money. This is an irrational fear because I will find a way. One option is HSBC's Premier Service. Seems you can set up accounts in multiple countries and then do online wire transfers between them. You need to have either $100k with HSBC or pay $50 a month. I doubt I'd have $100k with them any time soon as I like to have my money doing something more productive than sitting in bank deposits and savings accounts and I don't particularly want to set up a stockbroking/investment account with them. $600 a year is also quite a lot at this stage too for this service. At the moment I am likely to spend just $A88 a year with my Australian bank for transfers and $A60 to maintain the account and in the past I spent maybe $50-75 a year making transfers from here to Aus. But probably down the road I will eventually set up an international banking service of this sort to be sure I can get my money easily wherever I am.

Some people ask me why I maintain investments and accounts in Australia. There are three reasons:

1. I can't get the money out of my retirement accounts or transfer the accounts out of Australia until I am 60.

2. If I sell out my positions in regular accounts I'll owe capital gains tax.

3. From 2002 till now investing in Australia has been an extremely good move. The Australian Dollar has gone up and the Australian stock market has been very strong.

Aussie Dollar Trading Above 80 US Cents

It hasn't been above 80 cents in a long while. My Aussie Dollar model gave a sell signal yesterday. It's good I'm not trading forex anymore as I would have shorted the AUD and probably gone long the Yen, which would have made things twice as bad! This model is a previous generation model that is not as precise at all as my NDX trading model. One day maybe I will apply this new model to forex. But in the meantime I've decided to take a slow and steady approach to foreign currency management. Over time I plan to move my portfolio towards 50:50 Australian and US Dollars by accumulating savings in the US and transferring dividends and distributions from Aus to the US. After reaching the 50:50 level I would do regular quarterly, or whatever, rebalancing. Currently I am approximately 67% in AUD, 26% USD, and 7% other (global mutual funds that are unhedged or hedged into other currencies).

BTW I just shorted 2 NQ contracts @ 1781.75. The model is still not giving a very clearcut signal, so this is a hunch based on a bunch of stuff. I'll see in the morning whether I should add to it. Maybe this evening already I'll decide to get out of it if there is a very strong rally in Asia.

IB Account Profit and Loss Curve

The chart shows the cumulative profit in my Interactive Brokers account since I opened it in late October 2006 trade by trade. All closed trades are shown here. Initially, things were a bit erratic and then an Aussie Dollar trade went very bad. I shorted 3 contracts and the AUD rose 1 US cent against me... that resulted in a loss of $US3000. Since then I have had a pretty smooth ride along an ascending profit curve. As I blogged, yesterday, that might make me a bit too complacent. In fact I made a new short AUD trade yesterday - but only 1 contract - and again the AUD rose against me. But this evening, on the release of the SPI report in Australia the Aussie plummeted and that trade (now closed) turned out OK.

The chart also shows the importance of cutting losses. If I just halved the size of those two big losses the track record would look very different.

I did one of these reports before for non-futures trading. It also looked pretty erratic. I am still waiting for the decisive breakthrough where my trading looks consistently profitable.

Cushion of Profits

I've managed to build my Interactive Brokers account which I use for trading futures up to $12,000. I originally put $10k into the account. After the Aussie Dollar trading debacle in early December the account had fallen to $7,000. So at this point I am achieving the first part of my second goal for 2007 by bringing one of the three accounts back to profit. As I begin to rebuild profits I start to feel less anxious about losing money in trades. This doesn't make a lot of sense economically. $2000 is about 1/2 per cent of my net worth and shouldn't make much difference to my decision making if I was really a neoclassical rational optimiser. It shouldn't matter that the $2000 is the profits in a specific account. This is a classic example of behavioral economics.

Anyway, I'm not sure if this is good or bad. On the one hand, I am likely to be less jittery and more likely to let profits run etc. On the other hand, I might start to take unreasonable risks. Need to remain dsciplined.

Annual Report 2006: Part III

The following table compares my rates of return on investment to the MSCI World Index and the S&P 500 Total Return Index:



Both those indices include reinvested dividends and in the former case tax credits too. The MSCI World Index covers all countries indexed by MSCI is expressed in US Dollars. I consider the MSCI index the benchmark I measure my performance against. This post has a chart comparing my USD Total Asset Return to the MSCI World Index.

Anyway, getting back to the table - it is divided into four sections:

The first two columns of figures only cover non-retirement assets. I give the return in Australian Dollar and US Dollar terms. The latter look a lot better due to the rise in the Australian dollar from 2001. The returns are the total gain over the relevant period - not annualized rates of return.

The next two columns also include retirement accounts. In the long-term these returns are a lot better with a 123% gain over ten years but are poorer for 2006 itself. Recently, my retirement accounts have been invested more conservatively than non-retirement accounts. In earlier years this wasn't the case and I chose some very successful funds including Colonial First State's Geared Share Fund.

Columns 5 and 6 present the same data for the two stock indices. Over 1, 2, 3, and 5 years the MSCI has outperformed the S&P 500. I have just about matched the S&P 500 over 10 years and outperformed it on all the shorter horizons. I outperformed the MSCI over 3, 5, and 10 years but not over 1 or 2 years. My 2005 rate of return was particularly low.

The final three columns give the same information in terms of annual rates of return. This shows that my rates of return have been extremely strong over 3 and 5 years. The S&P 500 performed poorly over the 5 year horizon. The fall in the US Dollar is one reason that both I and the MSCI outperformed the S&P 500 - foreign stock markets have also performed better in terms of local currencies during this period. So are my returns just luck? I could have moved all my non-retirement assets to the US in 2002 when I moved here from Australia. I deliberately chose not to do so. I also chose to invest most of my Australian retirement account in Australian shares rather than other alternatives. These were deliberate choices based on my view of the value of the currencies. I now see the Euro, Pound, and Aussie Dollar as fully valued and so will focus on accumulating US Dollars. Only time will tell if I am right.

Changing Distribution Method

I've decided to stop reinvesting the distributions from my non-retirement Australian mutual funds managed by Colonial First State and receive cash distributions instead. These funds constitute 35% of my net worth. The reasons for this decision are as follows:

1. After maxing out my 403(b) contributions investable cash flow from salary is much reduced. Last year these funds distributed $A13,200 (USD 10,400). This cash will largely replace the funds now diverted to my 403(b). Cash is needed to take advantage of emerging investment opportunities and from 2008 onwards I will probably need cash to make tax payments - up till now salary with-holding has been sufficient. This year I will exhaust carried forward capital losses.

2. Tax is payable whether a cash payout is received or not. So using this money to invest in new investments is more tax efficient than selling existing investments.

3. There is no discount for reinvesting the distributions and no load for new fund investments so no actual costs to this choice.

4. The Australian Dollar is currently strong and the US Dollar weak. I want to increase US Dollar investments. I can easily transfer this money back to the US for investment. In fact, that is what I plan to do. Up till now I have been using Australian dividends received to reduce my margin loan with Commonwealth Securities.

I need to send my request in writing. The next distribution is at the end of March - some funds have quarterly and some half-yearly distributions. I am still reinvesting my dividends from Telecom New Zealand and distributions from Everest Brown and Babcock, the TFS Market Neutral Fund and the Hussman Strategic Growth Fund. My other Australian investments do not allow dividend reinvestment by foreign investors. I'm not planning on changing these instructions at the moment.

How Could I Add $105k to Net Worth?

2006's results (to be reported in detail after January 1) were helped by foreign exchange gain and a small ($6-7k) inheritance amount. I doubt foreign exchange will add much this year and it may even take away unless I successfully trade foreign currency. The Australian Dollar is close to 80 US cents and it is hard to imagine it going much higher. The US Dollar could be bottoming. The second part of the inheritance could come this year or not. Legal procedures are extremely slow. I expect it would be about twice the value of the first one but we don't really know. So let's assume all these factors are zero. I also assume that my tax bill in April will be zero - I have been over-withholding and I think it is sufficient to meet the required tax.

I can expect the following - my employer contributes 8% of my salary to my 403b and I am now contributing the maximum allowed contribution. Combined these come in at $1750 per month. If I spend at the same rate as this year, I should still be able to save $1000 a month after tax. Total from "contributions" would, therefore, be $33k for the year. In my previous post I stated a goal of making $19k from trading. That would be a 46% return on those accounts mentioned. This year I only gained $3k from QQQQ/NQ trading. So it seems like a lot. If I can succeed in adhering to my model it isn't though a very high goal. Viewed another way, it is about 1/2 the average US salary and only a step on the way to becoming a succcessful trader. If we assume that I do achieve this then the required return on my investment portfolio is 14%. This also is high, but not impossible. This year the S&P 500 exceeded that. Of course returns could be much lower and my spending much higher. But this is a goal, not a forecast, and the point is that it should be hard but not impossible to achieve.

Perfect Storm

This morning's CPI and wage data. Stocks and bonds soared and the US Dollar dropped on the news. Perfect for more my portfolio. But will the massive opening gap hold, or should I sell my stock positions. QQQQ was $44.40 before the news and now is at $44.78 a few minutes later. There is a potential for $45 being an attractor today as it is options expiry day....

12:39pm

The NDX gap pretty much did fill in the end and $44.50 is looking like more of an attractor than $45. I should just trust the model and stay long through Tuesday I guess... The Aussie and 10 year bonds retraced a lot of their surge too.

FOMC Day

And I gingerly stepped back into the market... So far, just one NQ Mar 07 contract @ 1805.50. If an uptrend takes hold I may add to it. Though it was announced this morning that the US trade deficit narrowed significantly the USD is weak (AUD = 0.7864). Bonds are up slightly and stocks are down. I am a bit apprehensive of getting too bold before the FOMC announcement at 2:15pm. Bernanke is in China, so don't expect any surprises. The most significant thing that could happen I am thinking is if Jeffrey Lacker doesn't dissent from the decision and state that he thinks interest rates should be raised as he has at recent meetings. That could be bullish for stocks (or maybe not - my TA is pointing up in the stockmarket so I suspect it would be read bullishly - rather than a sign that the economy is even weaker). It would certainly be bullish for bonds and bad for the USD.

3:17pm

It's been a catching falling knives kind of day. The model was forecasting a slightly down day (after the level I mentioned yesterday didn't hold). So when the market opened down I thought that was a good time to buy. The market fell much more before the FOMC announcement though... Lacker dissented again. Apparently he is rotating off the FOMC after this meeting. At least the model is forecasting an uptrend now for the near future as I'm underwater on the two contracts I ended up buying (there was a third which I sold for a small gain). Bonds are up and the USD down after the announcement while stocks are up though very volatile.

I Know What's Going to Happen...

but don't do anything about it.... same story as last week. The model forecast today as a down day, but my read of the intraday (and daily) charts came to the opposite conclusion. So I was hesitant to do anything. If the market stays up near it's current level (13-14 NDX points) the model forecasts Tuesday as an upday. Basically the market is forecasting a favorable FOMC report tomorrow afternoon. I'm pretty sure I can make money from trading on a full time basis but letting my attention drift can be fatal. And I can't fully focus on it. So that's why I'm not acting. I guess that is better than making more losing trades. And losing money makes me nervous and do dumb things.

This upcoming rally seems likely to be very short-lived though. I think it highly likely we are in an ending diagonal or some other topping action that will last much of this month.

On the foreign exchange front, my guess is that the US Dollar has just completed a fourth wave since October and new wave down is getting underway. This wave if it materializes will take the dollar to the support level that has held in the last couple of decades of 80 or so. Some kind of rally would seem likely from that point even if ultimately the support fails, even though I actually think that unlikely. Prices are already very high in Europe relative to the United States. In the end I believe that relative purchasing power will limit moves in currencies. If this is the case, the US Dollar can only keep on falling relative to the Pound and Euro if there is significantly higher inflation in the US than in Europe.

Tuesday Update

The market rebounded a little today. Friday remains the likely timing for a more substantial upswing. That is unless we get to oversold conditions (stochastic less than 20) before that. For that to happen we need to get another serious selloff in the next couple of days. The Aussie Dollar rallied against me. My futures position is partially hedging the underlying exposure to the AUD so actually my USD net worth rose still due to this rally in the AUD, but much less than it could have. The "autoregressive model" is now giving a more emphatic sell signal today for the Aussie. Bonds rose too, which is good for me. So all in all today was probably a wash. I did a couple of NDX daytrades the losing one lost a little less than the winning one made so I guess that is OK too :)

Tomorrow we get a bunch more macro news including preliminary GDP, new home sales and the Fed's Beige Book. Today existing home sales were up, but as expected there was a year on year price decline again.

Forex Update

I've been successful so far trading the Aussie Dollar on the long side - making $US814 so far (this is just futures contracts not gains on my actual Australian investments due to the rise in the AUD) - and now I have switched to the short side. I was long one contract and am now short one contract. So I have gone from almost 100% in Australian Dollars portfolio wide to about 50/50 Aussies and Greenbacks. The reason is because my "autoregressive model" gave a sell signal on the Friday close. I don't know how far the down move will go. It seems reasonable that the sharp fall in the US Dollar last week will correct somewhat even if the USD is headed down further after that. And the Aussie does look relatively weak. I've also relabeled my posts about currency trading as "Forex" instead of "Trading" so that they will be easier to find.

P.S. Noon Monday

I sold another AUD contract, taking my AUD exposure down to 23% and USD up to 67% (the rest is in funds exposed to other currencies).