Visa Application Lodged

Anyway, yesterday, Snork Maiden finally got her visa application lodged for her work permit (457 Business Visa) for Australia. Her employer already was approved in nominating her, so this was her side the story. Much more user-friendly than the US, everything is online and no lawyers needed. Today she needs to work on setting up an appointment for a medical examination for the visa. Nearest approved doctors are 150 miles away but she'll phone them and ask for advice/recommendation and if necessary travel to them. My employer is worried about paying me on 15th July - seems they need a resignation letter to stop payment but there won't be one till Thursday evening after I meet the immigration lawyer. Thursday is her regular office hours for university clients. Otherwise, completed boxes are gradually piling up around the apartment and the next three days I will be mostly working on that. Last night I also put a trade on (short QQQQ and NQ). So far so good, but will be tracking that too. I'd taken a break from that after losing a pile of money in the first few days of the month, trading against the model.

If the lawyer tells me I need to leave the country I will probably fly out by Sunday or so and go to Israel to visit my mother and brother and family. I lived in Israel myself for several years. Our family is rather international - each of us has multiple passports in different combinations. I have British and Australian, while my mother has Australian and Israeli. My brother has all three. My father when he was alive was British and Israeli. He was born in Germany though, but lost his German citizenship (of course he could have reclaimed it after the Second World War if he had wanted to).

Contingency Plans

Latest development is I will meet the university's immigration lawyer (she also worked for me on all my visas) this coming Thursday and come to a conclusion on what I should do. I actually wrote a resignation letter and gave it to the Dean's secretary on Thursday and then my chairman decided to try to see if we could do something better. I went back to the secretary and took the letter back. Luckily the Dean wasn't in.

I didn't sleep for two nights and was really freaking out. I lost more money on Friday when Interactive Brokers fell 8%. But now Snork Maiden drove down to visit, despite she being even busier, and I've cheered up a lot. Today we will rent a dolley thingy from U-Haul and move everything from my office on campus to my apartment. Then if I need to go to Canada and something goes wrong and I can't get back into the country all my stuff will be in one place ready for her moving company to pick up and take to her town and from there to Aus. Probable anyway that we'll move all of my stuff up there late in August using a U-Haul. This will be after she submits her PhD dissertation but before she defends it. I can help with packing up there then before flying back down here again.

The above post was posted Saturday but there were problems with Blogger.... so I'm reposting it. Sunday I hurt my toe while packing and we had to go the Emergency Room at the local hospital - so lots of drama. Also now I'm thinking of going to Israel next week instead of Canada!

Do I Need to Go to Canada?

In a couple of e-mails with the immigration lawyer over July 4th the conclusion seems to be that I should resign from my job ASAP. The neat solution where I stay on H1B status till September is out. She recommends that I leave the country and come back as a tourist for my final two months here. I should have the plane ticket for Australia very soon to be able to prove that I intend to exit again if necessary. I'm still afraid they'll refuse me re-entry. Snork Maiden thinks that if I don't tell the US Consulate in Australia that I intend to give up on the green card application then I should be able to stay in the US while I'm still seeking a green card. I just e-mailed the lawyer asking whether that's an option or not. Even if I resign in the next couple of days BCIS isn't going to know for a while that my H1B is terminated. But I will need to book a trip to Canada or wherever ASAP if the green-card seeker option is out.

A couple of years ago I told someone that I thought I'd be happier on the day that I resigned my position than on the day I got tenure. Back then, I had a heavy heart when I submitted the tenure file because I didn't want to stay here in this town all my life. When I heard that I got tenure I felt relief that I wasn't fired. But now I'm not happy due to this struggle to try to set up a better transition for both sides, which has failed and my anxiety about the visa issues. So I am feeling a little bitter as well as anxious. So tomorrow I probably will hand in my formal resignation and wait for instructions from my lawyer on what to do next.

If I do need to leave the country should I just take a trip to Canada (very near) or go visit family in the Europe area? Should I fly in and out of Snork Maiden's town (can leave my keys with her then and tell immigration that's my address in the US) or in and out of here where my ticket to Australia is routed from?

Independence Day

It's July 4th and I'm at my office on campus. But strangely enough this is a sign that I am independent and free. To some degree. I don't have a job, Snork Maiden is 150 miles away, and the rest of my family half way around the world. So today is as good a day as any to continue working on sorting and packing stuff for the move to Australia. So far I have been working on recycling, trashing, giving away, or deciding to keep. Haven't actually packed anything yet. But I think that will be next as it is getting harder to decide on what to give away and so I should pack stuff I really want to keep next and eventually zigzag into the grey area. Letting go of things can be hard. There are books that I've had twenty years - they're not useful to me now, probably they are in a library somewhere, so rationally I should let go of them. But when I look at them I remember the times and places were I was using them. This in my mind is connected to the Buddhist idea that "attachment" and clinging is a (or the) source of suffering. We realize that things are impermanent and we need to move on through life but still want to hold onto the past. Many people are too afraid to make changes and don't move on and stay stuck in suboptimal situations. But many who move on suffer from the giving up of the old. I have let go of a lot of things in life and now sometimes don't start new things because I know I'll need to let go. Sometimes this is good as those things are unnecessary and sometimes it's bad because I miss out on things that could be worthwhile. This move to Australia involves giving up many old things and starting new ones too. One part of me wants to be very radical and give up most of my "stuff" as well as my involvement in academia. The other part wants to hold on to the most possible. In the end I am going to compromise somewhere in the middle. My personality type likes to keep options open as well as explore new alternatives - to make radical moves slowly.

Ups and Downs

Feeling a bit down due to doing stupid trades against the model (I know these trades are wrong and stupid and still do them) I went downstairs to go out for a walk and found a check from the IRS for $3006.99. Now this is surprising as I sent them $400.36. I can't imagine how I got my taxes so wrong. Anyway, they include a card "about your refund check" which says they will send an explanation in a few days. If they are right then I will probably need to send an amended return to New York State as I sent them $1259.90! Also odd is why the IRS withdrew $400.36 from my account electronically and then send me a paper check?

Update on Passive and Trading Income

As June 30 is the end of the Australian tax year when mutual funds make major distributions and provide information on the tax treatment of distributions it will take a while to come up with final figures for June. Preliminary results show a return on investment of 2.98% while the markets went down. Using my fund manager's estimated distributions I've come up with an estimate of passive income for the first half of the year together with an update on trading income (all in US Dollars of course):



I don't know if I can replicate these figures for the second half of the year. I expect that passive income will be a lot lower as the takeovers will be lower and probably mutual fund distributions will be too. Dividends are likely to be higher. Anyway, these kinds of numbers give me some confidence about our move to Australia. Snork Maiden will be earning about $A65k (+15.4% retirement contribution on top of that) so our household income will be in the $US120k per year range if these numbers hold up.

Trading the Model: First Annual Report

It's been one year now since I started trying to trade the model - time for an assessment. I didn't trade much this month but did pretty well - a profit of $2691 or 11.95% on capital deployed. When I first started trading the model I had two good months followed by four losing months and now six winning months. The model itself only had one losing month in this past year (May):



The model and the market have similar standard deviations but the model returns far more - a sign of a very high alpha. My returns have been similar to the model but my volatility far higher. After the losing streak I cut back on the amount of capital I was using resulting in lower profits for given rates of return in the second half of the year. Obviously, I am very far from faithfully replicating the model, but as I'll show in the following, I think my performance is improving.



As this chart shows the model returned 102% for the year vs.23% for NDX and my performance of 76%. The model's return is entirely unlevered. Looking at a daily chart:



we can see that some short periods when the model got short correctly added a lot to returns. The only ways the model can add value is by shorting when the market goes down and by stopping out of long positions when the market goes down more than 1.25% in a day. Obviously the model makes mistakes too, but over time they are less important than its correct moves. I don't have daily data for my account, but I can show you trade by trade results for NQ futures contracts since November:



This shows clearly how my trading has been far more erratic than either the market or the model. The following chart compares my monthly returns to the model:



Months below the line show poor performance relative to the model and points above the line relatively good performance. The last three months have been three of the best by this measure. My performance has a beta of 1.67 to the model with a monthly alpha of -4.9%. This means that when the model returns zero I lose nearly 5%. But looking at the very small sample of just the last six months I have a monthly alpha of 5.3%. Relative to the market the results are clearer - I have a beta of -0.97 and a monthly alpha of 7%. This alpha is significantly greater than zero with a probability of 97%. So I do particularly well when the market declines. The model's beta in the last year is around -0.16 with a monthly alpha of 6.4%. So it too has a short bias.

In conclusion, I think I am gradually learning to trade with this model - my results are beginning to be statistically significantly positive and nonrandom.

Flight Booked

First day back home a lot got done, culminating in booking our flights to Australia for mid-September. We got a very good price via a website Snork Maiden told me about: kayak.com which searches over other travel websites and directed us to a deal at airfare.com. We'll fly out of our respective locations in the NorthEast and meet up in Chicago. Long wait in Chicago and then fly together to San Francisco, a plane change, and then to Sydney. All on United Airlines. From Sydney we fly on Qantas to Canberra. The price: $1146.

I'm still waiting to hear from my employer about whether I can officially quit in September or must officially quit June 30! HR is consulting their lawyer. This is typical. Didn't sleep much last night. I know intellectually that this is the right move for us (just need to think of being here on my own for another winter), but emotionally it still feels pretty scary.

How Big a Tip Did the Personal Finance Bloggers Leave?

That will remain a secret (the bill was about $81) but there was no disagreement on that or how to split the bill :) Last night I met up with Frugal Zeitgeist, Madame X, and Millionaire Artist for the inaugural NYC PF Blogger Meetup at a bar near Union Square in Manhattan. All very nice and interesting people. We mainly talked about life plans, history, and experience as they relate to personal finance issues and the mechanics of blogging, the internet, how we got into blogging etc. It's always interesting to meet people you know a lot about but have never met or even seen (in pre-web days I often experienced this with academics whose work I had read but who I didn't even know what they looked like). No big surprises here but a little adjustment in how I'll picture my fellow bloggers reading them going forward. Hopefully, this first meetup will be the beginning of many future ones!

Wall Street

I wanted to post a blogpost from Wall Street, but Starbucks was too busy. I am at least writing this one at the intersecton of Wall and Broad in front of Federal Hall and the NYSE (It was posted from a Starbucks by City Hall). I could find any password free network in the area. The NYSE has a really lame ticker in one corner with share prices going by, but no indices and no changes in share prices, so I couldn't even tell you whether the market was up or down (IYR is at 77.89 and BRK/B also looks down - so I guess the market is down - which is what the model was forecasting). The limits to technology even now are interesting. Main impression this morning coming into the WTC PATH station from NJ was the international mix of the crowds streaming off the trains. - mostly South and East Asia and all very young. Noticed a couple of Halal food carts on Wall Street. Anyway, to add some fun, I snapped some random snapshots on my laptop (it's a MacBook Pro with a built in camera), which is a little tricky. In the first one you can see the ticker I was talking about - the blue letters in a narrow ticker thingy.





PS there are a couple of police with machine guns stationed a few feet to my right. Tourist are taking photos of their kids with them...

Back in New York

I'm back in New York (actually right now I'm in Jersey City which is a much cheaper place to stay but only two stops on the PATH train from WTC) for a kind of economics conference and the NY Blogger Meetup. This particular economics group is a tight knit community (e.g. Snork Maiden's PhD adviser is the big star here) and the news that I'm quitting and moving to Australia is circulating fast. People seem confused when they find out I don't have a job lined up in Aus and I haven't been looking for one and don't really want any help in finding one. I make some noises about networking on the ground there and having various ideas. Only a couple of my students know what the real plan is. It's interesting that two of the people I know here at the meeting have never been to New York City before- one lives in Washington State and one in Alaska. But the Alaskan was a fellow student with Snork Maiden back in Maryland... still all the time I lived in Boston (7 years) I never went to NYC either. It's always shocking again how expensive it is here e.g. $6 for a bottle of beer in the bar we went to this evening.

International Moves and Frugality

I rarely post about the spending side of the equation but after spending yesterday working with Snork Maiden on move preparations I thought a bit about the connections between all the moving I've done and frugality. At first sight international moving is very expensive. Last time I moved I spent $A5,500 on freight and more on accommodation, rentng a new apartment, flying, and buying new stuff. Quite a bit of that was reimbursed by my employer. However, I liken the international move to being reborn. You have to give up a lot of links and ties in one country, get rid of a lot of stuff, squeeze yourself into a plane and your stuff into some boxes etc. and then you pop out in another country and start to expand all over again. I have done this many times. If you are like me you then tend not to accumulate a lot of expensive stuff or property because you know you are going to have to get rid of a lot of it probably in the future. Maybe a metaphor for life generally.

My former PhD advisor once said: "You have a PhD in international relocation" and it's true I'm very familiar with this process. So the familiar plan is swinging into action. Only difference is this time Snork Maiden is coming with me. She moved here from China and interstate but in both cases little stuff was involved. Most international grad students only arrive in the country with a couple of suitcases. I on the other hand was already shipping six tea-chest from London to Boston when I came here to do my PhD. That was already more than my previous international move - I've been moving since I was 18.

Avoiding an Immigration Pitfall

I suddenly realized today that if my employment terminates on June 30th my H1B status does too. There is no grace period to leave the country for H1Bs though apparently they allow "reasonable time" to allow people to find another H1B sponsor if they are fired. I should be OK statuswise as I have been approved for a green card. The only problem is I want to terminate that process and my lawyer thinks I should do that soon. The last resort would be to travel to Canada and re-enter as a tourist (using my British passport to avoid any border hassle). But I have come up with a creative solution - if my university terminates me at the end of September instead and puts me on unpaid leave from June 30 then there will be no visa issue at all and I won't even have to bother my long-suffering lawyer again. I floated this in an e-mail late today. We will see what the response is tomorrow. Been drafting up my moving plan and resignation letter. The latter will have to wait on a resolution of the timing issue. Snork Maiden finally sent in her formal acceptance to the Australian employer yesterday. It was held up by a slow HR department rewriting the offer letter to change the start date from September 1st to October 1st. She also asked her boss to suggest temporary accommodation - he stayed at the University across the street when he arrived in the city - exactly where I stayed 11 years ago in early October when I first moved to Australia to work at that university. So if we end up staying there at first this time it will be a case of deja vu.

Yesterday I started trading again after getting back from the trip to Massachusetts. I started by just buying 5 QQQQ puts in my Roth IRA account. Then I shorted some NQ contracts and my first trade netted $600 or so. But later today I reshorted after the market had risen a bit. But too early. The market rose a lot more from there. I also shorted too many contracts in total. The Kelly criterion says that I should trade 3 contracts in my IB account but I was short 5. I covered 2 at a 9 point loss after hours. This is my real job now as far as making money goes so I need to be more careful and consistent. Everything else I'm doing will either be career development or for "fun".

End of Negotiations

My negotiations with my university didn't last long. They didn't budge at all and so I'm not going to budge either. I plan to resign effective June 30th. We plan to travel to Australia around September 20th. I'm going to agree to continue to advise my 2 PhD students who are already working on their dissertation research. A couple of my students seem surprised or shocked. I've been keeping my colleagues informed so they aren't surprised though they would have liked me to stay on to teach in the Fall as we are very short of teaching capacity already. It is a strange feeling that I may never be an employee again unless I choose to do so (assuming things work out). But now everything is my choice. Having that power is scary.

I'm not going to revise my net worth goal for the year. My projections show we can still meet it despite me not earning any salary from May 31st. This will partly be due to merging my finances with Snork Maiden. So far we are in agreement and things should go smoothly. I am including Snork Maiden's superannuation (retirement fund) that she will start contributing to in Australia to my projection spreadsheet as well as her salary. I am assuming that her other savings will be used up in the move - if they're not this will be a bonus. I am budgeting an additional $US6000 for my move. On a day to day basis we plan to have a joint checking account in Australia which her salary will be paid into. This will either be a new account or if possible my existing account with Commonwealth Bank if we can add her to it. I will add money to it if and when neccessary. We will both have ATM cards to withdraw money from the account (I even need to get a new one). For larger expenses we will use credit cards which I'll payoff from the joint account or other accounts. For the moment she'll keep her US bank accounts and credit cards until we have an Australian credit card for her and the joint account in operation. Then we'll probably close her US accounts. I'm not going to consolidate any of her US accounts or the Australian credit card into my net worth reports which will continue to be primarily reported in US Dollars. I'll be in charge of managing all finances. All Snork Maiden will have to do is earn and spend money using the cards.

Back from the Trip, Meeting with Dean

Yesterday afternoon we drove back from Boston after dropping my brother off at the airport. I think for all of us the visit to Gloucester was the highlight of the trip. From our rooms we saw the swimming pool, then the road and then the sea. We stayed at a hotel called Bass Rocks Inn. Well worth the extra cost of a more run of the mill location. Met with my Dean this morning for an "exit interview". Mainly he wanted to ask me about what I thought about the future of our department and what can be done about it. But we also talked about my options. A terminal sabbatical is unprecedented and seems that the chances of getting the university to give it are low. They won't care if I publish some stuff in their name based on that period according to him. We might try to sell it on the basis of student advising. They don't pay out the unused sabbatical as a termination payment either. So I had offered to teach in the Fall based on receiving the sabbatical in the Spring. The Dean started the interview by congratulating me! And he certainly didn't seem desperate to get me to stay to teach the classes. So I think we are deciding that I quit as soon as possible and Snork Maiden and I move together to Canberra in late September. I will offer to continue advising grad students long-distance. Seems she will get a 457 visa which is similar to the US H1-B - a long-stay temporary business visa. We have been scouring the web for info. It clearly does not preclude applying for permanent residence/citizenship so that's good. May take around 6 weeks for the process to complete. In the worst case scenario I could travel to Canberra first and start preparing things for her arrival. Anyway, she won't be covered by public healthcare (Medicare) so we'll need private health insurance for her - relative to the US it's cheap. Her foreign source income isn't taxed by the Australian government. So am thinking about opening a trading account in her name in the US.

I have often said that I would feel happier quitting my job than the day I got tenure when I didn't feel happy at all (relieved that I wasn't fired). Now I still feel somewhat apprehensive of all the work and changes ahead. Maybe when we are finally settled in Canberra will be the time to celebrate?

On the Road

I'm in Massachusetts now travelling with Snork Maiden and my brother who is visiting for just over a week. His first time in America (and he's never been in Australia either despite being an Australian citizen - just to confuse things :)). The trip has been a lot of fun. He arrived Sunday night and we did a crazy trip to NYC and back in a day on Tuesday (cost around $500 all in). Today we will be exploring Cambridge and Boston. In between we have visted more natural and rural places done a lot of talking and eating :) and stuff. On Monday I met with my chairman. We discussed the options regarding timing etc. for the move. One is for me to quit right now. The other is to teach in the Fall on condition that they pay me a sabbatical (half pay) in the Spring Semester. I'd still need to take time out in the Fall to travel with SM to Aus. The Dean has now scheduled an "exit interview" with me for Tuesday. So we'll need to travel back to my hometown rather than SM's after Boston as originally was planned. I'm not trading this week apart from buying 4000 shares in PMC.AX @ $A2.02. My model for that stock told me to buy. The model combines time series analysis and a valuation model based on the NAV of the fund.

TD BankNorth Sucks!

Snork Maiden has a savings account with TD BankNorth. Don't worry, she also has one with HSBC but keeps this one because her pay is paid into it directly and rearranging that is a hassle. This savings account pays less interest in a year than HSBC would pay in a month on the same amount. Anyway, she fell afoul of the six withdrawals rule. Not only did TD BankNorth send her a warning letter as expected, but they also charged her $20 per transaction over the limit of six per month! When she phoned up to try to get them to cancel the charges they claimed that the government made them charge. This is incorrect and nonsense. The six withdrawals rule is a government rule but the charges are entirely their own. HSBC made no such charges. The $60 in fees is the equivalent of three years interest! Don't use TD BankNorth if you can avoid them!

Evidence on Overnight Trading

Interesting evidence on why overnight trading and closing the trade within the first hour or so is a good strategy when using directional trading models like mine. In my experience, unexpected changes in direction are more likely to occur intraday so that one can actually take more risk overnight in direct contradiction of received wisdom and futures trading margin rules. I don't think Steenbarger's conclusion that the US follows overseas markets follows from this though. That would need a different kind of analysis, which I might do some time. Looking forward to trading from Australia I won't miss much by being asleep during the main part of the US trading day.

Australia: Part III

Today we got the formal offer letter from the Australian position. It's OK - just need to push the start date off by about a month to 1 October if possible. Also need to find out how fast Snork Maiden can get a visa. I e-mailed my chairman today. We will meet Monday to discuss the options. He seems surprised. I've been signalling for a while that Snork Maiden is looking for jobs and got an offer from Aus and he even made her an offer so he shouldn't be surprised but some people find it hard to think outside the box I guess. SM's salary will be $A65k (c. $US55k). On top of that they will contribute 15.4% to a retirement fund. She can contribute 2-10% from her salary too. After looking through the conditions she said "they don't mention healthcare" and I told her that healthcare had nothing to do with employers in Australia. Either you use the public system or buy private insurance yourself. They are also going to pay her airfare and up to $A5000 in relocation expenses.

Australia: Part II

Some reasons why we've decided to move to Australia:

1. So far it's the only good job offer that Snork Maiden has received. There are a couple of rather inadequate alternatives at her university (she is completing a PhD) and mine which she could do on the OPT status (optional practical training which foreign students can do for one year after completion of their degree while still on their student visa).

2. The other alternative is for me to go through with the final stage of the green card process for us to marry and then for her to apply for a green card on the basis of mine. Perhaps there would be a job for her in my state government or some other opportunity. Here we have a clear option. I think once getting a PhD you need to use it fast before it loses its value. Later you can decide on changing career tracks.

3. We are going to Canberra which is the ideal place almost for her in terms of job opportunities down the road.

4. I have friends and contacts in Canberra which will help both of us.

5. She can become a citizen in three years, vs. a 8 year plus road here. I am already an Australian citizen.

6. No snow :) Well it did snow once in my six years in Canberra but it didn't stick. There is snow on the mountains. IMO an almost perfect climate.

7. The more Snork Maiden hears about Australia the more she likes it.

8. Only 2 hours time difference to eastern China, her home country.

9. This final step of the green card process where I need to get mutliple criminal background checks from all the countries I've lived in feels insulting to me. If I can avoid it I will. Probably, this is irrational. Even after that it will be five years before I can become a citizen. Though I wasn't born in Australia I feel more at home in the country that seems to want me. My mother is Australian and registered me as an Australian citizen when I was born.

10. Parrots.

Rick's Cabaret

New investment: 500 shares of Rick's Cabaret. Wallstrip umm "profiled" it and I checked out other blogs and the numbers and it looked good so thought I'd give it a shot.

Australia: Part I

We have pretty much decided to move to Australia though we still need to work out/negotiate all the details. I'll explain in another post the reasons behind our decision. Was wondering how Australian taxes compare to U.S. ones currently and came up with this chart:



I am assuming a single person who is an employee earns no other income and whose only potential deduction is state income tax and who is covered by private health insurance (relevant in Aus). I chose California - one of the highest taxed U.S. states as the point of comparison. Low tax U.S. states will look better. I also include FICA taxes in the U.S. calculation and Medicare in the Australian case. Apart from a blip around $US35k California's taxes are higher until we get to incomes above $125k. I only went as high as $150k because above that level the U.S. system starts to phase out exemptions and deductions. The top Australian tax rate is 46.5%. The U.S. Federal top rate is 35%, California, 10.3%, and FICA is 1.45% at those top rates. So eventually the two lines converge again. From my experience though there are more tax-reducing loopholes in Australia that high income individuals can use as there is no alternative minimum tax.

May Report

All figures are in US Dollars unless otherwise stated. This month saw weaker performance especially when compared to the market, but net worth still increased and investment returns remained positive for the eighth month running.

Income and Expenditure



Expenditure was $2,154 while take home pay of $5,248 reflects receiving two months pay this month - we don't get paid in June - and my income tax payments which I treat as negative income. 403b contributions totaled $1,792 and Roth contributions $333.33 as usual. Non-retirement investment returns were more moderate than in recent months ($3,530). Retirement investment returns were also weaker ($804). The Australian Dollar fell a little deducting $2,120 from returns measured in U.S. Dollars.

Net Worth Performance
Net worth rose by $US9,220 to $US433,011 and in Australian Dollars gained $A14,471 to $A523,530. Non-retirement accounts reached $US239k. Retirement accounts rose slightly to $US194k.

Investment Performance
Investment return in US Dollars was 1.02% vs. a 3.07% gain in the MSCI (Gross) World Index, which I use as my overall benchmark and a 3.49% gain in the S&P 500 index. Non-retirement accounts gained 1.52%. Returns in Australian Dollars terms were 1.68% and 2.18% respectively. The markets were again very strong this month but my U.S. Dollar returns are still beating the indices year-to-date:



The contributions of the different investments and trades are as follows:



The returns on all the individual investments are net of foreign exchange movements. Foreign currency gains appear at the bottom of the table together with the sum of all other investment income and expenses - mainly net interest. Trading worked out well in the end despite some setbacks along the way. Stock index trading (NQ/QQQQ and ES/SPY) produced nice results this month while very bad trades in Salesforce.com and Interactive Brokers lost the most.

Progress on Trading Goal
Trading in my US accounts netted $1,567 a 5.6% return on trading capital. The model lost 0.9% while the NDX rose 3.2%. This is the first time the model has had a losing month in more than a year and a half. In the light of that, my positive performance is rather surprising as up till now I have tended to lose in months when the model has even a weak positive performance. Seems my trading is improving at least in the stock index trading area. My goal for the year is to end up with at least as much in my three accounts - regular trading, Roth IRA, and IB - as I've put into them. The accounts have reached $53,758 with $63k contributed - so I still need to gain just over $9k. Since the beginning of the year the trading capital gained 64%, the NDX has gained 9.7% and the theoretical model gained 35.3%.

Asset Allocation
At the end of the month the portfolio had a beta of 0.48. Allocation was 30% in "passive alpha", 66% in "beta", 6% allocated to trading, 5% to industrial stocks, 4% to liquidity, and I was borrowing 11%. I've brought my Australian Dollar exposure down to 64.5% from 69.5% in January. The goal is to eventually reach 50%.

May Trading Performance

The model had its first losing month in a long time. It ended down -0.87% on the month while NDX gained 3.24%. However, my trading accounts managed to gain 5.60% or $1,567. If it wasn't for horrible trades in Saleforce.com and Interactive Brokers I would have done much better:



Futures trading made near $4000. The first half of the month was a struggle, but then things really started working out. QQQQ and NQ trading alone made around this amount. That kind of performance would be sufficient to make a living at this with a reasonable amount of capital at risk. Currently my z-score for all NQ trades to date is 2.44 which implies that the probablity that the average trade loses money and my success to date is just luck is less than 1%. The average winning trade makes $95 per contract (1 index point is $20). The average losing trade loses $109 per contract. But 62% of trades win. To date I've traded 555 NQ contracts or $21million worth for a total profit of $9386. This seems to be fairly typical of daytrading and why very low commissions are essential. The average contract is making me $17 in profit and costing $4.80 in commissions for the roundtrip.

Simulated SPI Trading

When I get worried about something I tend to do some research on the issue to reassure myself that it's not a real problem. So in this spirit I am doing some simualted trading of the Australian Stock Index Futures known as "the SPI". SPI stands for "share price index". It is based on the ASX/S&P 200 index (top 200 Aussie stocks). One point on the index is worth $A25. So the contract size (around $US130k) is almost double the size of an SPX E-Mini contract or more than 3 E-Mini NASDAQ (NQ) contracts. The required margin is roughly equal to that for two NQ contracts. The commission is $A5 a contract which means it's actually cheaper to trade.

I just want to see how this works before trying it for real. Executing the order is seamless using Interactive Brokers even though you are making a trade in a different currency in a different country. The account screen is more complex due to the introduction of a second currency. Seems that the current profit or loss is displayed in Australian Dollars but the margin contributed is displayed in US dollars. The current total account liquidation value is still displayed in USD. The exchange rate looks very favorable. So it's no harder than trading the US market in theory except where it comes to accounting for the profit and loss of closed trades.

Soul-Searching

I envy people who seem to know what they want out of life. I'm confused. When I'm trading instead of focusing on my job and on academic research I feel guilty. And when I'm not trading I feel bad I'm missing out on making money. I think grad school is a brain-washing process where students are persudaed that nothing is more worthwhile than academic research - at least for many it is. On the other hand society tells us it is important to make money. And when my trading works out I feel good about it. These different feelings are coming to the fore as decisions on the future are coming up. I'm scared by the huge roll of the dice coming up. But not taking the gamble would make me terribly regretful too. Maybe I just think too much. Tomorrow evening Snork Maiden will be back - that will certainly make me feel better.

I recently commented on this post and there was an interesting follow up discussion. My thinking at the moment is that I will need to continue some dimension of my academic career just as Brett is both trading and practicing psychology unless I end up entering the financial industry full time or finding some other occupation. Or is it academics that is making me unhappy? Can I unlearn this behavior and "live in the moment"?

Doing My Taxes

Finally getting around to this. One advantage of moving to Australia will be simpler tax rules and forms though at higher income levels the tax rates are higher. But there are lots of loopholes. Australia does not require any information on individual transactions or to specify how much income came from what specific account or security. There are no state income taxes either.

Following up on my post on foreign accounts, I just noticed you don't need to admit to owning a foreign account if you have less than $10,000 in those accounts. That would reduce the numbers who ought to file considerably. I also notice for the first time that I am meant to file some form with the Treasury Department due to owning a foreign account with more than $10,000. If you don't file you could be subject to a penalty of $10,000. I've never filed and never been fined. Guess that now I noticed it I'll file it.

It's a lot trickier filing a U.S. tax return when you have foreign accounts as you don't get those 1099 forms for them and you have to work out how to classify all the different payments in US terms. Also you need to claim back foreign taxes paid.

What I am noticing so far is that my dividends received have almost doubled since last year ($6199 vs. $3254) and my interest received is ten times higher ($2303 vs. $216.18).

6:43PM

Finally completed my Federal return. I owe $400. I guess there will be a small penalty for late payment. Miscalculated when I asked for the extension thinking I would be getting a refund. The state return is always pretty quick. After we decide on moving I'm going to run some scenarios of whether I should up my withholding, pay estimated taxes or just pay the interest next April. Due to my increased 403b contributions my withholding is currently less than last year but probably my investment income will be up on this year (I hope). To avoid estimated taxes or interest for not paying them I will have to withhold at least as much as this year's tax bill.

Dinner and then on to my state return.

11:51PM

I owe the state $1260 including a $14 penalty :( The penalty is based on the difference between my withholding and last year's state tax bill. Last year I had a big Federal Tax Refund and a very small state tax bill.

Thinking About the Future

Is something some people think I do too much of. Too much thinking about possible outcomes can result in "analysis paralysis". However, I find the big decisions easier to make than small ones.

Probably I will be giving up my position as a tenured professor fairly soon. The only scenario where I won't is if my university offers Snork Maiden a position that is acceptable to her and I decide to stay too. I think this has a very low probability. However, if they did make a decent offer we would have a very hard decision to make. Giving up a tenured post is a big financial sacrifice in terms of pretty certain future money and also the prestige in the academic community that goes with it. I probably won't give up academia altogether. Independent scholars (someone like Stephen Wolfram comes to mind) usually have a harder time getting their ideas recognized though it does help if they have had a conventional academic career first (Wolfram did). I might arrange a visiting fellowship or research associate position at a university where Snork Maiden ends up - the Australian job isn't at a university but my former employer is just across the street.

I've never had a dream of retiring and not working. What I have wanted is to have choices and now finally I can choose pretty much anything. But choices are pretty scary. Anyway, for the forseeable future I need to actively trade or have some kind of non-investment income, so the choice to "retire" isn't really there. So I am also thinking about how I will trade in different locations. Time zone matters a lot in trading. If I was in Australia I might trade the US market in late afternoon through the close in the Australian summer (the close is at 8AM Eastern Australian time then) and then the Australian market open at 10AM. The "model" is based on changing positions at the close each day so I could set up these positions with stops then as well as playing earnings releases. In the winter I would trade the macro news and market open (11:30PM Australian time - news at 10:30PM on). Probably I will wake up early anyway in the summer though I tend towards being a nightowl. I might mix and match depending on the news flow etc. The western US is a case of getting up early in the morning :(

Why not trade the Australian market instead? I think commissions are still way too high for daytrading individual Australian stocks. Trading the SPI futures - Aussie stock index futures - is possible but the big moves are set by Wall Street. I will have to see if I can model this adequately to make a profit. It's now possible to trade options online in Australia which would work out cheaper than trading the actual stocks. Exchange traded warrants were available to trade online when I used to live in Aus but they often are not very liquid. But I don't think I have any edge in trying to short-term trade individual Australian stocks. I will probably do some experimentation and see what I can learn.

Another idea I have is to interest a fund manager to work with me in developing an automated version of my trading system. I have some ideas here. Then I can forget about the clock :) Or maybe working with a trader in a different time zone.

More broadly I have a concern about how to spend the rest of my life in a meaningful way. Trading and investing is fun and makes money but it's not so meaningful to me in terms of improving the world which I still dream of doing. Should I focus more on the academic track? Partly I am frustrated with academia because progress seems so slow and so controlled by conservative gatekeepers.

Shanghai Volume

This chart is from Maoxian's blog. It just shows volume of the Shanghai A shares. It does not include the Shenzhen market which is smaller or the dollar denominated B share market. The latter market has been extremely volatile recently. The Chinese market suffered a severe bear market that ended in 2005 and has since boomed crazily as everyone knows. Earnings of Chinese firms are supposedly growing very fast but the P/E ratio on the A share markets are higher than in the B share markets or of Chinese stocks listed on the Hong Kong (H shares) or New York markets. But I didn't realize how low the volume was in the previous boom-bust cycle compared with today. Volume on the Mainland Chinese markets is now similar to that in the US stock markets even though at the official exchange rate the Chinese economy is much smaller than the US economy and fewer firms are listed.

Persistent Overbought State Clearing?

It's looking like the market will begin a new upswing about Wednesday next week. It's also looking like the persistently overbought rally we've been in the last couple of months, where downwaves are very limited in duration is coming to an end. I don't know if the next wave down will be bigger than the current one, or whether we'll enter into a more volatile sideways market. But it does look like that the strong low-volatility rally is at an end. At least that is what I can tell from the model. Other indicators both technical and macro-economic would suggest that this is just the beginning of a bigger correction. I'm looking forward to some day getting the "upcoming correction" behind us, so I can establish some new long-term investments in higher beta stocks and funds. Today I was a bit early in covering my positions but still got some nice gains. I couldn't believe how strong the decline was. Especially, after the headfake after the housing numbers were released. The bond market slumped in reaction but by the end of the day is back to flat. The initial reaction was that home-sales were up strongly and that meant yields would head up. But then people seemed to notice the steep fall in average house prices. Home-sales were only up because prices were down strongly.

Australia

Snork Maiden was offered the job in Australia. But she still needs to do a phone interview with the guy in Arizona next week. Looks like she'll have some time to make a decision on the Australian offer. If offered the Arizona job is probably better career-wise. Anyway, the countdown to some real decisions has started. I'm happy for Snork Maiden but the main emotion just now is feeling rather nervous about making the right decision for us. Life will be easier if there is no offer from Arizona :)

Ditto

Yes it (SPX) failed for a third day in a row to close at a record high after trading higher intraday. The model switched to short in the early afternoon after Greenspan's comments about China likely to see a substantial stockmarket correction seemed to catalyse the downward move in the US indices and the stochastic fell below 80. I'm now back to positive for the month on trading even thought he model is still seeing its first negative month in a long time and some idiotic trades I made earlier in the month. This is fun if I can keep it up. I doubt this is the beginning of a major decline in the market as yet, because the model is still in the persistent overbought state which means that down moves are likely to be short-lived.

My current trading position is:

Short 3 NQ contracts
Short 1000 QQQQ shares
Long 3 SPY 157 June Puts
Short 100 IYR

In other words the notional underlying value is short just over $200k of stock.

S&P 500 Fails to Close at Record High

for the second day in a row. Today and yesterday the SPX traded above it's record closing high from 2000 but closed below it. The NASDAQ closed up. I seem to be bouncing back on trading. I finally am exceeding $6000 in profit from futures trading in my IB account. Been going sideways for a couple of months there. The model is still long and I am getting more mentally aligned with trading the model. Platinum Asset Management (PTM.AX - they manage PMC.AX which I am a shareholder of among many funds) IPO-ed today. The IPO price was set at $A5.00 in the prospectus on an a priori basis. No book build. No institutions could buy. It opened at $A8.50 today. Now that is nice! Unlike Interactive Brokers :( PTM.AX has an 87% return on stockholders equity! Funds management can be a very profitable business...

Anyway, reflecting on the SPX touching on its all-time highs... the rate of return on the SPX before any fees etc. has been around 2% per year (the dividend yield) since the all time high in March 2000. That's more than 7 years. Something to think about when you read the next blogger talking about the 12% rate of return on the SPX... You can do better than that 2%. The MSCI World Index has returned around 4%. I've returned around 8% p.a (and that's after all the fees I've paid). There are funds out there that have done better than that. Of course they are not "low cost index funds".

OTOH if you've been dollar cost averaging since March 2000 your average returns will be considerably better - on the SPX something nearer 5% p.a.

Bureaucracy

On May 16th the U.S. Consulate in Sydney mailed a letter to my lawyer here in the U.S. with the date for my interveiw for green card visa. Just one problem (well more than one). The date: 8:00AM on May 20th. Not only is that date passed, even if I was in Australia it would be hard to meet it as first I need to visit one of their approved doctors for a checkup as well as pay various fees. And that was Sunday morning, which makes it look like either a mistake or an error (wrong month?). My alwyer says they send out these ridiculous appointments all the time, so perhaps it is simply a placeholder and they expect you to negotiate a real appointment with them? I'll pick up the packet of info from her on Thursday when she holds her regular "office hours" at our university's human resources department. Then I'll need to schedule an appointment with the consulate.

The appointment will have to be in several months time as I haven't yet done the criminal background checks in all three countries I've lived in apart from the US. I will ask them if I need to do the ones other than Australia when I reschedule as those two were places I lived more than 10 years ago and their procedures are real hassles. I've delayed doing them, partly because they are huge hassles and partly because I still don't know where Snork Maiden will get a job. The Europe job now seems to be out, but we are still waiting to hear on the Australia one. Meanwhile she has an interview with one in Arizona on the phone from Beijing. Her interviewer will actually be in Europe. This guy was my department head in my first academic job in Europe (now he is in Arizona). Would be funny if Snork Maiden's first academic job is working with the same guy I worked with on my first academic position!

So I've told my friends in Australia that either they will see me when I come to pick up my visa or when we move to Australia. Either way it should be in the coming year!

Financial Disclosure

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

Private Equity

Thought I'd follow up my recent investment in a listed private equity fund with some thoughts on private equity. It certainly is "flavor of the month" - the latest headlines generated by Daimler effectively paying Cerberus to take 80% of Chrysler off its hands. Private equity investment means various things but essentially means investments in companies that are not listed on a stock exchange.

According to the Federal Reserve, business equity constitutes on average 17% of households' net worth - more than the 6% or so accounted for by direct stock ownership. If we assume that 70% of the holdings of mutual funds and retirement accounts are also in stocks we get the same 17% of net worth accounted for by stocks as by business equity. This means that if you are ony invested in publicly listed stocks you are missing around half the businesses out there by value! Being diversified across stocks does not mean you are diversified across equity investments! The average household also has 32% of net worth invested in a primary residence but only 6.4% in other property.

Aside from starting your own business how can you invest in private equity? It's certainly hard to get a stake in someone else's private firm without the right connections or being an accredited investor. Managed private equity investments fall into two classes: venture capital and buyout funds. Generally these are only open to accredited and qualified investors. The nearest equivalent in the US to AEP is Leucadia National. They buy businesses, turn them around and sell them. The company is often compared to Berkshire Hathaway. The difference is that Berkshire does not resell the businesses it buys and it buys successful not distressed companies. A big element of Berkshire is acquiring private companies. Owners who want to sell their company phone Warren up and do deals if he is interested. I have one BRK/B share currently. Leucadia is on my watchlist but seems pricey at the moment. It is a stock I would buy in a stock market correction. Another option, and way to get some more investment ideas is Powershares listed private equity ETF. Its biggest holding is... Leucadia National. You can also wait for the Blackstone IPO. But it is likely to be pricey. Several of my holdings are in the business mainly of acquiring privately held companies - these include CIF.AX, CIW.AX, and FLIP.OB.

Private equity has a reputation for extraordinarly high returns. Buyout firms have high returns due to their use of leverage. Without leverage they likely wouldn't do much better than listed equity investments. In other words the returns come from a high risk exposure. Venture capital firms that get things right can achieve extraordinary returns. Google is just one of the famous cases. Investing in start-up companies is of course tremendously risky, so a high expected return might make sense - there are a lot of total losses as well as tremendous successes. You have to understand exactly what kind of listed entity you are investing in. Don't assume that "private equity" is some magic bullet that will generate high returns.

ETF Cheat Sheet

This ETF cheat sheet is very helpful. This one only covers the US market. Bespoke plans on coming up with a cheat sheet for international ETFs (traded in US but invested internationally) very soon. I use ETFs for trading purposes. Currently I'm long QQQQ (and QQQQ calls) and short IYR. If I was starting investing from scratch at this point I might use ETFs for the beta part of my portfolio. But there are still very few ETFs available in Australia where most of my money still resides and there were none when I started out. I don't have this option available on either my 403b or my Australian superannuation account.

P.S. The model is now forecasting an uptrend in the market for at least the next week.

P.P.S. I should have followed this guy's advice today!

Allco Equity Partners

This evening I am buying 4000 shares of Allco Equity Partners. They are trading for $A3.87 per share so that is an allocation of about 3% of net worth. This is a listed private equity fund. It was involved in the failed bid to take over Qantas Airlines and its price has fallen precipitously since. It now is trading at a substantial discount to book value as well as to net tangible assets, and actually to the cash the company holds. The IPO investors paid $A6.00 in installments for their shares. Tim Boreham of the Australian newspaper alerted me to this investment back in April.

Update

Today went pretty well. I started the day with some horribly losing positions and closed them for a profit (kind of - by making one much bigger I covered it for a profit based on the average price of contracts I had sold :)), did another quick trade and established some new positions near the close (still short). Interactive Brokers even closed up for the first time! I got my check for $A11.5k from the Powertel takeover, stuck it in an envelope and will send it back to Australia tomorrow (why couldn't they just transfer the money to our brokerage accounts?).

Taking Over a Mutual Fund

An interesting story concerning the manager of the TFS Market Neutral Fund, which I am invested in. Marketers and managers of funds can belong to separate companies sometimes for purely financial/legal reasons and sometimes to bring in specialist outside managers to enhance a marketer's offerings. The company marketing the fund gets to choose the management. The interesting point in this article, is that though in the US mutual fund investors are called "shareholders" (in Australia, unitholders) they don't seem to get any say in choosing the manager. At regular companies, private or public, the shareholders can vote to change board members (in theory - in practice it's rare for stockholders of listed companies to vote out a boardmember nominated by other boardmembers) - who get to hire the manager. Another possibility is for the company to be taken over or for an "activist investor" like Carl Icahn to buy a stake in the company, get himself or a representative elected to the board, and then attempt to change things.

None of these options are open to mutual fund shareholders. It is true that the management or marketing company can be taken over and transactions of this sort are common. But it's not possible to target a single fund. Closed end funds which trade on stock exchanges are another matter. Activist investors have been known to demand that a closed end fund convert itself to an open end fund (regular unlisted mutual fund). The reason for this is that closed end funds often trade at a discount to net asset value (NAV). By converting to the open end format the price will jump to exactly NAV and then the activist investor will get out for a profit (some time I should do a post on premia and discounts for closed end funds).

Anyway, after this long preamble, TFS Capital wrote to Phoenix Investment Counsel who run the Phoenix Market Neutral Fund (EMNAX) and proposed that TFS take over its management. EMNAX has negative alpha and beta and has lost money over its history. Amazingly enough somebody still has $53million invested in it. TFSMX has positive alpha and beta and has made good returns and has around $140million now in assets. Anyway, the fund is not going to take TFS up on its offer, though its good publicity for TFS I guess ;) And it gets me to think about the best ways to structure managed investments and reward or punish managers.

P.S. the letter.

Chinese Stock Market Update

Shanghai opened down and Hong Kong up on Sunday night just like I expected. But then the Shanghai market quickly reversed to the upside. The composite index ended up 0.61%. The B-shares index rose 9.54%. B-shares are denominated in US Dollars and are open to foreign investors. Hong Kong closed up 2.5%. H-shares (mainland companies listed in HK) rose 5.4%. Nothing seems to be able to stop the A-share bubble going onward and upward.

Market Update

The bull market remains intact - the model is indicating that overbought conditions will persist next week. We might be very close to the final top in the market - some of my E-Wave counts support the possibility that we are in the final wave up from the 2002 bottom - and the likelihood of recession remains strong as long as the yield curve remains inverted and now the economy's growth rate has slowed to 1.3%. However, the wave pattern has kept extending and extending and both these indicators made me too bearish too soon. In the meantime the Chinese government is going to let domestic financial institutions invest in foreign stocks for the first time. EWH - the Hong Kong ETF - and FXI - the H-share (mainland companies listed in Hong Kong) ETFs both rose steeply on Friday. The Hong Kong market should rocket up on Monday. On the other hand the Shanghai market could then suffer a correction. Shanghai shares are extremely overvalued compared to the shares of Chinese companies listed in Hong Kong and Shanghai but it has been difficult for foreign investors to trade in the mainland stock markets or PRC investors to invest in Hong Kong or the US. Arbitrage between the markets was, therefore, not occurring. I won't, therefore, be surprised to see a pullback in US stocks on Monday morning in reaction, especially after the strong rally in the US on Friday. In all likelihood it would be a buying opportunity given the state of my model a strong correction here doesn't seem likely. I just ran a scenario where the Friday rally completely reverses - in this case the overbought condition will likely come to an end and we will be set up for a bigger correction in a week or two.

Drawdown

That's what traders call it when they are losing money and their account is going down... I'm down 15.9% on my trading capital so far this month or a loss of $4292 so far. That's $476 down per trading day on average. The model is down 2.86% so far this month and when the model is doing poorly I tend to do terribly. Actuallly when I fit a trendline to a chart of my returns on the Y axis and the model's returns on the X axis I am still above the trendline for this month (technically I have a positive residual this month in this regression - alpha is very negative and beta of my returns vs. the model is near 3).

I don't seem to be able to do anything right tradingwise at the moment. I missed the big downswing yesterday because I was too busy and the model was long. Today the model is short and I'm trading and the market is going up! Supposedly, according to the media, the market is rising because the PPI figures released this morning showed inflation was under control. Therefore, may the Fed will cut interest rates sooner rather than later. Initially both bonds and stocks rose. But then bonds began to fall all day long and ended up down. This means of course that the yield on bonds rose. So if bond yields are rising how can stocks be rising on hope of a Fed rate cut? So I lost on both fundamentals and technicals today.

I need to stop the bleeding to avoid blowing up all my trading profits all over again. I'm going to have to change my strategy a bit I think. One problem that is getting me stuck in losing positions is mixing up different time frames. I am thinking of putting different trades in different accounts. In one account I will do trades purely according to what the model says to do. Then in the other account I will do discretionary trades - mostly these trades will be in the same direction as the model - for example, my overnight trades. I could get in or out of those trades without worrying whether I should hold the position because the model might turn out to be right, as I'll have another model driven position anyway. This might be easier to manage mentally. We will see.

Google World Update

I now found that most large US cities have some realistic building models as do some famous world cities - I checked out Sydney, Hong Kong, Rome, Jerusalem, Mecca, Melbourne, Beijing, Shanghai, Kuala Lumpur, Singapore. They're all cool (though some like Kuala Lumpur only have one building) except Jerusalem where the Dome of the Rock is modeled way too large and looks ridiculous. None of these cities have the generic grey buildings that fill in the rest of the space in the US cities. Austin, Texas just has the Capitol and two highway billboards! Very peculiar :)

My trading is awful this month so far. Everything I do seems to go wrong. Actually the model was on the long side today but I hadn't read things right and went short after the FOMC announcement when the market intially went down. But then the market went up and I lost again...

Magazines Meme

Clifford tagged me with the magazines meme. So here goes:

1. Barrons - I have a subscription and read it online now.
2. Scientific American - subscription
3. The Atlantic Monthly - once paid to read an interesting article online and ended up in a supercheap subscription which I kept.

They cover my main interests. In the past I had a subscription to the Economist but I find reading too many of their arrogant articles gets annoying. I read the New York Times online most days. Some days I buy a hard copy newspaper - could be NYT, Wall Street Journal, or even Financial Times. I also receive academic journals from the various academic societies I belong to.

Google Earth's Latest Cool Feature

As I mentioned that I was obsessed with Google Earth, I have to share with you the latest cool feature I discovered. Many of the buildings in southern Manhattan are now full color 3-D models! Previously all buildings had blank grey realistic shapes in that area and in several other US cities. Only the area south of Central Park and some parts of Jersey City and Brooklyn are modeled in 3-D New York. But this shows the potential and where this kind of virtual Earth technology will go eventually. Google is on my watchlist of stocks to buy for long-term investment on a pullback. I've made some money trading it in the past. Right now, though, the chart appears to be heading down:

Passive and Trading Income

I was wondering where I was at so far this year (first four months) regarding passive (nothing to do with "passive investing") and trading income:



My definition of passive income is money that arrives to me without me doing anything to realize it - so long-term capital gains from selling a stock isn't counted and unrealized gains certainly aren't. Also not included is anything that happens in a retirement account. But I am counting the net profit from cash takeover, like the Powertel takeover by Telecom NZ, in passive income. The other categories of passive income should be obvious. Projecting for the year I should receive bigger mutual fund distributions in June and December and a similar size one in September. I expect to receive about the same amount again in dividends and we could multiply interest by three. There is one takeover maybe in the works, but the payout will be about $1500 in net profit. So I could project about $23k for the year. Trading is very hard to predict. Maybe I'll triple the numbers or maybe I'll blow up like I did to some extent last year. If I tripled the numbers I'd have $33k for the year. With expenses of $25-30k per year (and not counting stuff like health insurance that my employer mostly pays for now in that) and considering taxes I'm just on the edge of "financial independence". But I can't afford to make too many mistakes or I'd start cutting into my capital.

Interactive Brokers IPO Prices at $30

So I have been allocated 200 shares! Looks like they'll start trading on Friday.

Passive Investing and Entrepreneurship

Many personal finance bloggers and personal finance gurus are in favor of passive investing. Invest your money in the market portfolio rather than trying to beat the market through selecting investments and trading. The logic behind this advice is that the sum of all "alpha" - risk-adjusted above market returns - is zero - unlike in Lake Wobegon, not everyone can be above average. The assumption is that the the above market returns are either distributed randomly or are flowing to the Goldman Sachs and Warren Buffetts etc. of this world. It is true that the majority of mutual funds have negative alpha. So why not minimize costs and invest in the market portfolio at the lowest possible?

In thinking about trading as a business an idea came to me.

Many of the same people who are opposed to trading and are in favor of passive investing also strongly favor entrepreneurship and starting your own business. But on average all businesses make the average rate of return on capital. Some are very successful and some fail. Why does it make sense to invest in your own business if it doesn't make sense to be selective in investing in other businesses through the stock market?

Junk Stocks, Bad Trades, and Complicated Security

Several themes today.... I bought 25,000 shares in FLIP.OB, aka FTS, this morning. Yes it's a penny stock. Literally. I bought at 1.84 cents a share spending $467 in total including commissions. This trade would have cost about $80 in commission using Interactive Brokers instead of $7 with Ameritrade! Unlike many or most bulletin board stocks with similar charts, FTS actually makes money. It even has free cash flow. And it is selling at about 3 times FCF or a P/E of 2. I'm willing to make a small bet on this stock - maybe something is actually really wrong and the stock goes to zero or maybe it increases 4 or 5 times over in the near future to reach a more reasonable P/E. Risking less than $500 to make maybe a couple of thousand sounds OK to me. The company is a retailer of cellphones, satellite dishes etc.

Talking of junk stocks, the administrators of Croesus Mining (CRS.AX) poked their head out the rabbit hole they've been hiding in for the last few months. They say that they are now focusing in the next three months on recapitalizing Croesus. So this stock still might trade again one day, though likely at a value similar to FTS :)

Trading very badly today and giving back the profits I made in the last couple of days. The stockmarket remains extremely strong and overbought. The model gives short signals which can be profitable but they are reversing very fast at the moment and I haven't been nimble enough to get out before the uptrend resumes.

In a collaborative effort with my Mom on the other side of the world we managed to access her new account with a well-known global investment bank. This involved her working a special card reader, an access card, and a pin number and me entering numbers into the computer here. It reminded me of movies where thieves are trying to get into some fiendishly complicated safe. Any moment they might set off the alarms :) It's nice to know the money is secure!

April 2007 Report

All figures are in US Dollars unless otherwise stated. This month saw very strong performance, which has been the case for the last several months.

Income and Expenditure



Expenditure was $3525 - more than take home pay ($3,299) due to spending on my brother's upcoming visit to the US. 403b contributions totaled $1,792 and Roth contributions $333.33 as usual. Non-retirement investment returns were again very strong this month ($10,363). Retirement investment returns were also nicely positive ($5,615). The rise in the Australian Dollar again contributed significantly to returns.

Net Worth Performance
Net worth rose by $US17544 to $US423,791 and in Australian Dollars gained $A7451 to $A509,058. The Australian Dollar again rose this month resulting in a relatively large gap between performance in the two currencies. Non-retirement accounts reached $US232,779. Retirement accounts also saw nice gains to $US191,012.

Investment Performance
Investment return in US Dollars was 3.93% vs. a 4.48% gain in the MSCI (Gross) World Index, which I use as my overall benchmark and a 4.33% gain in the S&P 500 index. Non-retirement accounts gained 4.65%. Returns in Australian Dollars terms were 1.11% and 1.87%. The markets were extremely strong this month. My U.S. Dollar returns beat the indices year-to-date and over the last 12 months:



The contributions of the different investments and trades are as follows:



The returns on all the individual investments are net of foreign exchange movements. Foreign currency gains appear at the bottom of the table together with the sum of all other investment income and expenses - mainly net interest. Trading worked out well in the end despite some setbacks along the way. Trades around the Google and Apple earnings reports made good contributions. I again had a positive result for QQQQ/NQ trading ($527). The biggest gain was from a balanced mutual fund - the CFS Conservative Fund. Symbion began to run up in anticipation of the May 1st merger bid. Everest Brown and Babcock suffered a loss this month as the fund of funds sold off in response to the rights issue.

Progress on Trading Goal
Trading in my US accounts netted $3,248 a 10.8% return on trading capital. The model gained 6.4% while the NDX rose 5.4%. My goal for the year is to end up with at least as much in my three accounts - regular trading, Roth IRA, and IB - as I've put into them. The accounts in total gained a net $3,249 and I have now achieved $12,297 of the annual goal of about $19,000. Since the beginning of the year the trading capital gained 56.1%, the NDX has gained 6.3% and the theoretical model gained 36.5%.

Asset Allocation
At the end of the month the portfolio had a beta of 0.04. 41% of the portfolio was in stocks, 42% in bonds, 13% in cash, and loans totalled -9%. The remainder was in hedge fund type and real estate investments, futures value etc. Looking at asset allocation the way I prefer, 25% was in "passive alpha", 66% in "beta", 8% allocated to trading, 7% to industrial stocks, 3% to liquidity, and I was borrowing 9%.

Separately Managed Accounts

I logged into the smaller of my Mom's new accounts for the first time since we started investing with a certain manager of separately managed accounts. Separately managed accounts are similar to mutual funds but the funds are not pooled - instead of owning shares in the fund you own the actual shares directly. This gets around the negative tax issues associated with traditional open-ended mutual funds. In traditional funds you pay the pre-tax net asset value of the fund for a share in the fund. When you buy shares in the fund might have tax liabilities due to selling stocks or receiving dividends during the year before you bought in. You have to pay these taxes when at the end of the year capital gains and dividends are distributed to you even though you didn't benefit from those gains or dividends. Also, when investors redeem shares the manager has to sell stocks generating capital gains whose tax liabilities are distributed to all shareholders. The flipside is that growing funds like TFS Market Neutral tend to have lower tax liabilities. Anyway, none of these issues apply to separately managed accounts.

But what surprised me is that when I logged in I saw all the individual stock positions in the account just as if it was a regular investment account. This is an excellent manager, and I'll probably get some investment ideas for myself by checking out their picks.

Symbion Again in Merger Talks

Symbion Health (SYB.AX) is again in merger talks. There is a bid from Healthscope (HSP.AX) and a couple of private equity firms that values the company at $A4.30 per share. The firm would be dismantled and the path labs etc. merged with Healthscope in return for Healthscope shares and the pharmacy etc. division would be purchased by the private equity guys for cash. I will be due long-term CGT on the latter and I believe no tax on the scrip for scrip portion. So I'm planning to hang on and see what happens here.

In related news, Powertel, which was acquired by Telecom NZ was delisted today. From the merger scheme document seems we'll be sent a paper check (for $A11,500 in my case), which I'll then need to mail straight back to Australia. I am thinking to use $A1500 towards paying off my margin loan and then wiring $A10,000 back to the US. The check will likely not be mailed till May 9th. In the meantime I'm recording this as a receivable.

That's Insane

Said Snork Maiden. This was when I told her the difference in commissions between trading a stock index futures contract on the Sydney Futures Exchange through Interactive Brokers and trading the same nominal amount of actual Australian stocks at the lowest online rate offered by Australia's biggest online brokerage. $A5 vs. $A186. The latter reflects trading $A155k of stocks at a 0.12% commission. Going short through the latter broker involves additional commissions. Another way to significantly lower costs is to trade warrants (options on stocks issued by investment banks that trade like stocks on the ASX) or options rather than actual stocks. Because the face value is much lower you pay less commission. But you can't always get the exact warrant you want and trading options requires phoning a broker and paying much higher commission rates.

Trading Result for April

April turned out to be a good month in the end. I made $3278 from trading in my three US accounts. That's about a 10.9% rate of return (per month not per year!) on capital deployed. The NDX rose 5.4% and the model gained 6.4%. Based on my trading since June 2006 I would be predicted to make about 4% when the model returned this amount and so I had a nice positive residual driven by Google and Apple trading. My accounts have gained $12,200 from trading in the same period. So I estimate conservatively that I can make $15k or so per year from trading. Together with passive income from dividends and distributions I'm close to earning enough income (not counting long-term price appreciation) outside of retirement accounts to meet my expenses. There are no guarantees that the recent good trading results will continue as none of the test statistics are very statistically significant yet.

New Short: Salesforce.com

An article in Barrons this weekend suggested that Salesforce.com (CRM) would be a good stock to short. As usual I checked out the financials. It has a forward P/E of more than 60 and free cash flow is significantly below earnings. Analysts are forecasting rapid earnings growth but some have recently downgraded the stock. The chart also looked vulnerable to decline. The stock has an extremely high beta of 4.58. If the market goes down in the next few days then it will go down more. Salesforce was also mentioned here over the weekend. Wallstrip recently ran a positive show on it. Not sure how long I will hold the short. I'll play this one by nose or is that ear :)

Barrons also suggested shorting ACP, Carl Icahn's firm. It opened today steeply down. The bid-ask spread was so big though that I didn't want to get in. I'll monitor this one and see if a bounce is worth shorting.

Sydney Futures Exchange

When I opened my account with Interactive Brokers I signed up to trade all electronically accessible US markets. But in fact one can trade many international markets too from the same account. I just added the Sydney Futures Exchange to my permissions as the data is free and I am curious about trading on it in case we end up moving back to Australia. IB charge $A5.00 per contract for trades (about $US4) which is good. The only stock index traded is the S&P/ASX 200 Index. The contract size is $A25*index. As the index is currently at 6213 the contract size is around $US128k which is bigger than the US mini contracts but smaller than the US full size stock index contracts. The minimum tick is one index point which is percentwise about the same as the NQ and ES tick. I am tracking it now in real time and around 50-150 contracts are trading per minute at the open, so there is plenty of liquidity. Initial margin is $A6250 which is in line with the margin for a couple of ES contracts of similar value.

I don't try to day-trade the Aussie stock market because I think commissions are too high and the information flow isn't as good as in US markets (some of the info is better though). IB don't offer Aussie stocks yet. The Australian market trades in the US evening opening at 8pm EDT in the northern summer and 6pm EST in the northern winter. US markets open at 11:30pm or 1:30am Sydney time. Even though I tend towards being a nightowl it would be hard for me to daytrade the US market from Aus I think. As I get older I also am waking up earlier in the morning. Of course, all the Asian markets would be open to me from a base in Australia but language issues might pose a barrier. For example, Yahoo's Hong Kong site is in Chinese but the Singapore site is in English. Hong Kong is a bigger financial market.

Accounting for the Effect of Australian Superannuation Taxes on My Rate of Return

The earnings of Australian retirement accounts, known as superannuation accounts, are taxed by the Australian government at 15%. Contributions are also taxed at 15%. This is in contrast to the US approach of either taxing the contributions at the regular income tax rate (e.g. Roth IRA) but not taxing the earnings or not taxing the contributions and deferring the regular income tax on the contributions and earnings till the money is withdrawn (e.g. 401k, 403b, traditional IRA). The superannuation earnings tax is deducted at source from managed funds and the amount is not reported to the account-holder/taxpayer. Up till now I have been using the after tax returns on these accounts in my performance calculations combined with pre-tax returns on all other accounts. The correct way to compare returns to a market index is, however, on a purely pre-tax basis. I've now added back in the superannuation tax paid to each month's returns:



Obviously the result boosts my rate of return and I now almost match the MSCI World Index over 10 years and beat the S&P 500 total return index on all time horizons. The change has the effect of increasing alpha very slightly but boosting beta by about 5 percentage points.

I've been fascinated by the concept of "portable alpha" or "alpha-beta separation". This concept is based on the idea that any mutual or hedge fund can be broken down into a market neutral fund and a market index fund. The former is the "alpha" and the latter the "beta". I did a decomposition of my total returns into the portion attributable to the market (estimated beta*MSCI total return) and the residual or market neutral portion:



The total return index is the product of the market neutral and market related indices. This is natural as current returns multiply the capital built up from past returns.