The Market Went up Today... Better News from Australia

The market went up today, but my model is still on short heading into the FOMC announcement tomorrow. We are getting close to a turning point in the market though. Better financial news out of Australia for me today. There was an update about a very complicated real estate security (IYS) I invested in which is going to be wound up and the capital distributed. The final distribution will be 21 Australian cents a share more than previously offered ($A1.91 vs $A1.70). Should wind up in September. I am tempted to buy more but the risk control side of me says: "who knows what might happen?". The spread is enormous. The bid is $A1.24 and the offer $A1.72. It almost never trades. Maybe put in a bid at $A1.25 and see what happens? I can't see why anyone would sell at that price though. But why sell at the offer price either?

Croesus Mining Declares Bankruptcy

I wrote in an earlier post about the trading halt in the shares of Australian gold miner Croesus Mining. In the last couple of days the firm went into "administration" the Australian equivalent of Chapter 11 after the Japanese Mitsui Bank refused to reschedule the gold hedging contracts between it and Croesus. Macquarie Bank in Australia had agreed to reschedule the hedging commitments. This means the value of the shares is likely totally wiped out. I won't write down the loss to my net worth (about 2.5%) until this is finally confirmed. At least some of it can be used as a short-term capital loss reducing the hit somewhat. The basic problem was that Croesus was not producing enough gold to meet its commitments to sell gold to the banks at the prices of the hedging contracts. Therefore, they would be forced to buy gold on the open market at a much higher price fill the contract. Macquarie was happy to reduce the monthly commitment. I suppose they thought that the price of gold will continue to rise so it doesn't matter if they have to wait a while for their cheap gold. And, additionally, they let a borrowing client survive to borrow another day.

Kiyosaki Wrong on Mutual Funds

I like a lot of what Robert Kiyosaki says usually and there are serious problems with a lot of mutual funds, but the basic point in his column on Yahoo's website is plain wrong. He says that if a mutual fund earned 8% a year and charged 2.5% in fees (the first number is plausible as an after inflation return on a long stock mutual fund, the second number is high but not totally implausible) then your after fees return is 5.5% which means that over a 65 year period $1000 would grow to $140,000 if there were no fees but only $30,000 after fees. So far so good. But then he says that this implies that the fund manager makes 80% of the return and you only make 20%. Not true. You make 21% of the potential before fees return but the fund company only makes 10% of the potential return ((2.5*30,000/5.5)/140,000). 69% of the potential return just disappears. So it is just as bad as he said but the mutual fund company isn't benefiting from this. The idea that if you lose someone else must be gaining is a common myth among investors - many people think that if the stock market goes down and investors who own stocks lose someone must have gained. Not true - a few short-sellers do gain, but most of the value just evaporates.

The truth about mutual funds is that actually fees don't matter. Fund companies like Vanguard who have low fees would like you to think this. All that matters is your net return after fees. If the return after fees is better than you can do on your own after taking into account the value of your time you would rather spend on something else then the mutual fund is worth buying and otherwise not. You could just buy an ETF invested in a stock index. If an actively managed mutual or hedge fund returns after fees more than this investment then it is worth buying. I find that in very strong trending markets, passive investing beats active investing. In weaker markets active investment seems to win out even after fees. Last year in the US active funds beat passive funds. But in Australia the opposite was true. In the 1990s, active investing won in Australia and passive investing in the US.

Market Forecast

Despite the market being up today all my newly developed indicators are pointing the same way - down. Some other indicators and the chart pattern too are ambiguous. The NDX (NASDAQ 100 index) would need to rise around 14 points I think to reverse this. Something unexpected can always happen. I'm thinking now when I do reverse position I will set up main position using stock after all. This is so I can do an after hours trade if neccessary - you can't trade options outside regular market hours. But the position in my Roth IRA will remain in options. Will be interesting to see how the two approaches work out.

Technical Analysis Modeling

Been spending a lot of time recently on developing new technical analysis methods (commonly known also as "charting" - but the stuff I am developing barely involves a chart). In my academic career most of my research has involved applying time series models (statistical modeling methods related to regression analysis applied to data that is available as observations over time like historical temperatures, GDP, stock prices, population etc.). I have also done some work to apply these methods in the stock market.

I have found that, not surprisingly, it is pretty much impossible to forecast daily changes in stock prices using any standard time series model. This is why academic economists who work in finance say that technical analysis is rubbish and can't work. It is also why technical analysts use indicators which rather than forecasting changes in stock prices try generally to pick out turning points in the trend. I have created one indicator myself that is fairly useful by using an unusual combination of time series methods. My new approach is to try to forecast an indicator.

Recently, I have found that if you could predict the direction of the %K(5,5) full stochastic oscillator correctly (see this chart) you would beat the market by maybe 100% in bull market years and by hundreds of percent in bear market years. So being able to predict it is definitely a worthwhile thing. And it is far more predictable than stock prices themselves. Of course, no forecast can be 100% accurate and so these kinds of returns are not possible.

The time series model I have developed so far (in the last couple of days) can predict it well enough to increase the value of the account in bear markets. But in bull markets, following it blindly could lose money big time. Interestingly, we are now in a bear market by that definition. I tested each year from 1997-2006 and see how the model does over each year separately. This is called backtesting and is standard in developing technical analysis methods.

So I think my focus should be on improving those forecasts. Next step is to try some things that aren't in the time series textbook.

Anyway at the moment we have a very high probability forecast that the oscillator will be lower on Monday - i.e. stay short. This is backed up by the McClellan Oscillator and my E-Wave discussed in previous posts.

Plutonomy

Plutonomy is a term invented by some analysts at Citigroup. Download their articles here. The central thesis goes against everything you probably thought about people's saving behavior and what is taught in macroeconomics and development economics. They provide evidence that today in the more unequal developed economies - the plutonomies - the rich save less than the poor or the middle class. In order to understand this idea you need to remember that in the national accounts capital gains are not included as part of personal income. Most capital gains go to the highest income and wealthiest segment of a society. If you are a CEO with big options grants it is easy to spend your salary and save the profits from your option exercises and have a zero savings rate. This turns the popular notion that the decline in the US personal savings rate is due to poor and middle income consumers spending beyond their means (by cashing out housing equity in the middle class or running up credit card and other consumer debt in the working class) on its head. Another thing they don't mention is that people who save successfully for retirement are going to end up in the wealthier segment of society and they are dissaving. This phenomenon does not apply to developing economies apparently even though many are far more unequal than the United States. It is certainly an intriguing idea and the evidence looks strong but something is still nagging in my mind that makes it hard to 100% believe in it.

The Correction Continues - Technical Analysis

We are still in what I believe is a correction of the 14 June rally in US stock markets. Even though yesterday's rally exceeded the previous highs it took place on weak volume. Volume only really picked up when the selling off started. Today was mostly down and then sideways. This type of correction is called a "flat" in the terminology of Elliott Wave Theory.

Check out this chart of the NASDAQ 100 index. The stochastic oscillator maps out the waves pretty clearly. And the last wave of the oscillator is clearly pointing down and has some ways to go before it bottoms out. So market timing doesn't work and technical analysis is rubbish? It is still hard to determine a turning point as it happens. Once the move is underway though the momentum is pretty clear. But a rally like yesterday's is just noise as far as the oscillator on a daily chart is concerned. You need to go down to the hourly chart to detect it... and then keep the daily one in mind too. And this is part of the reason why I am thinking of using multiple trades simultaneously some longer term (based on the daily chart) and some shorter term (based on intraday charts). My mutual fund investments would be traded on the basis of a montly chart perhaps.

Trading Diary Part II

9:33am

I won't post hour by hour detail today. Have a big meeting from 12-2 anyway. Market is showing early strength. For the moment I will hold my positions until I am clear a bottom has been reached and then reverse course to the long side. Will report positions at the end of the day. Right now I am short 50 GOOG, 500 QQQQ, and 100 AAPL as at the close yesterday.

4:03pm

A mixed day - not much to report - ended down $50 overall in my Ameritrade accounts and with more short positions than I started. So the new plan still isn't implemented but my trading positions are not bigger than my risk management allows: 1000 QQQQ, 50 GOOG, 100 HANS, 100 AAPL all short (and 4 QQQQ puts and 150 GLD long in my Roth account). The GOOG and HANS positions are in the 5-6% of net worth range. QQQQ positions can be much bigger as this is a market index. My current position is conservative.

Trading Diary

Today I am trying to exit from my previous strategy and initiate the new one.

9:54am

I went into today short 100 GOOG and 500 QQQQ in my trading account (I also have 1 BRKB in this account. I added 500 QQQQ and 100 HANS to the short position in pre-market or the first few minutes of trade. Let's see how it goes. Barrons had a negative article on GOOG (as did the Economist) over the weekend. In Friday trading GOOG's share price got pinned down to the $390 strike at the option expiration. Maybe it can fall a little now that the options expiry is over. I see the market as a whole as needing to consolidate a little after last week's rally. HANS is very volatile and so sometimes is good for daytrading though often spreads are big and often it can't be shorted and because of the relatively low liquidity spikes in either direction can easily appear from nowhere. So not the ideal daytrading stock. But I don't have any other real ideas.

I have the market running on my laptop while working on other stuff on my desktop. Using the F9 key on my Mac I can get all the windows to be visible nicely spreadout across the screen and monitor various stocks for anything unusual out of the corner of my eye....

10:10am

Perfect reason not to trade individual stocks in large amounts - $5 spike up in GOOG came out of nowhere in 5 minutes. $2 of the spike happened in 1 minute. As I write the stock is falling back. No news out, nothing. I don't need this kind of stress. If I had half the number of shares I wouldn't worry.

10:23am

GOOG's back in the red for the day LOL

12:53pm

I am tracking the SP500 index. Tech stocks are showing relative strength today and it is hard to tell which way the market will go by just looking at the NASDAQ indices alone. The SP500 index though is much easier to read and if it goes down it is hardly likely the NASDAQ will go up. Looking at correlations across multiple indices and securities is one of the ways I try to work out what will happen next. Most individual traders and market commentators seem only able to focus on one thing in isolation.

1:40pm

With AAPL showing relative strength today and everything else near or at session lows. I add 100 AAPL to the bundle of shorts. Maybe this is getting too clever for my own good. But I figure the downside can't be too bad. Now I am using my full daytrade buying power.

2:47pm

With indices at session lows I bought to cover half my QQQQ and GOOG positions. The remaining positions are around 6% of net worth each and so much closer to my comfort zone. I am also well within the overnight margin requirements. So from now on if the market goes down more good, if it goes up a bit no big deal.

3:31pm

I covered the HANS position for about $500 profit. Actually I accidentally pressed the button :) I had the order set up and was looking for the price to fall back a bit and then accidentally leant on my laptop.... anyway the probability of more gain is too low now to make reshorting it worthwhile.

7:24pm

Well it was a good trading day, but we will need to wait till tomorrow to complete the transition plan. But at least I no longer have an outsized position in an individual stock.

Mid-Month Update

As of 16 June net worth has declined to $304k (down $14k) with an investment return for June so far of -4.56%. The MSCI global index (in USD terms and including dividends on a pre-tax basis) is down -3.41% for the month so far. So I am lagging the index. YTD my return is only 3.20% against the MSCI at 2.80%.

New Short-Term Trading Plan

After my experiences over the last couple of months I have developed a new trading plan to try to implement a bit more discipline. This doesn't cover very long-term trades using mutual funds and changing currency exposure.

1. Only do short-term trades in my US accounts. This gives me a break rather than thinking I need to trade in both the US and Australia. Australia is only for long-term investment and long-term trades. The rationale is that it is more expensive and difficult to trade in Australia in every way (executing trades and getting real time information) and the market is less liquid.

2. Set up a position trade (i.e. for period of week, weeks, months) using options on QQQQ based on my own market timing model, E-Wave, and other technical analysis of daily and weekly data. The rationale for this is that options give some up and downside protection in the event of an unexpected market move (and stops won't really help outside the regular market day) and that option spreads (difference between bid and ask prices) are wider than individual stock spreads so that daytrading options can be difficult.

3. Set up a few position trades of small size in individual stocks. These should be less than 5% of net worth and probably smaller.

4. Do day and multi-day trades using stock in QQQQ and individual firms where appropriate. Use stops on these trades to weed out the losing trades fast. I don't have to day trade as I will have a position trade in place. Hopefully in a situation like yesterday I would have shorted the stock but kept a call options position. This would have mitigated the damage. Even better would have been not to go short at all till the end of the day :)

Comfortable Being Bearish

Went into today with my Ameritrade account short and added to the shorts and bought puts in my Roth IRA. So far it is working out. And I feel much more comfortable being bearish than trying to be bullish. It suits me much better :)

Trading and Emotions

I am now at the point where I know good money-making trades but the problem is actually executing them. Seems that all the recent volatility in the market has shaken me up and I am making bad decisions. Starting today I had good positions and ideas for good trades. I executed those trades and then midday reversed course and blew up most of the profits I had made. Don't really know why I did it. I guess there is the fear of losing the profits I had made. But why go short? Anyway the market kept rising through the day and I ended up giving back most of my profits by the end of the day. My trading account and Roth IRA ended up about $500 on the day but it could have been at least $2000 if I had played things right. Only consolation is that this is only 10% of my money. Another 10% is in my 403(b) and 80% in Australia in retirement and non-retirement accounts which I am not actively short-term trading.

Net Worth Update

After last week's "trauma" I did a thorough update of the results so far this month. Investment return is -2.67% but the MSCI World gross index is down 2.82%. So still beating the benchmark :P I guess reversion to mean. Lot of luck in this business. I just hope that each debacle I suffer in the markets makes me a better investor and trader. The data so far say yes. But it is a very slow process. I updated my net worth profile and it is down almost $8000 or 2.5%.

Stressful Trading Day

Today is a day when everything went wrong. Here are just some of the things

1. I went into the day long even though I didn't really have any good case for it and vaguely thought I already should have sold.

2. I didn't manage to sleep last night. Not good for cool headed decisions.

3. I still didn't sell when the futures showed the market would open down or whent he market started falling - I was like a deer in the headlights.

4. Cramer said to sell HANS the night before.

5. I finally sold half my position after QQQQ had bounced 20 cents above the bottom. That was enough for me to stop panicking.

6. The market then rallied to end the day not far from where it started. I had to be in a meeting for part of that, but don't think I would have added to my position anyway at this stage.

The realised loss after tax is about 1/2 % of net worth. So in the big scheme of things not really such a big deal I guess. B ut I was feeling very scared while it was happening.

One of my problems is that when my trading starts going well I get cocky and arrogant and start breaking my rules. Then I blow up. Mostly I am upset at the time I wasted making those profits in the first place and why I was so dumb.

To make money trading you need emotions, but too much fear and panic will end up losing you money.

One good move: I sold my TLT call options just when bond prices were at the peak of the day.

Today's Report

I think there is still more downward movement coming in the stockmarkets in the next week or two, but today I sold most of my put options (kept Starbucks as it didn't seem worth trying to trade it) and covered my short positions and went long (QQQQ and HANS) for this bounce. The bounce might end tomorrow already but hard to tell at this point of course. I now have a small margin loan in my US account.

Net Worth in Australia

An interesting article about net worth levels in Australia. In the US median net worth is around $US93000. Recently I read in the New York Times that US mean net worth was just above $US400k. The mean net worth in Aus according to this article is similar ($US351k), while the median is more than twice as much ($US225k). However, the Australian study includes the value of cars and household contents in net worth which the US data does not - a comparable median figure is probably around $US175k. Official statistics typically place Australia with income per capita of around 80% US levels and around the same level of inequality in terms of income. These data indicate less inequality of wealth in Australia than in the US. I have seen median net worth statistics for Sweden and the UK which were much lower than the US median. Is the typical Australian the wealthiest citizen in the World? A comprehensive international comparison would be very interesting.

Kondratieff Waves and Deflation

Michael Alexander has begun a new series of articles on SafeHaven. His analysis can look a little weird to mainstream economists like me but reading his articles in the past was the first time I really began to understand the Kondratieff Cycle. Of course I was familiar with this long cycle of more than 50 years in economic activity, but none of the previous discussions I had read seemed to be particularly well-informed and it was rather confusing to me. If the theory is valid then the current cycle is longer than previous ones. We are currently supposedly in the deflationary depression part of the cycle in the US - though Japan went through that in the previous decade. Yes, both Alexander and Mike Shedlock think that deflation, not inflation is the threat. I think they are probably right. My big bet on bonds in my portfolio (and my Mom's) wouldn't make sense if I thought we were facing inflation. In inflation interest rates rise and bond values fall. This is what happened from 1966 to 1982 in the US. Since then the reverse has been happening. We believe that the disinflationary cycle is not yet complete. Both these commentators have been marshalling the evidence in favor of this thesis. Everything I see reinforces the suspicion I already had that this is what will happen. Of course this is a hyper-contrarian belief. Most so-called contrarians believe that inflation is greater than government agencies state and that it will rise further. Wall Street orthdoxy is that the economy is strong, the Fed will stop both inflation and deflation etc. Actually, I don't think we will see any significant deflation in the prices of goods or services but little inflation either.

BTW, I finally got the second part of my Federal Tax Refund in my HSBC Online Savings Account. I now have over $11k piled up there exactly balancing my credit card debt. In July I will pay off all those debts before the zero percent offers terminate. I may get balance transfers in the future but will use a lower balance ratio so as not to affect my credit score.

Levels of Frugality and Wealth Creation

There is a lot of personal finance advice out there on the web and a lot of it is quite good, but of course little or none of it is tailored for people's specific financial situations. The things that are going to be important to focus on are going to change not only with people's life stages but also with their wealth and income relative to expenses. I've seen quite a few discussions in the blogosphere about whether paying attention to the latte factor makes a difference or whether PF bloggers are saving too much for retirement. And then there are people with negative net worth giving advice to supposed multimillionaires.

So here are some random thoughts:

1. If you are a student or on a low income the key is not to get into a level of debt which will be hard to stablize or pay down once you start working or get into a higher income job. Being very frugal is going to help. But it doesn't make sense to make undue sacrifices if you know your future income is likely to be much higher. My Dad told me I should be saving when I was a grad student rather than borrowing. I ignored his advice, to my mind that made no sense.

2. If you are earning roughly the average income for your city, country etc and can't make ends meet, then serious frugality intervention is required to get back into balance. This is where the stop buying crap, latte factor etc. are going to be important. Otherwise, I think even if you expand your income, your expenses probably will expand at the same rate. This has never been a problem for me or some others. We are just lucky to have had the frugalness meme instilled in us I guess. So I don't discuss this at all in my blog.

3. Once you have that under control then I think income expansion becomes the next focus whether increasing salary, or business and investment income. My focus in the blog is on the latter and how to manage the money. The key I think is to expand expenditures slowly and smoothly over time so that they always remain far behind income.

4. Once you have money to save then the natural focus is where to put it. When your monthly savings are still relatively large compared to your total wealth, managing the money is probably less important. For example, if the stock market goes down, the dollars you lose will not be very many and your new savings will buy more shares through dollar cost averaging. At this stage all the usual PF advice about building up emergency funds, index fund investing, different types of retirement accounts etc. is most relevant.

5. Soon enough you have more wealth than annual income or several times more wealth than annual income. The absolute dollar impact of each investment decision becomes greater. At this stage, searching for superior investment managers, seeking true diversification, thinking about market timing strategies etc. becomes much more relevant. That is the stage where I am at with financial wealth equal to more than four times annual income. So it's what I am mostly going to blog about. Buying real estate (or not) I think should come in at this stage. Most middle class people are house rich and financial asset poor. No surprise that I'm not a big believer in the usual advice about buying a house. To my mind it would usually be a good idea to get beyond stage 4 at least first, but this will differ with local conditions and personal preferences.

There are stages beyond here of course - when true wealth is reached and you can live off of business income, investment income, or retire. Or take an increasingly proactive role as an investor.

Monthly Report for May

I am happy with my financial performance this month and this year so far. Net worth increassed $6413 to $318482. It would have been stronger if there hadn't been a bit of a fall in the Australian Dollar. The gain in Australian Dollars was $A12740. I am almost halfway to my goal of adding $100,000 in net worth this year. At the beginning of this blog I said I would be happy with adding only $50,000 for the year, so I should be really happy now :) Investment performance for May was 0.59%. Doesn't seem much but the MSCI world index fell 3.33% and many stock indices and mutual funds fell by much more. I've noticed quite a few bloggers out there commenting on the decline in their portfolios in May. I am up 8.14% year to date (MSCI 6.35%) and 18.97% for the last 12 months (18.55%). Over the last three years I have gained more than twice the gain in the index. Beating the index is possible. But it takes both effort and skill and maybe luck :)



Other income is particularly high this month because my employer always pays June's salary on the last day of May. Spending was high this month because of the vacation trip and associated expenses. As you can see investment income on non-retirement accounts was halved by the change in exchange rate (I don't bother computing this for the retirement accounts). In order to increase net worth in June I am going to need to have a higher investment income than my spending (the retirement contributions for June will still occur in June though). That might be hard!

Follow-Up on US Retirement Accounts

I've done a bit more research since posting on the retirement account puzzle. I now see that there are more options to get the money out of US retirement accounts without penalty before age 59 1/2 than I thought. The main one is if you convert the account into a lifetime annuity you can withdraw the money anytime without the 10% penalty (see comments for a better option suggested by Stealthbucks - coincidentally one of my local fiannce radio shows is talking about it right now...). For 401(k)s and 403(b)s it will be taxed at your marginal income tax rate rather than the lower investment (long-term CGT, qualified dividends) rates. You can get a variable annuity which varies with an underlying investment or a fixed annuity. A key issue here will be your tax rate when making contributions vs. withdrawing them. If you are happy with the annuity option and the tax rates work out in your favor then this could make sense. However, for a Roth IRA the distributions are taxable before age 59 1/2. So 401(k)s, 403(b)s, and traditional IRAs are clearly superior for this purpose and I think taxable accounts are too.

The other way money can be withdrawn before age 59 1/2 without penalty is if you are over 55 and leave your job or make a hardship withdrawal etc. (Roth's also allow a withdrawal for the first time purchase of a residence after the account has been open 5 years).

Australian retirement accounts are not as flexible in terms of withdrawing the money before age 60 (for those of us born in 1964 and later). It's not even a question of paying penalties.

Please only use my blog as a starting point to do your own research as I am not a qualified financial adviser of any sort.

Hussmann and Svenlin on the Stockmarket

Here is the latest from Hussmann on the stockmarket. He seems to be one of the smarter guys around with regard to market analysis. Basically, he says hedge your stock portfolio against loss at this point. This is what I have been doing (after a rebound in the Aussie markets in the last two days my investment return for May seems to be 0% exactly :)).

Why hedge rather than just selling everything and going to cash? In taxable accounts there is the capital gains tax issue. If you sell you pay the tax with 100% certainty and you especially don't want to pay the short-term rates (as they are in the US and Aus) if you can avoid it. If you hedge and you are wrong you sell the hedging instrument (or buy back shorted shares) and take a capital gains loss. Another issue is mutual funds cannot be traded intraday. In reality there can be a day or two delay in getting the transaction done. If the market moves up suddenly you lose out. Hedging positions are normally much more liquid - I hedge with shares or options on ETFs or heavily traded stocks. For big investors, individual stocks are illiquid, they hedge in the futures market which is much more liquid.

Of course you can get more aggressive and overhedge until you are net short. I am slightly net short by standard measures. Again it is a risk if you are wrong - in the long-term stocks go up and based on the law of percentages up moves are bigger than down moves - a stock can only go to zero on the downside - but can go up infinitely in theory on the upside...

Carl Svenlin has posted an article on shorter term technical trends. I think that short term bounce is likely completed for now, but a larger rebound will happen in the first half of June.

Portfolio Update

This is the first time I have provided a snapshot of the allocation spreadsheet I use to give myself a picture of my portfolio and calculate my NetWorthIQ numbers. It includes percentage allocations, summary allocations, performance figures, and total portfolio, saving etc. in US and Australian Dollars. It is based on a whole series of underlying spreadsheets. Each month I create a new worksheet like this from the previous one. That way I can compare this month to previous months. I was inspired by the worksheets George Soros provided in "The Alchemy of Finance".

I'll mainly focus on the current allocation in these comments. The main window shows the allocation of assets to securities and funds irrespective of whether they are in a retirement or taxable" account (Australian retirement accounts are taxable, but at a concessionary rate). The overall strategy which I ahve discussed is to invest 100% of assets in medium to long-term invests and then use leverage to trade. The market risk of the medium to long-term investments is adjusted slowly - preferably not more than once a year.

Main categories:

Mutual funds:
CFS (Australia), TIAA, CREF mutual funds - 78% of total. These are currently in a conservative mix - the largest amount is in the CFS Conservative Fund which is 70% bonds and cash, 30% equity related. When I think the stock-markets have bottomed I will become much more aggressive here.

Closed end/listed hedge funds/fund managers:
Everest Brown Babcock (fund of funds), Platinum Capital (listed hedge), Loftus Capital, Clime, Berkshire Hathaway - 12% of total - in the long-run I want to have much more in these kind of investments with the plan to only sell if the managers performance declines. Listed property/infrastructure adds another 3% in Challenger Infrastructure and IYS. Berkshire is really an insurance conglomerate but I think of it like a hedge fund/fund manager.

Individual stock investments:
Telecom NZ, Mayne Pharma, Symbion, Ansell, Croesus, Powertel - 11%. This is the extent of my "traditional stock picking". As I've posted, I don't do a lot of it. Mainly these are health or telecom firms. Croesus is a rather unsuccessful gold miner.

Trading:
A mix of short stock positions - Starbucks, Google, Apple, QQQQ, options - TLT, HHH, QQQQ, and gold. Any of these can be traded at any time, often intraday. Overall I end up with 46% more assets than equity. Less than half of that additional money is borrowed cash (19%) the rest is in borrowed stocks (26%). Short-selling requires holding lots of cash on deposit. That's the reason for my big cash holdings: 38% of assets. Cash outside my trading account is only 2% of assets. I have been withdrawing some profits from my trading account to my HSBC Savings Account in anticipation of paying off my credit card balances in the next couple of months (mostly zero percent). I missed out on playing this bounce in the markets in the last 3 days - I think there is another downwave to come before a more significant rally occurs. I will let you know when I get short-term bullish. However, I am not so bearish - If the stockmarket falls 10% I only stand to gain 1.6% (beta leverage) and so far I have lost money this month (0.43%) though less than the benchmark index has (2.64%).

Two Interesting Articles from the Economist

One story about the world economy and state of the financial markets and another with the latest edition of the Big Mac Index. Seems to me that the Economist is a bit too optimistic about current earnings levels of firms being maintained going forward. Also I am surprised that the Yen and Hong Kong Dollar are undervalued by this measure.

Timing the Market

Today stock markets are rising around the world. The decline to this point hasn't received much attention outside the financial media. Some bloggers are beginning to notice though that their portfolios are taking a hit. I think that those who are selling out of stock mutual funds at this point are likely to feel better about their decision later in the year. I have been discussing the potential for a significant decline in the markets for a while now on this blog. And many others are coming to similar conclusions. As this article notes though, most individual small investors don't get market timing decisions right. And more sophisticated traders screw up too all the time :) The real solution is to invest in a portfolio of hedge funds of course and outsource that decision making. That can be hard for most individual investors. There are funds of hedge funds that take relatively small investments. The problem with many of these is that the funds willing to take investments from these funds of funds are not the superior hedge funds. Finding a good one takes some research. I know of one exception which is the Everest Brown Babcock fund of funds listed on the Australian Stock Market - sorry that isn't much use for US investors. The other alternative is a truly diversified portfolio with rebalancing and other techniques which I have discussed on this blog, here, here and probably other places.

More Volatility

Today was another volatile day in the financial markets. Gold fell - obviously the wave 2 correction I disucssed yesterday is not over but with any luck this is the lowest point it will reach for now. If my new interpretation is right it would be a good trade to sell any short-term rally in gold. Stocks fell and rose and fell and ended up... Bonds rose and the yield curve by one measure is again inverted. The US Dollar strengthened again. But recent action in the dollar looks to me like a corrective wave or consolidation before the next fall (I think the same on stocks too).

And yes, my net worth is now down for the month. Investment performance is -0.5%, which is still much better than the the MSCI index's 4.5% loss (losses for other indices and stock mutual funds and similar or greater). Heavy spending on the trip didn't help either. My long positions in mutual funds and stocks are very conservative, but my short positions are not quite compensating. One short position (on News Corporation) went very wrong. The Australian Dollar has also been weak.

Evening Market Update / Gold Chart

Like the US stockmarket today, Asian stockmarkets opened higher but have reversed at this point after Hong Kong opened at 10pm EDT. Though I am very bearish on stocks I am bullish on gold. Here is a chart the gold ETF GLD in the last two years with my educated guess of the simplest division of the move into Elliott Waves:



The count as posted means that the next move in gold is the third wave of the third wave up since mid 2005. That means that the move since then is less than half complete at this point. 3rd of 3rd waves are often very strong. Even if my exact count since mid 2005 is wrong the chart shows that using E-Wave principles we have to conclude that gold has not yet reached a final bull market peak - up waves must have 5 or 9 (or 13 etc.) subwaves and at the moment we only seem to have 8 at the most - the five subwaves of what I've labelled wave I and then II, 1, and 2. Elliott Wave theory is a very important tool in my technical analysis - both of long term trends and in intraday trading. It takes a lot of experience and skill in pattern recognition to use it properly. I find I get much better results by combining it with other forms of technical analysis and for the longer term analysis combining technical analysis with fundamental analysis and macroeconomics. Most E-Wave practioners think that the latter is tantamount to sacrilege. This doesn't make any sense to me. I also try to understand the relations in the patterns of different markets and securities. In general the more data point in the same direction the more reliable the result is likely to be.

Another Crazy Day in US Markets

First the stockmarket was up strongly and then towards the close it slid heavily - a slide that continued after the official close. This wasn't at all unexpected to me, though Google rallied stronger than I expected and closed up. I reduced several short positions near the close ($40,000 of SBUX, AAPL, QQQQ) - not because I think we have yet reached the bottom but in order to get back within my margin requirements. Day trading buying power (on margin accounts with more than $25,000 in equity) lets you buy or short much more stock potentially than regular overnight margin requirements allow. If you hold the position overnight you will get a margin call, but the broker won't forcibly close the position that day as they have to allow you time to sell or deposit more cash etc. So this is what happened to me today. I get margin calls all the time because I tend to do extreme things with my account. But I haven't had a forced sale in years... All the trades I closed were profitable. My average profit on closed short-term trades in my taxable accounts is now 0.45% for the year again. This reflects some good and some bad trades. On the other hand Roth IRA is now up 40% since I opened it. I am amazed at how well those trades have gone - again there have been winning and losing trades but the winners have far outshone the losers. Currently I have 150 shares of GLD and 7 $40 June QQQQ puts in the account as well as a very little in a money market fund. I am increasingly thinking that individual stocks are most suited to long term investment and day trades, while short-term position trades are best handled using ETFs (or futures ultimately). The potentially high volatility of individual stocks can be useful intraday, when gapping is not possible and stops can be used. But it can be a real pain if it goes against you on position trades (held overnight, or for days, weeks etc.).

Stockmarket Slide Continues - Is Slowing Growth or Rising Inflation Responsible?

The slide in global stockmarkets continued today (and tonight in Asia). Not getting a lot of attention yet in the mainstream media (in the US at least) and in the financial media commentators are mostly remaining bullish. Bill Gross has posted his annual economic outlook. The bottom line is he still expects inflation to be low and bond yields in the US to remain in their recent range. He expects global growth to remain relatively strong. Others also think that the inflation outlook is benign but that global growth is likely to slow. This is on the whole my take, but I think the US stands a strong risk of outright recession in the coming year. Barclay's Bank warn that current conditions are very similar to those in 1987. I already made the same analogy with the big caveat that resource prices have been rising now, which wasn't the case in 1987. Others are similarly bearish but are looking for the main decline in the markets to occur in the Fall. There is no reason why we have to wait for the Fall for a crash to occur. On the other hand a slow slide across the midle of the year is entirely possible as are strong countertrend rallies on the way.

Something interesting is that bonds have begun to rebound from their recent lows. The sell-off in gold and other commodities may also have exhausted itself. I don't see us as being in a commodity price bubble. There is a genuine shortage of supply in many commodity areas. Perhaps the long-term trend of declining real resource prices (except for forest products) has begun to reverse? In the very short-term I am expecting a flight to safety to US government bonds and gold as stocks slide further. Regarding my own portfolio today, I rolled my QQQQ put options to a lower strike to free up some equity and buy gold with it. I also shorted more Google shares.

NetWorthIQ Top Ten List

I just entered the NetWorthIQ Top Ten List. Cool :) Probably it's because I am the top of the most active user list. Just got back from a roadtrip to Charlottesville, Virginia and back. Was a lot of fun and we had many memorable experiences. That included crashing the car into the grassy median of a highway resulting in $1000 in repairs which we did in various places en route. We also had to stay in New York City for an extra day and had to rejig the trip plan. Will soon get up to speed on the financial situation - there will be some goods (US tech stocks fell) and some bads (Aussie Dollar and gold fell, News Corporation shares rose). Seems that overall I am down several thousand from where I was before the trip. Investment performance for the month is a positive 0.45% gain versus a 3.45% loss for the MSCI index. Year to date I am up 7.94% vs. 6.22% for the MSCI. Over the last 12 months I am up about the same as the MSCI at 18.78% vs. 18.4%. Only a couple of weeks ago I was lagging seriously behind the MSCI over each of these time horizons. My assessment of sentiment from various sources is that on the whole investors remain mostly bullish. This probably means that the selling of stocks has not ended yet.

More Good Tax News

More good tax news for investors on this side of the Pacific today. Interesting factoid in the article is that only 23% of people in the $50,000-$75,000 income bracket have any taxable investments. And even at the $1 million income level there are still 19% who don't.

Another Fed Day

Nothing unexpected for me in the announcement. After the announcement at 2:15pm, the dollar fell, bonds rose, gold rose, oil rose, and non-resource stocks fell. The "perfect storm" for my portfolio. Nice to have a little encouragement for my strategy. This evening at 5pm EST is the Google shareholders meeting.

Australia Simplifies its Retirement Accounts System

In the Federal Budget announced last night, treasurer Peter Costello, announced among other things a simplification of the superannuation system - Australia's retirement accounts system. Unlike the US there was already only one type of account but the tax regime was a little complex. It consisted of a 15% tax on contributions, a 15% tax on earnings, and above certain limits - additional taxes on payouts. Getting a payout as a pension annuity was tax-favored over taking a lump sum. So it was some mixture of tax concession and deferred tax regime.

The new system removed the complex regime of taxes on large payouts. Now it seems there is just a 15% tax on cointributions to and earnings of the funds and no taxes on payouts after age 60. This news is important for me because 40% of my net worth is in an Australian superannuation account. I estimate that I will save at least $A90,000 in tax that would have been paid in 2024-5.

For Americans and people from the many other countries that visit this blog it might be interesting to compare these moves in Australia with the system in your country. The announced changes makes this system simpler and lower tax than any of the US accounts - especially for people in higher tax brackets - as the only tax that will ever be applied is 15%. Also the maximum contributions allowed are much higher for people over 35 than those allowed in the US - equivalent to $US 40,000 per year. The downsides of the Australian system is that it is harder to withdraw your money before age 60 though it seems that now money can be left indefinitely in the Super system at the 15% earnings tax rate. In the US earnings on the Roth remain tax free and IRA/401(k)/403(b)'s etc. remain tax deferred until the money begins to be withdrawn (with compulsory withdrawals at age 70).

Sell Signal on the S&P 500 and Dow Industrials

The S&P 500 and Dow Industrials rallied strongly on Friday (punching through the 34 day Bollinger Bands indicator I like to use). This triggered the same sell signal on these two indices that occurred for the NASDAQ 100 index a few weeks ago. In 2000 the NASDAQ indices also started the big decline before the S&P 500 and Dow Industrials did. It could happen again.

The Retirement Account Puzzle

One thing that puzzles me after my explorations in NetWorthIQ and PFBlog space is the obsession with retirement accounts. Many people write about getting financial freedom and are saving but they are stuffing the maximum into retirement accounts. In the US you generally can't touch these until age 59 1/2 and then the money withdrawn is taxed at your marginal rate of federal and state tax. If you touch the money before then you pay the marginal tax plus a 10% penalty (in Aus it is almost impossible to get the money out of a Superannuation account before age 60). Yes I know that a 401(k) defers tax to the future and the profits on a Roth IRA are tax free (if withdrawn after age 59 1/2 or in special cases - see below) and Roth contributions can be withdrawn at any time. But the federal long term capital gains tax rate is now 15% and the qualified dividend rate is also 15% (with 5% rates for lower income earners). And you can use the money to achieve financial freedom at any time....

If you are nearing 60 it certainly makes sense to stuff the maximum into a Roth as you will soon be able to get it out again (a 401(k) or traditional IRA will convert potential investment income though to ordinary income). But if you are in your 20s as many bloggers are - 60 is a long time off. Of course it makes sense to make contributions in order to get an employer match - even after paying a 10% penalty to withdraw the money that can usually be worthwhile.

I have about half my net worth in retirement accounts. Most is in an Australian Superannuation account. I had no choice on the level of contributions as a condition of my employment at a university in Australia. We put in 8% of our salary and the employer contributed 17%! That is the deal the unions had negotiated (I didn't join the union - but had to accept the same pay deal). All employers in Aus must contribute a minimum of 9%. There is no system like the US Social Security in Australia. Instead real savings must be made by employers and there is a flat rate welfare payment for poor retired people called the Age Pension. Here in the US I have to contribute 1% and my employer contributes 8% to a 403(b). I don't have any choice there either, but if I did I would do it - it is an excellent deal. However, we can make extra contributions, which I don't do.

I did open a Roth IRA recently with the sole purpose of creating $10,000 of tax free profits towards a first time purchase of a house, which is one of the special uses allowed. I will likely withdraw the contributions once that goal is achieved, though that is subject to review. The last thing I think I am going to need is more money at age 60.

Reflections on PF Bloggers

I've been reading plenty of these PF blogs as well as creating my own since discovering the NetWorthIQ website. It is very interesting to see how different people think and feel about money. Maybe I should get a new career as a financial adviser instead of as an economics professor :) As a professor, I just just get to tell people how to think about money (when teaching introductory courses) ...

Mainly I have discovered how different I am to the majority of bloggers out there. There are at least two very different universes in the financial internet. People interested in investing and trading on sites like Silicon Investor, which I've belonged to since 1998, have a very different mindset to those interested in personal finance. There are, though, some crossovers like Stealthbucks and Adventures in Money Making. Investor blogs look very different. Investors aren't interested in saving money but instead on making more of it (and protecting what they have). Some of them are naturally frugal and some not. Most, but not all, PF Bloggers seem more directed on saving money than making it. Maybe an exaggeration... but that is why I recently added the phrase "Absolutely no money saving tips!" to my profile.

I don't try to save money and don't need or want money saving tips. It seems I am just trained to be naturally frugal. I don't like buying things, or having things. What I do buy though has to be good quality and convenient. I do take advantage of any deal which is not inconvenient to do. It's not a question of trying to control expenditure or deny myself things. I just spend whatever I want and given current income it isn't too much. On the other hand, when I was a student or unemployed I had to think much more about what I was spending as my income was very low. Maybe all those years helped train me. I seem pretty lavish compared to my parents - perhaps more on that in future posts.

PF bloggers seem to fall into several categories that might overlap:

1. Young people just starting out in the financial world and dreaming of getting rich.

2. People who used to spend beyond their means and regret it and now try to save and invest (I used to spend beyond my means but don't regret it).

3. People whose parents and family are "financially irresponsible" or had little money and didn't know anything about it and are now trying to live a prudent lifestyle themselves.

There don't seem to be many who come from very financially prudent families, got a good financial education, and are themselves a bit more relaxed (that's me).

The Fed Isn't Printing Money

Despite the ravings of many goldbugs and other conspiracy theorists the Fed is not printing money. The chart of the M1 money supply has been flat for the past year. M1 money is the sum of bank notes, coins and checking deposits. It is in the direct control of the Fed. But that doesn't mean everything is just fine. If commodity prices are rising yet the money supply is not increasing to accommodate them we should get a recession instead of inflation. And that is my forecast which my investment strategy is based on. This morning I shorted more Starbucks - they release earnings tonight and the stock is looking very weak. Seems like there is little justification for the very high price/earnings ratio (around 50) of the stock given year on year earnings growth rates (around 10%). Yesterday I shorted more Apple Computer. That was a good move so far too. Each day we are seeing a pop-up in the markets in the morning and particularly in Google, only to see a sell-off in the afternoon. The myth is that morning price action reflects "dumb money" and afternoon price action "smart money". Could be some truth in that in recent days.

April Report

After a bit of a run around I bought a new firewire cable and got into the portable hard drive with my most uptodate accounts on it. Of course, I immediately backed up the disk. I use an Iomega hard drive which I switch between the various desktop and laptop computers I am use as my primary data store. The last cable only lasted 2 weeks! That cable was from our campus computer store where the same brand of cables are selling for less than half the price CompUSA are charging, but it's no good if they keep failing. Strange :o

Anyway, my investment performance for April was a 4.49% gain in US Dollar terms. All of it and more is due to the gain in the Australian Dollar. The core rate of return at constant exchange rates was negative. Net worth increased by $17452 to $312,069. Net worth in Australian Dollars declined. Expenditure for the month was $1925. It's all detailed in this spreadsheet:



Investment return year todate is 7.45% and for the last 12 months 20.12%. The MSCI Gross World Index is up 3.09%, 10.01%, and 24.91% respectively. I am about a month ahead of my net worth goal for this point in the year.

Returns so far in May are already 2%.

Global Markets Update

Here is Bill Gross' latest commentary. The last days and weeks have seen rapid movements in exchange rates, interest rates, stock prices, commodity prices etc. Volatility is increasing. Having some computer problems and so haven't yet produced final April numbers. Yesterday, the first day of May, though, was extremely good for me, especially in the US Markets. Stocks fell sharply, especially after Maria Bartiromo said that Ben Bernanke had told her he was misunderstood. Didn't do any good for my bonds of course (and the US Dollar reversed course and went up - though it's down again this morning). In the morning I covered 20 shares of my GOOG position and then in the afternoon started a short position in AAPL. Google went under 400 - Apple fell too - but would have been better to keep all 120 shares short of GOOG I had in the morning! Am also short (and have puts on) QQQQ. So that helped too.

Weekend Links

John Mauldin's latest weekly letter is all about the weakening US Dollar and the Federal Reserve. Included is this great video! :) We've been watching Ben Bernanke in the Introductory Economics course I teach. We use the textbook the coauthored with Robert Frank and keep uptodate on his progress. And then this crazy real estate listing! That wild insider trading case again, and, finally, an article on renting vs. buying from the Economist.

End of the Month

Looks like I made about a 5% investment return for April. Most of the move was due to the strong rally in the Australian Dollar. The core investment gain - not counting exchange rate movements - was pretty small.

Last month, by contrast, the move in the Aussie was negative and wiped out most of my core investment gains.

Net worth increased by almost $20,000. One of my highest monthly gains, but not unprecedented. I am about $10,000 ahead of the target I set for April based on my goal of increasing net worth by $100,000 in 2006.

Moominmama also saw strong gains due to the fall in the US Dollar.

There doesn't seem to be much awareness of the collapse in the US Dollar in the media.

In the coming days I will post the final results for April.

What Does the Rise in the Gold Price Mean?

Interesting article that looks at whether the rising price of gold is a signal of future inflation. Especially interesting is the comparison of the price of gold to that of other metals. Industrial metals make gold look cheap! No crash yet - but the stock market remains weak. Today I added I took a slightly more bearish stance by buying more QQQQ puts with the cash in my Roth IRA account - doubling the number of contracts. I like to buy in the money options and pay a minimum of time premium. Buying at the money or out of the money options really does seem like gambling. The options have no current "intrinsic value" and unless the stock price moves in your direction by the expiry date you lose all your money... Deep in the money options are closer to futures contracts or heavily leveraged stock positions and are definitely more my "cup of tea" :)

Potential Crash Warning

One of the things that maybe gives me some trading edge is a technical analysis indicator I developed myself. It is very different to traditional indicators and is based on an autoregression model computed in a spreadsheet. I apply it to the main stocks I trade.

I just did some forward simulations on my NDX spreadsheet using my autoregressive indicator. There is the potential for a massive crash in coming days and weeks. I can't forecast a crash with the indicator, all I can do is plug in some values for the index and see whether the indicators they yield make any sense. Basically the model finds turning points. So if I plug in a number for tomorrow or next week or whenever and it yields a turning point value (greater than one) then I know that is a bottom or top. Very large declines are now possible before the bottom is reached. This wasn't possible even a couple of days ago, but the last couple of days' rally has loosened things up and the index has come to a potential top turning point on my weekly spreadsheet.

For those of you who remember, I reckon the current juncture has some of the feel of Fall 1987. Read the discussion of the crash in the Alchemy of Finance. Interest rates and the US Dollar played a key role in the crash. In fact the current NDX chart and the SPX chart from that period are uncannily similar in appearance:



Now check this.

Of course this isn't a forecast. Nothing may happen. Or perhaps it will.

Sell in May and Go Away

Great article by Mark Hulbert on the "Sell in May and Go Away" saying. It is true that stocks perform worse in the summer and better in the winter. In the article he looks into the question of whether there is another asset class that performs better in summer and worse in winter. He finds that the Lehman US Bond Index does perform better in summer than winter. Therefore, an optimal strategy is to sell stocks and buy bonds for the summer. Of course this is just a statistical average over the long term and won't work every year. At the moment, though, I am net short stocks (including put options as shorts) and long bonds, which is a more extreme version of this strategy. I'm also 60% or so at least exposed to the Australian Dollar and only 20% to the US Dollar which is falling. In computing the latter I look at a firm's primary listing - for example, News Corp is a US Dollar asset even though I trade it in Australia. I'm now up to 2% allocated to gold (in my Roth IRA through GLD). Recent trades including buying TLT calls (today that doesn't look like such a great idea!) and this morning Yahoo puts. Yahoo's earnings report yesterday met expectations. So why the huge ramp in price? This is the kind of trade I do on news occasionally. When Fortune decides that finally it is time to get back into net stocks, it may actually be time to get out (or past time). This month the main news in my portfolio has been the rise in the Australian Dollar - each 1 US cent move up adds about $US3700 to my net worth.

Buying and Holding an Index Fund is so 20th Century

Article on MoneyCentral introducing some alternative investment ideas for beginners. Also, Yahoo has an article on finding the best fund managers. Some managers can beat the market fairly consistently...

More Bond Bulls

These guys' Q1 report - highlighted in John Mauldin's latest letter - has an identical viewpoint to my own on inflation, bonds etc.

Savings vs. Profits

I was curious what fraction of my net worth accumulation had come from saving and how much from investment profits. I created this chart, which also breaks things down between retirement and non-retirement accounts. Profits on the retirement accounts now exceed contributions. Performance on the non-retirement accounts has not been as good. Cumulative profits in both categories were negative in January 2003 after substantial bear market losses. Non-retirement saving has not been much recently as I have fully funded a Roth IRA for 2005 and 2006.

Clustermaps is Amazing

This Clustermaps application is so amazing! Every day I check the new red spots appear on the map. The latest entrants are for Bangkok, somewhere in southern Turkey, and Tokyo. Everyone I show it to is amazed also. I also installed one on my academic homepage.

Is There a Housing Bubble?

There have been a couple of recent economic studies published that argue that there is no housing bubble. One paper by Himmelberg et al. and another by Hwang Smith and Smith.

Both studies value houses appropriately from the point of view of a potential homebuyer. I don't have any problems with their house pricing formula or data on existing prices, rents, and other variables. My problem is with their conclusion that their results indicate that there is no housing bubble.

The valuation formula takes into account rents for rental housing, interest rates, property tax, maintenance costs, federal and state tax deductions etc. and, crucially, potential capital appreciation. It makes sense to pay more for a house if you think its price will go up. So from the point of view of a potential buyer their formula for valuing a house is correct.

But this builds an expectations component into homeprices. If people think houseprices will rise they will pay more for houses. If houseprices continue to rise this will have turned out to be correct. But if houseprices in fact stop rising then the prices people are paying will turn out to be too high and prices will start to fall. Falling prices mean negative capital appreciation, which means prices should be even lower. There couldn't be a simpler and better bubble generating mechanism.

The two studies I cited assume house prices will continue to rise at historic rates. If you assume that, then people are not currently paying too much for housing in supposed bubble zones and hence the authors claim that there is no bubble - houses are not overvalued. But the instant prices stop rising - for example due to increasing interest rates - suddenly homes are overvalued and there is a bubble!

Similar mechanisms exist in the stock market - as discussed by Soros in The Alchemy of Finance. Stock prices partly depend on expectations of the growth rate of corporate profits. Soros pointed out that sometimes these contain a self-reflexive component where increasing stockmarket valuations feed back into increasing corporate profits. But in the housing market the growth component is even more self-reflexive. If everyone believes houseprices will rise then they will, until people no longer believe this.

In conclusion it is impossible to find whether a bubble exists by looking at whether house prices are currently overvalued based on historic capital appreciation rates. You have to be able to also model the future path of house prices and then ask: "Given this future path, are prices now too high". Yes the two depend on each other - the economics is dynamic and not as simple as the economics in these papers.

Wealth Distribution

There has been some discussion on NetWorthIQ about what fraction of the US and world population are millionaires. It is surprisingly hard to get that information and there are various definitions including both total net worth, net worth excluding primary residence, and financial net worth. An expert on the topic is Edward Wolff, his paper on the topic of changes in the net worth of US households in the 1980s and 1990s includes official data from 2001. It doesn't quite give the answer but has lots of interesting data. Based on this, I estimate that in current dollars using a broad definition of net worth there are around 10 million millionaire households in the US. This is far above the Merrill Lynch estimate but close to the TNS estimate. Also my net worth is about average for someone of my age and income, though its composition is rather unusually biased to financial securities.

Update (20 April): Another survey on wealthy households in the US

$300,000

Today I exceeded $300,000 in net worth for the first time. This is based on an update of all values yesterday and the change in exchange rates and my Ameritrade account today. The rise in the Australian Dollar and fall in the stockmarket pushed me over the line. A falling stockmarket has a positive effect on my short positions and put options. The beta of my portfolio is currently -0.35, which means that a 1% fall in the stock-market increases my net worth by 0.35% on average.

It took till November 2001 to reach the first $100,000. My net worth declined after that, though, to a low of $56,000 in September 2002 shortly after I moved back to the US. I again reached $100,000 in August 2003 and $200,000 in October 2004.

Let's see if I can stay in the new wealth bracket permanently!

Check that Tax Return!

Today I got my tax assessment letter from the IRS. Now I know why the refund they paid me was $1250.00 less than I expected. I forgot to fill in line 23 of my Schedule A! Line 23 asks you to add together lines 20 through 22. I did, but forgot to fill in the box. I used the number I calculated in computing line 26 which is where you deduct line 25 from line 23. As my line 23 had zero on it their computer told them my line 26 should have zero too. Instead I had $4981.04. As a result they raised my taxable income by that amount and taxed me $1250.00 more. I will phone the IRS and explain it to them. So, those of you out there who haven't yet filed - check all the relevant boxes are filled in and if the IRS changes your refund, don't assume they are right! I will recognize the extra $1250.00 in my net worth immediately.

Picking Stocks is Hard

Looks like Croesus Mining will survive though I have no idea what the shares will trade at on 28 April when the suspension ends. One reason I originally bought shares in this company was because I had read they were not doing much hedging of the gold price. And looking at the accounts over the years this seemed to be the case until suddenly their hedgebook exploded. Gold miners hedge by agreeing to sell their gold at a predetermined price using futures (or forward) contracts. This means that they miss out on any upside or downside in the gold price. It gives them more certainty. Any extra gold they produce could be sold at the spot price. A problem happens, I now understand when production falls short and the gold price is rising steeply. Then they need to buy gold at the spot price and sell it at their lower contract price. I knew also that Croesus was having some difficulties in operations, but it seemed like they were addressing these - for example selling a large part of their mineral concessions at a nominal profit. And the company kept putting out announcements on promising exploration results. Seemed that reserves while never big were being replenished. A warning sign I should have noted was when last year they appointed a new CEO who resigned within months. I thought I understood fairly well what was going on with this firm, but now I see I didn't. This is a reason that I don't try to pick many individual stocks in "industrial companies" for long term holdings (as opposed to closed end funds, and other financial operations). I have very few. It is hard for an individual investor to have any edge in this, unless they are knowledgable about a particular industry or there is a very clear undervaluation phenomenon.

Turning Point in the Bond Market?

Great article from Bill Gross explaining why the bear market in bonds (equals rising long term bond rates) should be almost over. It's a bet I have been making through holdings in bond and majority bond mutual funds, so far with neither good or bad results (apart from missing out on stock market gains I could have made. Colonial First State's Conservative Fund has however performed nicely over this period.

Today the gold price touched $600 per ounce in the futures market and a little less in the spot market. The Australian Dollar has been rally ever since I did that transfer to Australia - so good timing for once. On the other hand the stock market has been resilient but the McClellan Oscillator has been pretty weak the last three days.

Salary Increase and March Report

Got the letter today. 1.5%. Inflation is 3.6% p.a. currently. The pool for all salary increases was 2.5%. The rest of the letter went on about how we should think of our department's performance measures as an opportunity for next year and beyond. My chairman ranked me as strong on two measures and outstanding on one of the three. Not much incentive is it.

In the end I got a -0.47% return on investment for March in US Dollar terms. In Australian Dollar terms I made 2.87%. The fall in the Australian Dollar more than wiped out all my positive performance when measured in USD. The MSCI world index returned 2.24%. As a result, net worth increased by only $US1,474 but by $A16,653 to $A411k ($US295k). Still that means I am up $25k so far this year which is exactly on track to add $100k to net worth by the end of the year.

Federal Tax Refund

Received my refund and it is more than $1200 less than expected :( Will have to wait to get a statement to see why there is such a large discrepancy. Whether they disallowed something or I miscalculated something. Something very curious is that the number of cents after the decimal is exactly the same as what I calculated. In fact, the two figures are different by exactly $1250.00. Very weird. Am restating my February accounts and net worth.

PS: Sunday - decided to transfer $3000.00 - my refund + $500 to my Roth IRA. Enough to buy another 5 ounces of gold :)

Google Enters the S&P 500 Index

Crazy action at the end of the trading day and after hours as GOOG entered the S&P 500 Index and Google's 5.3 million secondary share offering was priced. Huge volume. I would interpret the downward pressure towards the end as players who bought shares in the last week in the hope to sell them to mutual funds dumping their surplus. They should have a surplus if they didn't expect this 5.3 million share offering. We can't really know this unless we are actually inside these institutions, but it is a picture that makes sense. I stayed short GOOG at the end. Tried to play HANS. There was a rumor that they are in talks with Anheuser-Busch, which pushed the stock up in pre-market trading. I shorted but missed my opportunity to buy back before the news wires reported the story and pushed the stock up again. Covered after hours for a small loss. Trading has been harder recently, no big wins since WLS jumped $20 on the offer by William Lyon to buy out the company. My average return on a trade so far this year is now about 0.45%. The experiment will continue :)

In the next several days will calculate and report results for March.

Are We at a Market Top?

I think the probability that the downphase of the four year cycle is now underway is getting higher. Been looking over various of the usual charts this evening. I was looking for another up wave in the NASDAQ 100 Index. But the NASDAQ Composite and S&P 500 have reached new 5 year highs and it looks hard for them to push higher. The Australian All Ordinaries is at an all time high and a model I have developed is now sending a strong sell signal on that index. There are some countervailing indicators - as always the picture is not totally clear. The US Dollar is looking also very weak on the charts... this is surprising. I thought this wouldn't happen till the Fed stopped raising interest rates. The Australian Dollar has rallied since I bought a few days back.

My portfolio is now net short when taking into account the correlation of the various assets with the general market (beta). In fact for a 1% fall in the market I should see an approximately 0.2% rise in my portfolio, everything else held constant.

pfblog.org

This site is cool. LInks to almost 400 personal finance blogs and data on how many visits they have received and how many clicks have been made on each entry. Moomin Valley is included. Which it isn't on pfblogs.com.

Gold

I bought some gold for the first time ever today (in my Roth IRA). This is through the Exchange Traded Fund GLD. Gold broke out of the trading range it was in and headed higher. And looks like going higher still... For several years now, gold has been rising and I put off buying because I held lots of Australian Dollars which traditionally have moved with gold... the link seems a bit broken now though (there was never a really good rationale for it). Also I had shares in a gold-mining firm (CRS.AX) which turned out to be rather a disaster...

I also bought more QQQQ put options in that account and sold Yahoo. So in my Roth there is 5 ounces of gold and around $20,000 of QQQQ shares sold short effectively. This is basically what the Prudent Bear mutual fund (BEARX) consists of.

I did a bunch of trades in my taxable Ameritrade accont too... am rather short...

Millionaire Households

Article on millionaire households. Not surprisingly Los Angeles County is #1 as it is the most populous county in the country (10 million people). What is surprising is that New York County (i.e. Manhattan) doesn't show up. Do the New York wealthy pretend to live somewhere else with lower taxes? Hide their wealth well.

Fed Day

Today is the day of the Federal Reserve statement - at 2:15pm - and it will be Ben Bernanke's first... The buzz on Silicon Investor and my own read of the markets is that investors and traders are very wary about what will be in the statement that accompanies the change in interest rates. Last year my Intro Economics class was 2-4pm on Tuesday and Friday and we followed the Fed decision live and its impact on the market. Pity I can't do that this time.... but will definitely be paying close attention at that time. Plan to show my students on Thursday what happened. The Aussie Dollar is up overnight... which is a nice change after I bought more Aussie Dollars. One of my best months ever from an Aussie Dollar perspective, but down in US Dollars... maybe a natural rebound after overselling... or a forecast that US interest rates will rise less? Or a response to the gold price? Maybe a bit of the latter but this morning the US Dollar is down across the board....

Update 5:41pm EST - the market eventually did go in the direction I expected after the Fed announcement. But I made a short bet on GOOG and it went the wrong way... oh well...

International Barriers and Bridges

Yesterday I decided to cancel a trip to speak at a university in the southern US. They told me that as I wasn't a US citizen (but am an H1-B, green card approved but no card yet, have a SSN, and am resident for US tax purposes) they couldn't reimburse my expenses. Instead they would have to pay through my university but I would have to fill out a pile of bureaucracy delving into my tax and visa issues and then set up all kinds of bureaucractic stuff between the universities.... I just wasn't going to put up with this and even though it will cost me $130 in cancellation and change fees on the flight I decided to pull the plug. Was sorry for the guy who invited me as he is an H1-B himself. Just wasn't going to put up with more of this stuff. At a committee meeting at this university today we were presented on the barriers the US is putting in the way of foreign researchers and students and how foreign competition in the university sector is catching up and overtaking the US.... nothing really of news to me on that (unlike some of the Americans at the table...)...

Anyway, have assembled a pile of US dollars in my HSBC account and tomorrow will transfer them to Australia. The Australian Dollar has been falling sharply this month. Ostensibly because the Fed is going to raise interest rates much more than the Reserve Bank of Australia will. I have saved $A15,000 so far this month, but am down in US Dollar terms as a result. So at least make lemonade from lemons and try to buy more Aussie Dollars cheap... They will then go to paying down my margin loan in Aus. Last night I sent a fax to my broker in Aus to withdraw $A8000 from two Aussie mutual funds and put that towards margin loan reduction. The Australian All Ords index reached the magical 5000 mark for the first time. My technical analysis model is "flashing" a sell signal. So I have to act. I need to keep some money in those two funds as they are closed to new investors like all good funds eventually are. Large size in mutual funds is detrimental to performance. Good managers call a halt to the inflows at some point.

My mother and brother went to see a potential money manager yesterday. Got the info he sent on fees and performance of managers he outsources to. We know this guy from his previous job with Citibank. Could be good.... need to hear more details from them on what they discussed.

The Four Year Stock Cycle

Coverage of the four year stock cycle on CNN Money.

Daytrading vs. Savings Accounts

Stealthbucks commented that he was curious that so many personal finance bloggers seem really excited about savings accounts from Emigrant Bank, ING, HSBC etc that are offering interest rates in the 4-5% range. don't get me wrong, I recently opened such an account with HSBC. With interest rates higher than they were a few years ago it makes sense to park cash temporarily in such an account. And for those just starting out on the saving and investing journey it makes sense to do this before taking the plunge into more sophisticated investments. Also I have long had a Cash Management Trust account (a Money Market account in American) with Adelaide Bank in Australia (and Macquarie Bank before that).

What is stunning though is comparing my recent day-trading with such a savings account. I have really improved my performance and I hope this keeps up... I am still kind of skeptical. I was always skeptical in the past of people who claimed such high rates of return... It so goes against everything taught in finance theory too... The key is risk control combined with excellent pattern recognition and letting winners run.

Anyway, basically I am taking $10,000 and then using daytrading buying power I can borrow $30,000 extra. If I make 1% in a day's trading as I mentioned in a previous post I have made $400 on the $10,000. Today I made $600. You can't expect to make money every day wins and losses have to average out. But that is a 4% rate of return in one day! if you put the $10,000 in a savings account you get 4% in one year!

Maybe there is something wrong here? Of course this is a reward to skill rather than to capital. If you randomly make daytrades even with stops you will lose money. If you got caught in the huge downdraft in GOOG a couple of weeks back you could have lost $7000 of your $10000 in a few minutes. Even with a stop in place the loss would likely be in the thousands due to the extreme rapidity of the collapse. So you only want to put a fraction of your total capital on the line and keep packing profits back into other investments (as well as spending and taxes). This is the risk control strategy of most professional traders. I first read the ideas in Teresa Lo's writing.

$A400,000

Looks like I just went over $A400,000 in net worth... Three hundred thousand US Dollars remains elusive though due to the weakness in the Aussie Dollar. Did some GOOG daytrading again today - made money but could have done a lot better by just holding onto my position from the beginning of the day to the end. The stock soared when a judge released a fairly favorable opinion on the case between DoJ and Google. I sold into that spike and then did a couple of bad trades before buying into the final upswing of the day and selling 70 of my 100 shares at the close. Using daytrading buying power that allows additional intraday borrowing is on the one hand dangerous on the other hand it imposes discipline to close overly large positions by the end of the day.

Also am almost finished Mark Tier's book "Becoming Rich". Don't be put off by the title and somewhat self-helpy style. It really is an excellent book on developing an investing/trading philosophy. Of coruse there are some contradictions here and there in some of the things he said. The key messages are a delineation of the the main components of master investors' systems - primarily Buffett and Soros are discussed and finding where you have an edge in investing and focus on that just as the masters do. In my strategy I don't any more try to pick what I call "industrial stocks" for long term investment. I can see what is a lousy firm to invest in but don't know what is neccesarily the best opportunity. I focus instead on:

1. Picking good managers for long-term investment

2. Using my knowledge of macroeconomics etc. to try to time the market

3. Use my knowledge of time series analysis, pattern recognition etc. to do short-term trading.

Some people are good at real estate, some in the stock market etc. There isn't anything you have to invest in, despite what people commonly say. If you can't see where you have an edge then focus on finding good managers and advisers. Easterling's book which I completed reading mainly drives home the point that you need a very long term horizon for passive index style investing to work for you. If you are in your 20s and don't want to retire till 60 at least you will probably do fine (but could do better). Dollar cost averaging will help you. Rebalancing and bond strategies the book discusses will help more. But if your time horizon is 10-20 years you may need something more radical given the probable secular bear market that we are in....

Credit Scores

Good article by David Bach on credit scores. I don't like a lot of what this guy writes, particularly on housing, but seems there is a lot of sense in this article. Some of the people playing the credit card arbitrage game should read this and learn more. I fell into some of these traps without knowing. Am not planning on buying a house till 2009-10 at the earliest so hopefully can clean things up by then. Hopefully my balance sheet will be taken into account too!

PS: A whole new credit scoring system was announced today by the three major agencies.

Trade Analysis

Most people probably don't analyse their investment performance as much as I do. My motives are to find what works and see whether I can viably some day be self-employed as a trader-investor. Over time my investments have made money and beaten the relevant indices while my trading has lost me money. The question is: Am I improving? and: Which kind of trades are profitable for me?

Using the spreadsheets that I set up for the Schedule D of my tax returns in the last two years I computed the rate of return on each trade held for less than a year - just gain or loss divided by cost of investment. Overall I found that there was a negative correlation between period held and rate of return! Looking at just day trades they on average returned 0.78%. Those this year have averaged 1% and there is a correlation of 0.33 between date of trade and rate of return. So I am profitable and learning on day trades.

I am usually trading about $30000 or 10% of my net worth on each day trade. A 1% rate of return is $300 per day or $75000 a year which is my current salary. So if I can maintain that over time (this sample is just 42 day trades), it would be a viable occupation.

Longer trades lost money. However, when I excluded the worst two trades that happened last year, the return was a little greater than 1%. The correlation with date was zero. So I am not learning there... but if I can exclude these worst disasters by setting some kind of wide stop on trades I should be able to make money on that too.

I also separated out option trades. These also lost money. But excluding the three worst where the option expired worthless they earned close to 2%. Key here also seems to hold for a short period, though probably more than a day. I have never day traded an option.

If you are an active trader have you tried analysing your trades? It's one good use to put the Schedule D to!

Leverage

Some posters on NetWorthIQ have criticized my use of margin or said: "well it's not for me - good luck". Leverage through margin loans, options etc. as well as funds that have built in leverage is both dangerous and useful. It needs to be used judiciously. In today's markets I don't think you want to buy stocks for the long-term on margin. That worked in the 1980s and 90s but expected rates of return are just not good enough now. But when the market is in rally mode as it was from late 2002 to 2004 or 2005 depending on the index some leverage can add to returns. In Australia the standard model is to set the loan so the interest equals the dividend earned and then you are basically looking for capital appreciation and in Aus. surplus tax credits from the dividends (unfortunately the US still has double taxation of dividends instead). Margin also allows you to short either to hedge your long holdings or to speculate which should be done cautiously. At the moment I am using little and fluctuating margin depending on what trades I am doing. Soros' model was to invest one's net worth in longer term investments and then borrow a little against it to trade which is roughly what I am doing at the moment.

However, if the market should crash I would then have a lot of reserve firepower to buy stocks cheap... that is something to think about. You don't have to use a margin facility just because you have it.

What I certainly will do then is move most of my mutual funds and retirement funds from the bond dominated diversified funds they are currently in to a fund called CFS Geared Share Fund which is a leveraged stock fund. Rydex provides somewhat similar products in the US. The difference is the CFS fund is actively managed and Rydex is an index product.

Bullish Percentage

Yeah, I am getting bashed in the markets, giving up profits I made earlier this and last month, though as only a fraction of my net worth is in trading and most is in fairly conservative at the moment long-term investments the overall damage is not too severe.

Another interesting indicator I follow is the Bullish Percentage. This one is for the NASDAQ 100 index. It tracks what percentage of the point and figure charts of the stocks in the index in the question currently yield bullish recommendations. It is read in a contrarian fashion. When most charts look bullish according to the P&F methodology the market is overbought and will fall. This shows that P&F is mostly not a very useful methodology except used very carefully and differently, for example, in this way...

Another investment book arrived yesterday from Amazon. This one is by Mark Tier. Glanced through - a little "self helpy" but pretty useful I think. More later on this when I have read it. First need to read more of Easterling which I have started.