Bitcoin Trading Update

This morning Bitcoin plummeted several hundred dollars at the open of the US overnight session on Globex. It triggered both my sell stop to close my long April futures position at a profit of USD 194 and my sell stop to go short the May futures from 5375. This also triggered the set-up of a buy stop for the short position. Everything worked as it should. On the other hand, I was pretty lucky to come out with a profit from the long position, which at one point was much more in the money.

Updated Post on Labor's Tax Increase Proposals

I had forgotten about one of Labor's proposals to increase tax. Limiting tax free pensions to $75k per year. I've now added it to the list. It's number 13.

P.S.
Another one - limiting deductions ofr tax advice to $3,000 per year. Now 14 proposals on the list.

Update on Trading Research

I came to the conclusion that none of the trading tools I developed are reliable. They can match market behavior for a while and make money, but then the relationship breaks down. In the long run there is no relationship between any of these indicators and returns.

I wrote a back-testing program for Turtle type trend-following models. This allows me to optimize the time periods to use to maximize profits. There is the potential for over-fitting and unstable relationships here too. The answer I think is to regularly re-optimize as the market changes. This re-optimization is easy to do. Given that a wide range of values is profitable in the exercise I did, I don't think there would be a sudden failure. We will see.

In the backtest there were 78 trades with a 48% win rate. But wins were on average 3.45 times larger than losses. The annualized Sharpe ratio is 2.2. Here there is a negative correlation between the initial risk taken (amount of money lost if the stop is triggered) and profits. That means it makes sense to bet bigger when the risk is lower:

I am now trading Bitcoin futures with the optimized algorithm (Long Bitcoin since yesterday). Next step is to see if there are other futures I could trade. Stock index futures aren't more profitable than just going long the index.

Save 4% on Transferring Money to Australia

My brother is planning sending me my share of the proceeds of selling my mother's apartment. If we sent the money in Falafeland currency to our account at Commonwealth Bank in Australia we would lose around 5% of the value relative to the exchange rate on the forex market (representative rate). The spread between their buying and selling rates is around 10%. This is just crazy. I can think of another word that starts with "cr". I checked the rates of other Australian banks. HSBC and Macquarie are better, but not that much better.

My brother got a quote from his bank in Falafeland to convert the money to Australian Dollars and then send to Australia. The cost is about 1% relative to the representative rate. Online, I found that TorFX is recommended for such transfers. I now have a quote from them which is about 1.2%. So, we will go with the Falafeland National Bank.

You can get much, much better rates by trading in the forex market yourself using a broker like Interactive Brokers. But I can only hold currency in AUD, USD, GBP, and EUR at IB. So, I can't make a conversion from Falafeland money to AUD.

Doing More Trading Research

Seems like April is the time for me to think about trading. I developed a very simple mechanistic trend-following model for trading Bitcoin futures. I have placed orders in the market but they haven't triggered yet. Initially, I tried to be too clever, but quickly decided that just using mechanical rules will work better...

Now I am returning to thinking about more sophisticated models as well. Here are the results from a very simple mean reversion model – it goes short when stocks are strong and vice versa, with daily trades on the NASDAQ index:

This assumes perfect trades with no fees. It worked great until the end of 2008. Then it did nothing for three years and then started working again. But in the last five years it again went nowhere. Strangely, it looks a lot like the returns from trend-following over this period. Still, from 2005 to the present it returned 19% per year. I might be wrong, but I'm thinking that this is a benchmark for more sophisticated forecasts. If we can predict that we should trend follow rather than mean revert for a few of the worst days here, returns would improve a lot. But it has to be a very simple method that won't result in overfitting.

On the other hand, the NASDAQ 100 index itself returned 14.18% and go long with a stop if the market falls 1% or more intraday returned 19.85% a year.

March 2019 Report

In March the Australian Dollar fell from USD 0.7106 to USD 0.7096. The MSCI World Index rose 1.32% and the S&P 500 1.94%. The ASX 200 rose 0.97%. All these are total returns including dividends. We gained 0.53% in Australian Dollar terms and 0.40% in US Dollar terms. Our currency neutral rate of return was 0.39%. The target portfolio gained 1.10% in Australian Dollar terms and the HFRI hedge fund index 0.97% in US Dollar terms. So, we underperformed our benchmarks.


Here again is a detailed report on the performance of all investments:

The table also shows the shares of these investments in net worth. At the bottom of the table I also included the Australian Dollars return from foreign currency movements and other net investment gains and losses - net interest and fees. This time I also combined all individual corporate bonds into a single investment. Their individual returns are not very informative. At the asset class level only Australian small cap stocks and hedge funds lost money this month. U.S. stocks were the best performing asset classs.

Things that worked very well this month:

• Pendal Property Investments an Australian fund of REITs did surprisingly well. Pershing Square Holdings continued to gain as Bill Ackman turned round his recent poor performance.

What really didn't work:

• The Tribeca Global Natural Resources listed hedge fund performed very badly this month.

We treaded water relative to our new long-run asset allocation:*

The main driver is continued movement of cash from my US bank account to Interactive Brokers where I am buying bonds before eventually transferring some of the money to our Australian bank accounts when the broker allows..... We are now quite underweight in Australian shares.

On a regular basis, we also invest AUD 2k monthly in a set of managed funds, and there are also retirement contributions. Then there are distributions from funds and dividends. Other moves this month:

• USD 135k of corporate bonds matured (Santander UK and Welltower) and I bought USD 284k of bonds (HCA, Virgin Australia, Viacom, WGL, Goldman Sachs, and Kinder Morgan). 
• I bought 755 Commonwealth Bank hybrid securities (preferred stock).
• I sold 10,000 shares of PIXX.AX and bought 30,000 shares of PMC.AX after the premium to NAV of the latter fell substantially.
• I bought another 1089 OCP.AX shares.
• We completed the deleveraging this month, just in time for the US yield curve to invert out to the 10 year maturity. I sold all of Moominmama's units in the CFS Geared Share Fund and bought units in the Imputation Fund instead. I also sold all her units in the CFS Geared Global Share Fund and bought units in the Generation Global and Platinum International Fund (same as PIXX.AX) instead. Yes, we still have a margin loan, but we have the cash to pay it off, just not yet in the right country...
• I applied for the Pengana Private Equity IPO.
  

* Total leverage includes borrowing inside leveraged (geared) mutual (managed) funds. The allocation is according to total assets including the true exposure in leveraged funds. From this month though we no longer have any leveraged funds.

CommBank App Not Working

More financial frustrations today... Recently I set my phone up to pay cardlessly using the CommBank App. But today, I went to buy lunch and it wouldn't work. This was the first day I didn't bring a credit card so I have less stuff to carry around. I couldn't log into the app either. I got a message that I didn't have an internet connection, despite everything else on my phone working fine. I phoned Commonwealth Bank and their solution: Delete the app and reinstall it. Apparently the cardless world hasn't arrived quite yet.

One thing positive I can say about CBA is that their phone service is excellent. Wait times are always very low and the representatives have the solutions to the problems immediately. I can't say that about some other Australia companies. Telstra for example.

Restrictions on Withdrawing Cash at Interactive Brokers

If you move money to Interactive Brokers through the American banking system, they put a hold on your money so that you can't withdraw it to another bank for 44 days. This works in a very strange way. If you have more than the amount on hold in US dollars you can obviously withdraw that excess money in US Dollars. But if you want to withdraw money in Australian Dollars you also have to have more than that amount in Australian Dollar cash! Well, this is what an IB representative just told me to explain why I can't withdraw any money in Australian Dollars despite having cash in that account, including cash I received from dividends that absolutely wasn't transferred from a US bank.

This will slow down my financial restructuring plan. I don't want to buy that many Australian Dollars all at once, though I could use futures contracts to retain exposure to the US dollar... but for psychological reasons I find that harder to do. And I would have to sell the US corporate bonds I bought to do it. The only thing that I really want to do that is time bound is to make a non-concessional contribution to superannuation before the end of the financial year. I guess I will sell some Australian managed funds to come up with the money.

Bitcoin

I thought it was time to buy Bitcoin when I heard that CBOE was dropping Bitcoin futures contracts. Supposedly, when everyone hates something, it's the time to buy it. I have also seen research, which argues for a big rise in Bitcoin. I set up a simple trading model and it confirmed that I should go long now. I got approval to trade CME Bitcoin futures on Monday. Looking at the stochastic oscillator on the chart above, I thought there would be a bit of a pullback and put in an order yesterday to buy at $4000 when the futures were trading at $4140 with a stop at $3845. I went to a meeting and when I came out  I saw Bitcoin was at $4700. So, trying to be too clever, I missed the boat. The problem is that the stop is still the same according to my trading model. One contract is 5 Bitcoins. I don't want to risk USD5000+ on this trade. So, I will need to wait, probably a couple of weeks before the stop will change and I can place a trade with acceptable risk. The alternative risk is that Bitcoin continues to go higher from here. But after yesterday, I really want to stick to the model and not try to be clever.

This is one of three more "macro" trades that I am thinking of doing. At the moment, I don't have the time to do the research to fix my shorter term trading model.

Reduced Incentive to Access Superannuation as Early as Possible

Currently, Australian superannuation earnings are taxed at 15% and 10% for capital gains while you are in the "accumulation" phase (before you retire). When you retire you can switch up to $1.6 million of assets into pension mode and then the earnings are taxed at 0%.* The downside is that then there is a minimum payout ratio every year which increases with age. Unlike the U.S., there is actually no requirement to make any withdrawals from super. But making withdrawals is incentivized by the reduction in tax rate.

But if you have shares that pay franking credits, you can use these franking credits to offset the 10-15% tax. You might not pay any net tax on your super fund in the accumulation phase. When you switch to pension mode you will get cash refunds of the franking credits.**

Labor plans to abolish these refunds of franking credits. This means that there may actually be no net change in tax due when switching from accumulation to pension mode. The incentive to switch disappears. This means that if you have assets outside super you probably should spend them first in retirement as they are relatively highly taxed. Only if you run out of such assets, should you access your super.

* Any excess remains in accumulation mode.
** You might even get some cash refunds in accumulation mode if you have enough shares paying franked dividends.

Planning Permission Refused

I got an email today from the city planning office that the development in our neighbourhood that I had objected to was refused planning permission. The plan violated many individual rules, but basically the developers were trying to cram too much development into a small space. They planned on 56 town houses and commercial space and 12 apartments in a 5 storey building. The development occupies the two greenish blocks on the map:

You can see the size of townhouses and houses in the neighboring development (yes, we live there) to get an idea of how crammed this development was planned to be.

I objected to the height of the 5 storey building, which we would see from the front of our house, largely blocking our existing view to a wooded hill. Only 7 members of the public had filed written objections to the original plan despite wide advertising by the government of the application and consultation sessions in the neighborhood. I was the only person who wrote an objection against the revised plan the developers submitted.

I have been surprised how much work the developers have been doing on site. Apart from demolishing the existing office buildings, they have done most the excavation for underground car parks and then started building individual underground garages for the townhouses on the east of the site. They also recently installed a big yellow tower crane on site. How could they submit a plan that violated so many rules and then invest so much money on the basis of such a flawed plan. Will they have to change the work they have already done or will they get away with it? They have a month to appeal the decision, or they will need to submit a new plan.