July 2007 Report

This is my net worth and investment performance report for July. All figures are in US Dollars unless otherwise stated. This month saw the first negative investment performance in 10 months (in USD terms), bad trading results, and a small decline in net worth.

Income and Expenditure



Expenditure was $2,113 - this month there were no moving expenses. Current non-investment income mainly consisted of a refund from the IRS. I'm no longer receiving a salary or making retirement contributions. Non-retirement accounts lost $1797 but would have lost $3923 if it were not for the continued lift from the Australian Dollar. Retirement accounts gained $288. I've introduced a new entry this month: "retirement tax credits". As I've explained, I measure all investment performance on a pre-tax basis including my Australian supperannuation account. Unlike US retirement accounts the returns on Australian retirement accounts are taxed at source but at a concessional rate. In order to compute the actual gain in my superannuation account after tax to get the change in net worth I need to take out the tax paid. This month the account lost in Australian Dollar terms so the tax adjustment is negative.

Net Worth Performance
Net worth fell by $US356 to $US444,932 and in Australian Dollars lost $A6615 to $A517,784. Non-retirement accounts were at $US244k. Retirement accounts were close to $US201k.

Investment Performance
Investment return in US Dollars was -0.34% vs. a 1.50% loss in the MSCI (Gross) World Index, which I use as my overall benchmark and a 3.17% loss in the S&P 500 index. Non-retirement accounts lost 0.73%. Returns in Australian Dollars terms were -1.48% and -1.91% respectively.



The S&P 500 is barely beating a savings account so far this year.

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. I can't see any patterns at all in these results - the best gains and worst losses both came from futures trading.

Progress on Trading Goal.

Asset Allocation
At the end of the month the portfolio had a beta of 0.59. Allocation was 34% in "passive alpha", 64% in "beta", 6% allocated to trading, 6% to industrial stocks, 6% to liquidity, and I was borrowing 16%. My Australian Dollar exposure was steady at 62% from 69.5% in January.

Trading Results for July

I lost $3067 in trading in my US accounts. That's 13.61% of the capital allocated to trading. That's the second worst performance since I started recording this data in July 2006. In October 2006 I lost $5952 which was 14.33% at the time. The theoretical model gained 3.22%, which is a weak performance. I tend to perform poorly when the model performs weakly:



The NASDAQ 100 index declined 0.11% in July. The S&P 500 Index feel about 3% and MSCI World Indices fell around 1.5%. Seems like my overall investment return will be only slightly negative for the month in US Dollar terms.

Volatility

I was doing well trading this morning and was up about $400 and then for some dumb reason tried to trade again this afternoon. Things went crazy when American Home Mortgage imploded and I lost About $1000. Bad day to end a bad month of trading. I don't have the final figure yet but it's probably going to be the second worst in the last 13 in both dollar and percent terms and ends a run of 6 profitable months. The only consolation is that it was worse even a few days ago and I did manage to claw some back. These latest losses also were at least when I was trying to trade according to the model more or less. The less is because I really shouldn't try to position myself according to the model in a new position till near or after the close of trading as the model has only been tested based on placing trades at the close (and overnight trades).

Investment returns for the month will also be negative. That's not surprising as the stock market has gone down. And, therefore, net worth is down too.

Some good news today, is that Snork Maiden got her Australian visa approved. It has been such a pleasure working with Australian immigration compared to dealing with US immigration. No lawyers required. Everything can be done online. There are online updates on the state of your application etc. Last night though we got a message that the visa was approved but would be granted on September 25th. We are flying to Australia on the 13th and arriving there on the 15th. So we e-mailed the person who had e-mailed us to inform us of the approval. It probably helped that Snork Maiden's employer had checked with immigration earlier that this entry date would be OK and we attached that e-mail. The same day the message came back that the visa would be valid from the 11th instead. This is just another planet from the experience of people applying for US visas. On the other hand, Australia is extremely tough on illegal immigrants of which there are not many.

Recovery

I fixed the damage caused to my futures account on Friday and then some. HIgh volatility in today's session was very useful for this purpose. I traded NQ and ES on and off. My US stock account is also doing fine mainly due to a rebound in Interactive Brokers. I expected a bounce today based on my modeling, examining historical parallels, and reading blogs etc. The question is whether this is the beginning of a corrective wave that does not exceed the July high in the indices and then there is another wave down in the correction (or more) or whether we now rally to new highs. Based on E-Wave, other chart analysis, and my model output I am leaning to this being a corrective wave followed by a similar size second corrective wave. It's possible to view the action in the SPX and Dow in June and July as an E-Wave "flat correction". This could be a complete correction labeled iv here:



But looking at the stochastics it seems more likely that there is more of iv to come. Wave ii lasted a long time but didn't result in much downmovement. The "Law of Alternation" suggests that there should be more downmovement in this correction. One possibility is a complex correction with 3 waves down complete, 3 waves up to come and then another 3 down (WXY). After that we would need to rally to new highs to complete the bull market since 2002.

Of course since E-Wave is so subjective lots of other scenarios could be equally valid. In the longer term E-Wave often seems more useful after the fact.

This scenario explains why bearishly oriented traders and investors have been wrong for so long. Wave 5, the final wave of the bullmarket, extended tremendously after getting started in late 2004. Every time the bull market has seemed ready to come to an end another wave has appeared. Of course, the most bearish forecasters, such as Robert Prechter, have assumed for most of this period that we were not in a bull market at all. Action in non-US markets such as Australia convinced me that that was incorrect fairly early on.

That Was a Bad Idea

It was a very bad idea to put so much reliance on an essentially untested or minimally tested model. The progress in winning back some profits in the last few days has been reversed. I have now done some more testing of this new idea and while the results are interesting it is far from a panacea. I don't understand why I trusted this model today to the point that I lost a pile of money in the final collapse of the market at the end of the day. Up to that point things were going well, but I was convinced the bounce should continue. And then I guess I froze in disbelief. Very bad behavior. The Australian Dollar has also been falling in the last couple of days. I now have a negative return overall for the month and not just for trading which was a given. The only consolation is I'm not doing as bad as the market is. It's been a good run in the last several months up till now.

Trying a New Way of Using the "Model"

Just thought of a new way of using my model results and so am going to make a bold prediction for tomorrow.

Direction: Up

Predicted rise in the NDX: 7 points IF today's low of 1955 is not taken out.

But if today's low is taken out then still expect a big bounce before the close.

My modeling approach forecasts the stochastic oscillator which measures where price is relative to the recent range. Today I would have been able to forecast where the stochastic ended up pretty precisely. But because the range extended dramatically to the downside the price could be much lower and still above the bottom of the range. There was a 31 point bounce off the bottom to the close. I am thinking that that is not too hard to forecast but where the bottom will be is not possible...

Five Years Ago Today

I moved back to the US from Australia and now we are on the verge of moving back to Australia again. I produced a NetWorthIQ style snapshot of where things were at then and now:



Apart from the sevenfold increase the big difference is how levered I was back then. My debt was 242% of my non-retirement net worth, which was only $22,597. Non-retirement net worth has risen much more than the retirement accounts. Apart from credit card debt I had $38,540 in a margin loan and $12,502 I owed to my mother. I took on the debt to avoid selling all my shares and funds at the bottom of the market. I just about made it through with a positive net worth.

The Australian Dollar was only worth 54 US Cents back then and now it is at 87 US Cents.

The Model Missed This One

But Oscar was calling for an up day too, so I wasn't the only one. I made some money on the long side and then just when I realized that the market was going to really go down hard I had a bad trade losing just over $200 a contract. Could have been a lot worse today. The model is still predicting up for tomorrow and for a few days after that. Anyway, by the end of the day NDX was only down 1.22% which is slightly less than the model's 1.25% stop. So it wasn't that wrong in the end. Was looking to see if there was some way to predict what happened today, but I only found one past instance when the model "failed" in the exact same way - predicting up when the stochastic was above 20 but instead the stochastic fell the next day below 20 which is the oversold zone. So there wasn't anything I really could learn from that. And by the end of the day the model hadn't actually failed - the stochastic ended the day above 20.

I've tried to avoid making any bigger predictions about the market recently as the market has generally confounded any bearish predictions in recent years. Still the move down from the recent highs is a very nice impulse wave in Elliott Wave theory - a five wave move. If there is any validity in E-Wave theory then that won't be the entirety of the decline. After an upside correction we should expect to see at least another five waves down again.

The Returns from Housing

Following up from my recent posts I thought it would be useful to write down a simple equation that really sums up a lot about the decision of whether to buy a house or not: Rate of Return = Rent Yield - Costs/House Price + Rate of Appreciation The return from owning a house is the rent you would otherwise have to pay minus costs that include insurance, maintenance, and property taxes plus the gains in the price of the property. I'm not including mortgage interest here so I can compare the return on a house with the return on other unlevered investments. The investment decision comes down to whether this rate of return is higher or lower than the return on other investments with similar levels of risk (yeah it is more complicated than that as I'm ignoring the correlation with other assets etc.). Rates of return in bubble areas such as most of California, the coastal Northeast US, Sydney Australia, and probably the UK among many others can only be high enough to pass the investment hurdle if the rate of expected price appreciation is high enough. Enough Wealth pointed out in a comment on one of my posts that high end real estate can appreciate in the long-run faster than the rate of economic growth, but it is hard to imagine that the average house can. In fact Robert Shiller's research has shown that the average house in the US has appreciated slower than the rate of economic growth in the long-run. It is very likely that prices have overshot and that future rates of appreciation will not be as high as in the recent past. In order to restore equilibrium house prices have to fall in order to raise the expected future rate of return. This is the housing bubble argument in a nutshell. So what about mortgage interest? It makes sense to borrow money to buy a house if the expected rate of return (assuming no uncertainty in this return) is greater than the interest rate on the mortgage. And this only if you have passed the investment return hurdle. I think this makes sense though I'm kind of thinking out loud :)

Wednesdays

Maybe I should add this to my model? That is a huge effect not to be arbitraged away already. Weird.

Housing Simulation for Canberra

I plugged the actual numbers for our own situation into my housing simulator. These include a 7% mortgage rate current in Australia, Snork Maiden's salary, and our current net worth. I'm assuming a 10% downpayment, a house price of $A500k and rent of $A400 per week. Buying would cost us all of Snork Maiden's salary at first vs. about 40% on rent. It would only make sense if prices appreciated at 7% per year indefinitely. Maybe prices have historically risen at that rate in the recent past, but can they continue to do so? The average Canberra house would cost $A3.8million in 30 years time and rent would be $2800 a week. Adjusted for inflation at 3% these are $A1.6million and $A1200 per week in today's money. In the long-run real GDP per capita growth has averaged 2% p.a. So we can't really expect wages to increase faster than that. How long can house-prices and rent rise at twice that rate?

Renting vs. Buying Simulation

It seems to me that the best way to address the financial aspects of the renting vs. buying conundrum is to use simulations. There are too many variables and complications for most people including me to get a handle on this problem analytically. Of course you need to make a lot of assumptions but these can be adjusted in a "sensitivity analysis" to see what effect each assumption has. My initial assumptions are as follows:



Both the renter and the homebuyer start off at age 30 with a disposable monthly income of $5000 and savings of $40,000. The homebuyer uses all this as a downpayment on a house with a 30 year mortgage. The renter invests the money in a taxable account with an after tax rate of return of 9% and pays rent of $1500 for an identical house (which isn't too far off for some of the bubble areas). House prices and rents rise at 4% per annum and wages at 5% p.a. Initially I assume that the homebuyer spends the rest of their after tax income and the renter spends an identical amount. The renter saves the remainder in the taxable account. Initially the homebuyer can't save any extra money but as the homebuyer's mortgage payments do not increase (but property taxes etc. do) gradually they can afford to make some additional savings which they also put in a taxable account. Both the renter and homebuyer increase their spending at the same rate as wages increase. I run the simulation till the end of the mortgage:



At age 60 the renter has a net worth of $4.74 million and the homeowner $3.88 million. Obviously there are possible assumptions and scenarios which would result in the homeowner ending up ahead in net worth terms. But these assumptions seem pretty typical to me and result in the renter coming out ahead.

Let me know if there are particular scenarios you want me to check out or I can even e-mail you the spreadsheet.

New Trading Strategy Working So Far/"Subprime Woes"

My new trading strategy is to hold a minimal or small position overnight (currently equivalent to 1100 QQQQ shares) and to increase my position only when I am actively looking at the market. The previous strategy was to hold a larger overnight position and only to hold the minimum position during regular trading hours when I wasn't available to trade. This was the so-called "overnight trading. Recently I haven't been feeling confident enough to do this. Well, I did make money today going short in a mostly up-market. So that's a good start.

Some of my investments are now not looking like such good ideas. Specifically (there are others :)), Newcastle and Hudson City Bankcorp. The idea was that these were two of the better real estate investments and I would hedge them by shorting IYR in a "pair trade". The bottom line is the hedge has been insufficient. The main question concerns NCT. Is it likely to implode like the Bear Stearns funds? Or is the selling overdone? Is it a buy, hold, or sell? I don't know.

How Will Moving to Australia Affect My Investment Choices?

There are two main ways that an international move of this sort should affect investment choices:

1. Differences in tax policy - I don't believe in arranging investments to minimize taxes. Rather one should choose investments that maximize net worth (for a given willingness to bear risk). Taxes will affect the net worth outcome but are only one factor. Nevertheless differences in tax policy are important.

2. Differences in accessible investments - For example, as an Australian resident I will again have access to Australian IPOs and adding new investments to Australian mutual funds. I am likely to do both to some degree.

In this post I'll discuss some more about the influences of tax policy on my future investment choices:

Margin interest I'll probably increase my margin borrowing in the long-run as Australia lets you deduct margin interest at your marginal rate whether your investments made any money that year or not. In the U.S. margin interest is directly deductible against investment income. If you didn't do well that year you have to carry the expense forward to following years. So I've been a bit more cautious on using margin. Still there are often cheaper ways of getting leverage than actually using a margin loan. These included levered (geared) mutual funds, options, and futures. So I won't be overdoing it.

U.S. Dividend Paying Stocks As a U.S. resident most dividends are taxed at the Federal rate of 15%. As an Australian resident I will need to pay a 30% with-holding tax in the U.S. I can claim this as a foreign tax credit in Australia but I'll need to pay tax at my marginal rate on the dividend. That is likely to be 30% at first but could be 40% or higher if my income rises. I'll pay lower or similar rates on long-term capital gains (no U.S. with-holding). So I am more likely to choose a low or non-dividend paying U.S. stock over one that pays a high yield.

Australian Stocks Stocks that pay dividends based on Australian sourced profits are highly tax advantaged in Australia. You receive a credit for the tax paid by the company. The company tax is 30%. So if your marginal rate is 30% you pay no tax on the dividend. If your rate is above 30% you pay the difference between the two rates. Things get more interesting when you lever a portfolio. The interest is effectively deducted against the dividends and you end up with excess credits that can offset other taxes. I'll be more likely to invest in higher yielding Australian stocks either directly or through Australian mutual funds. One interesting twist is that listed investment companies (the equivalent of closed end funds) can invest outside Australia but are deemed as earning Australian profits and the dividends that they issue have franking credits attached. The leading example is Platinum Capital, which I already invest in.

From an economic perspective there really isn't any difference between investing through the listed investment company or a mutual fund which passes all earnings through pre-tax. Actually, there are advantages to the mutual fund structure as long-term capital gains are taxed at a lower rate. The LIC pays 30% tax on its profit and then distributes a dividend with a credit but no other concessional tax rate. So the total tax bill to company and investor combined is higher! With leverage though, the LIC's tax credits can offset taxes on other income the investor earns.

However, it is structured though there is double taxation of foreign dividends but not of dividends from actual economic activity in Australia.

U.S. Mutual Funds I think I can still invest in these but all distributions are subject to U.S. with-holding. I should be able to claim that tax back in Australia. There are very complex rules governing investments in foreign mutual funds. This can include paying tax on unrealized gains at the top marginal rate. Generally if you hold less than $A50k in foreign mutual funds you are exempt from the rules. Most U.S. mutual funds now also appear to be exempt. But it's not clear to me yet whether you can pay the lower long-term CGT rate on capital gains distributions from the funds. Given this, I won't be making extra investments in U.S. mutual funds in the near future. Employer sponsored retirement funds are also exempt. I plan to keep my 403b with TIAA-CREF and my employer to avoid any issues.

Individual Retirement Accounts Australia taxes non-employer sponsored foreign retirement accounts as if they had no retirement status at all. Probably next year I will close my Roth IRA. I will need to pay a 30% with-holding tax (but no penalty) on the profits for doing this. But I should be able to claim this back in Australia while if I just transfer the fund units to a non-retirement account without redeeming them paying no CGT in Australia. Actually, it could make sense to cash out the 403b once I'm a non-resident too - I'd pay a 30% withholding tax that was reclaimable in Australia and then 15-20% capital gains in Australia. We could then maybe make an aftertax contribution to an Australian superannuation fund where earnings would be taxed at 15% in perpetuity or just keep it in a non-retirement account. This will need careful analysis. One thing I would need to understand is how distributions from a 403b would be taxed in Australia. I would think that selling the units should be subject to capital gains rather than ordinary income tax rates?

Futures Trading The U.S. taxes futures trading at a concessional rate, while Australia doesn't. But it is more flexible (24/5) and cheaper than trading ETFs so I probably won't be likely to reduce my futures trading.

So the bottom line is there is a mix of things where I'll be cautious until I understand them better and others where a small change is likely to happen over time. No dramatic moves.

Please let me know if I made a mistake in anything!

Buying vs. Renting Again

A very good article on buying vs. renting.

Rule #1: Don't Lose Money

Is a famous saying of Warren Buffett. Actually, it's OK to lose money as long as you don't lose too much. To illustrate this point I simulated the equity curve of my Interactive Brokers account assuming that on each losing trade I only lost half what I actually lost. So I would have made just as many bad trades but recognized my error in half the time. The gains are unchanged:



The current profits in the account would be more than triple what I have now. The average gain per contract traded is still "only" $35, but the win/loss $ ratio is now 1.64. The percentage of trades that win is unchanged at 61%. The t-statistic for trades in NQ is now the unbelievably significant value of 7.48 (currently a respectable 2.12) and the Sharpe ratio of weekly returns on the account is 4.24 (currently 1.42). Obviously lower levels of loss mitigation will lead to results somewhere in between these two extremes. This shows the immense importance of recognizing losing trades fast. The difficulty is that many trades that are down a little eventually win. So maybe this is unrealistic. So I repeated this exercise assuming all losses are the size they really were unless I lost more than $200 per contract. All those losses are truncated at $200 per contract:



The equity curve looks pretty similar. Now profits are around twice their actual level. The average gain per contract traded is $24 and the win/loss $ ratio is 1.08. The t-statistic for trades in NQ is 4.83 and the Sharpe ratio of weekly returns on the account is 3.73. I think this is a realistic goal. Holding onto more winners longer is obviously desirable too, but just cutting losses could be easier. In theory at least.

How Much Does it Cost to Move to Australia?

I just agreed with a moving company to go ahead for an August 3rd pickup of my stuff. The cost: $4175 including insurance against loss for door to door to Canberra. I've also spent $1146 on a one way plane ticket. There will be plenty more costs. Snork Maiden will have similar costs but the moving will be covered by her employer up till $A5000 and her plane fare too. They are also paying for two weeks of accommodation for us when we get there ($A525 a week).

Need to Try Something Different

Today was meant to be a big trading day with lots of news releases, the FOMC minutes, and Google earnings. But I didn't sleep last night and just closed out another trade at a loss. What I'm doing is not working both in practice and psychologically. There is also the stress caused by my whole visa and moving situation and undoubtedly the fact that I am no longer earning a salary is a major influence even though I have plenty of funds. The model is performing very badly this month. But I am doing even worse. At this point my Interactive Brokers account is down another 5% this week so far. Several of my investments have also been falling. The inexorable rise in the Australian Dollar makes my USD net worth look like it's growing, it doesn't look as good in AUD. I think I should take a break for the rest of this week from trading. Rest and get most of the rest of my packing completed. Then when I come back to trading just do day trades, using the model and intraday charts for guidance until I can rebuild my confidence. I can't handle holding these overnight trades at the moment. And do quite small trades to start with. The main thing is to rebuild my confidence in this next period, not lose money, rather than really try to make money. Well that's the plan.

The area circled on this chart is the track record so far in July:



After the initial loss I thought I was getting to grips with things. Until the last couple of days. At least the recent loss was trading according to the model, which turned out to be wrong, which is better than the cause of the initial loss when I was trading against the model. There are also plenty of losses in my Ameritrade account. So this isn't the complete picture.

Equity Curve Generator

Corey linked to this interesting Applet. It seems to have some built in assumption about the variance of the amount won or lost.

Plug in Win/loss ratio of 0.85 and Win per cent of 0.61 to see my performance so far trading NQ futures. If I stick to that I should do OK. This is especially cheering after another dumb trade this evening (in Australian futures). I knew my models weren't any good for trading the Aussie futures, but I still tried to do it instead of just doing a very short-term opportunistic trade based on very short-term technicals, which has worked so far. Within a minute I knew I was wrong, but hung on.... Can't seem to do anything right this month.

Economics of Homeownership

The naive thinking in this kind of article is just poor economics. It's the way most people think though. Yes it's true that the homebuyer's mortgage payment falls in real terms over time and eventually goes to zero while the renter's rent will rise over time. But:

1. Property taxes and maintenance will rise with inflation over time just like rent.

2. As you pay down the mortgage you tie up capital in the house. This capital has an opportunity cost in foregone investment returns. This implicit cost never goes away.

3. The value of the house may rise over time but so will the value of alternative investments.

The bottom line is that there aren't many free lunches out there... A renter does need to invest the cash that would have gone into principal payments in an investment that can in the future pay their rent. Such an investment may be risky but need not probably be very risky in order to keep up.

Home ownership is beneficial if someone enjoys the control of owning their own home (in terms of remodeling etc. and not dealing with a landlord) and/or finds it hard to be disciplined to save the money that would have gone into paying off the mortgage.

Umm

Big down day in the market and I still manage to lose money going long... what is wrong with me? First two trades went OK but the third lost more than the first two. Ameritrade's site is also down now. Old news. Moving guy came today to look at my stuff. At least that went OK. WIll have quote by Friday.

P.S. 7:34PM

I had the right idea - that the market would bounce back. I just gave up much too soon. After the official close there have been huge gyrations in the futures too. People are saying this is options expiry related. Anyway, I am now short NQ (NASDAQ 100) again @ 2059. The model is now officially short. Today it was long.

First Australian Futures Trade

Did my first actual trade of the Australian Share Price Index Futures. Using my Interactive Brokers account and trading on the Sydney Futures Exchange. Sold short at 6385 and closed at 6380. Five Australian Dollars commission each way. Each point is worth 25 Aussie Dollars. So a profit of $A115. Now that 115 dollars is sitting in my account separately from my US dollar balance of more than $17k. You can change it into US Dollars. If you lose they extend a loan to you in that currency. I guess they charge margin interest on that though they don't pay interest on balances less than $10k. I did do some simulated trades a while ago.

Also went short NQ at today's close. An earlier generation model gives a very powerful sell signal on the NASDAQ. There was a buy in October 2002 and nothing till this month using a monthly model. But it has no sell signal in any time frame for the S&P 500 which is weird. Subprime mortgage backed securities really plummeted today. The BBB grades have already fallen. Today was the turn of even AAA rated tranches. This could be a fundamental trigger for a selloff in the stockmarket. On the other hand treasury bonds rose strongly. Flight to quality?

Trying to Model the All Ordinaries and S&P 500

I tried applying the same model I am using for trading the NASDAQ 100 to the All Ordinaries and S&P 500. The results were very poor for the All Ordinaries - buy and hold performed better, while for the S&P 500 the model might add value but better results can be obtained by trading SPX using the trade directions generated by the NDX. I'm not surprised about the All Ordinaries as it is driven to such an extent by what happens in the US markets. Much of each day's move typically occurs overnight Australian time while the US market is open. The stochastic is rather noisy and hard to model. Recently, there has been much less noise... I think the S&P 500 is just not volatile enough relative to the NASDAQ. This is why I started trading the NASDAQ. In future work I might try modeling more than one index simultaneously. I expect there are gains to be had from that.

Housing Preferences

Been taking another look at Australian real estate sites for our desired location. We should be able to pay $A350-$A450 per week in rent ($US1300-$US1700 per month). These are for houses and apartments in what is known as Inner North Canberra. Snork Maiden and I currently pay $US750 and $US600 in rent each. Of course we could pay less if we either went for a smaller apartment or were prepared to live in a more remote suburb. But we want plenty of space - at least two bedrooms and preferably three, to allow each of us to have our own office space and we want to live close to Snork Maiden's work and to stores etc. so we don't need to use a car on a day to day basis if we don't want to. What I noticed was that rents on apartments in new buildings with perceived luxury features such as granite countertops and gyms/pools in the building etc. can go for rents that are higher than older but larger apartments and houses in equally good locations. So this is where we have room to be "frugal" in getting good value of money.

For example, take this one bedroom two year old apartment (In an ideal location IMO almost in the city center just across the street from where I used to live):



or this three bedroom house:



which is one block from a small local shopping center and within walking distance of Snork Maiden's work.

Which would you choose?

Buying a property of this type would cost around $A500k ($US425k) which assuming a real cost of carry of 8% would be about $US2800 per month. There is no mortgage interest deduction in Australia for owner-occupied housing but there isn't any capital gains tax on it either.

Professional Trader?

My first two weeks as a supposedly professional trader (as I'm no longer earning a salary) are not going well. I've lost $3800 or 16% on my trading accounts. If that rate of loss is maintained this would be my worst month in the last year. The dollar loss is less than the worst due to having less capital allocated to trading at present. In my futures account the weekly losses are $1751 and $38 or 9.3% and 0.2%. I guess that trend is slightly encouraging. The model is having a bad month. It's up 1.85% when NDX is up 5.07%. That was the cause of this week's performance. Last week was pure stupidity in trading against the model and then not getting out of the trade fast enough. Stress due to the visa status and job-quitting issues has made it hard to focus. I need from now on to be focused, systematic, and disciplined in my approach or not try to trade.

I Wasn't Paid

today, which is great news. So I am effectively already on unpaid leave from my job. I went to the local immigration office this morning. Luckily there was no wait and I got the form for a change of status to a B Visa. The officer though advised not to resign before receiving the new visa. This can take up to 45 days apparently and looks pretty bureaucratic. Given I am already on unpaid leave and BCIS are unlikely to ever check with all the other things they have go on seems I can just write a letter with a September termination date and keep going as I am. But I am still waiting for my lawyer's response to my findings this morning before going ahead.

Terrminating Green Card Application

Just faxed this letter to Sydney. Hope it does the trick. There is no point in pursuing a green card if I don't intend to stay in the US. For one thing I would have to pay US taxes on my worldwide income. Big hassle. And a big hassle getting completing the last few steps to get the visa.

We met with the immigration lawyer today. After much back and forth discussion she told me to go to the local immigration office tomorrow and ask a couple of questions. If the answers are positive I'll apply for a tourist/business visa and resign my job tomorrow. If the answers are not positive then she'll look at another option. She agreed that there are risks to trying the leaving and re-entering the country option. Snork Maiden headed back interstate to get the medical for her Australian visa done. Did some more bad trades (the model was short on a massive up day) and some more packing...

June Report

I finally have the data together in almost final form to be able to present to you my net worth and investment performance report for June. All figures are in US Dollars unless otherwise stated. This month saw stronger performance than last month, net worth again increased, and investment returns remained positive for the ninth month running.

Income and Expenditure



Expenditure was $3,622 which included a plane ticket to Australia. Current non-investment income consisted of $561 in reimbursements. I was paid two months salary in May already. 403b contributions totaled $3,021 due to delayed deposit of last month's doubled contributions. I stopped contributing to my Roth pending the move to Australia. Non-retirement investment returns were strong at $9698 but more than half of that came from the continuing increase in the Australian Dollar. Retirement investment returns came in at $3299, almost entirely due to the change in the exchange rate.

Net Worth Performance
Net worth rose by $US12,166 to $US445,261 and in Australian Dollars gained $A866 to $A524,391. Non-retirement accounts reached almost $US245k. Retirement accounts rose to $US200k.

Investment Performance
Investment return in US Dollars was 3.00% vs. a 0.26% loss in the MSCI (Gross) World Index, which I use as my overall benchmark and a 1.52% loss in the S&P 500 total return index. Non-retirement accounts gained 4.06%. Returns in Australian Dollars terms were 0.35% and 1.36% respectively.



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. Stock index trading (NQ/QQQQ and ES/SPY) produced nice results this month while long-term investments lost the most with the weakness in the market.

Progress on Trading Goal
Trading in my US accounts netted $2,691 - a 10.7% return on trading capital. The model gained 4.1% while the NDX rose 0.3%. 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 $55,233 with $61.5k contributed - so I still need to gain just over $6k. Since the beginning of the year the trading capital gained 82%, the NDX has gained 10% and the theoretical model gained 41%.

Asset Allocation
At the end of the month the portfolio had a beta of 0.49. Allocation was 34% in "passive alpha", 63% in "beta", 5% allocated to trading, 6% to industrial stocks, 6% to liquidity, and I was borrowing 14%. I've brought my Australian Dollar exposure down to 62.2% from 69.5% in January. The goal is to eventually reach 50%.

Powercut

We were going to spend yesterday on packing, dealing with Snork Maiden's visa issues and then maybe getting around to some work on her PhD dissertation due in mid-August. But around 11am there was a powercut and little of those things happened. After figuring out that it was restricted to at most our town and there was power on the other side of the river we decided to take the food from our fridge and have a barbeque in a park (we have electric everything in the apartment). This is the first time we've done that activity together. We did get to Starbucks later to do some "work" (Panera Bread was closed) and then shifted into entertainment mode (as if we weren't in it already). We really liked the movie "Once".

I checked the explanation the IRS sent about my tax refund. I made mistakes on my return and they made mistakes too in interpreting it. I have it figured out now.

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.