A More Realistic PPP for Australia

PPP means purchasing power parity. At least that's what it means in economics. There are the regular market based exchange rates between currencies and then there are theoretical exchange rates which if we could buy and sell foreign currency at those rates rather than the actual rates a given basket of goods would cost the same real amount of money in every country. Anyone with international experience knows that things are very expensive in Switzerland and very cheap in China or India. This means that the Swiss Franc, Yuan, and Rupee do not trade at PPP exchange rates to the US Dollar. If they did, things would cost the same amount of US Dollars in each of the three countries.

Researchers at the University of Pennsylvania pioneered the estimation of PPP exchange rates and further work has been done by the World Bank and others. This research involves collecting the prices of a large basket of goods and services. The Economist magazine pioneered a very simple alternative - recording the price of a Big Mac hamburger in each country. The difference between the price in USD at existing exchange rates and the price of a Big Mac in the US indcates whether a currency is over or undervalued. According to the February 1st edition of the index a big Mac costs $US3.22 in the US and $A3.45 in Australia. This implies a PPP exchange rate of 93 US cents per Australian Dollar. As the Australian Dollar is trading at 88 US cents, it is still undervalued. Though services are cheap in Australia, goods are generally more expensive. A more realistic indicator might be the price of a coffee at Starbucks. A grande coffee of the week costs $A2.75 and the "coffee of the day" cost $US1.75 last time I checked though it could be higher in expensive locations like NYC or airports. But this exchange rate is just 64 US cents, making the Aussie Dollar wildly overvalued. Other drinks on the Starbucks menu seem to have similar implied exchange rates.

It is difficult to see how the US dollar could "collapse" in the long-term in the face of these kind of facts. Australia is probably not expensive when compared to most northwest European countries. In the short-term currencies are more driven by interest rate differentials. In the long-term PPP eventually has some effect though richer economies' currencies tend to remain overvalued relative to poorer countries' currencies.

Two Weeks in Australia

We've been here more than two weeks now and the frenzied phase of getting a household set up is winding down. We returned the hired car for the second time today after snagging a couple of good deals in Fyshwick, the industrial suburb where Canberra's planners have dumped everything that would appear in a stripmall in a usual American or Australian city in one convoluted maze of streets removed from their "beautiful creation". Snork Maiden starts work tomorrow (today was Labour Day in this part of Australia) and Moom will be tying up some of the bureaucratic and technological loose ends after walking her over there.

We've spent a huge amount of money in this time as well as in the leadup to the move. Still, it is likely that our US Dollar net worth increased this month due to the steep rise in the Australian Dollar. Needless to say our net worth measured in Australian Dollars took a plunge.

Dot AU

We got into our apartment today, spent a huge amount of money on appliances, furniture, etc. and got the phone and internet running. The last was the only tricky part. A few phone calls to the ISP and Apple too. The ISP had no record of the account we opened on 21st September. Then we had to get the hardware and software aligned and then remember that my new e-mail/username ends in .com.au and not just .com.

Do You Have a Chequebook?

Met up with a second friend (T) last night. He brought with him all my mail - I've been using his address as my address in Australia until we get our own. When we move in Friday, the phone guy should come and give us a phone number as well as installing a modem (phone over the cable TV system). When we have a phone number it will make sense to again change all our addresses. Most important mail was our ATM/EFTPOS = debit cards as well as a pretty much useless cheque book. I asked T whether he had a chequebook. He said: "My father does". Today, we will kick back into high gear on our move again. On the agenda is hiring a car again, converting Snork Maiden's international driver's licence, getting cash for our first couple of weeks' rent and buying some supplies. The last couple of days we have been relaxing and looking around town. The picture is of the National Museum. It opened shortly before I moved away from here before. The building is far more impressive than the displays. Some interesting aboriginal and Torres Strait Islander stuff. The rest was not very coherent and too humanities, political correctness driven. Not much science. If you knew nothing about Australia you wouldn't have much idea afterwards. Not sure who the audience is supposed to be. The day before we visited the botanical gardens and had a great guided tour. All these attractions are free and within walking distance of where we are staying.

Follow Up

My friend sent me an e-mail today. He starts: "this isn't meant to put any more pressure on you".... "but we have a temporary open position in our department for a background researcher". Pay would be $A65k. After the election the position might become permanent and there could be a promotion. I'm not quite ready for this yet. I think the positive is that there are opportunities out there. But I'd like to learn more about what they are first and settle down a bit. My ideal position would be half time in the afternoon in the City Centre. Unlikely there is such a position of course.

Get a Job

Yesterday lunchtime, we met with one of my friends here at the "Labor Club". In the "old days" we used to hang out at the Labor Club a lot as it was on the edge of the university campus and had the cheapest beer in central Canberra. The old building has been demolished for new development and the club moved to a new location in the city centre. It is very slick compared to its previous incarnation. Very upmarket. Maybe that's representative of what has happened to the Labor Party too. The funny thing both myself, my friend, and another guy we used to hang out with there are all Liberal Party voters now (I always was). We don't like the social conservatism of John Howard but we support the generally free market approach of the party. We all have training and work in economics related areas. The absent friend likes Howard's foreign policy which we don't agree on.

These "social clubs" are very popular in Australia. They are generally organized along ethnic or sporting lines. A big source of revenue is from gambling machines - pokies - as well as bars and restaurants. The old Labor Club was dominated by a huge battery of pokies. In the new venue they are hidden away. You don't need to belong to the Labor Party, just pay $A2.20 to join the club.

Anyway, my friend wanted to encourage me to find a job. He said that government (he works for government) is short of people. He also sent me a job ad from my former university employer here. My brother also asked me when I was going to get a job. The answer is I am going to try trading for a while. Maybe up to a year. If it doesn't work out after that, I'll then get a job. Moving to Australia to follow my partner is a good reason for leaving my previous position. And likely I would be moving industry too. I've been working on academic research for 20 years since I was an undergrad (some of that work then was later published). I want to have a break and re-assess. I'm not going to completely leave the academic game in the coming year. I remain associate editor of an academic journal, will continue advising my students back in the US, and probably will submit a paper or two for publication. My dream is to be a "gentleman scholar" :) I long realized I wasn't going to be a big academic star. I do have a very good track record in publication and citation. But the key nowadays is fund-raising and I haven't had much success there. And I have a distaste for begging for money to do research when the research really doesn't need funding to succeed. So like Steven Wolfram I am going to try to find the money somewhere else.

Beginning to Relax

After the first week here we are beginning to be able to relax a little. We saw Parliament House, Floriade (and annual Spring flower festival in Canberra), the National Capital Exhibit (explains history of Canberra), and a stroll in Commonwealth Park along the shores of the lake with views to the Brindabella Mountains (picture of the Brindabellas above), and sat at an outdoor cafe in Garema Place. Canberra is cold in the shade and warm in the sun at this time of year.

I've also been testing a few trading modeling ideas. One result is that the correlation between the returns of the overnight session on the NDX and the intraday session is only 0.03. The overnight session has a correlation with the previous intraday session of -0.03. These are low correlations. Yet both have much higher correlations with my model's direction. Trading both sessions is a good diversification strategy. The overnight session (daytime in Oz) has half the volatility of the intraday session. A strategy that uses my model for market direction and trades twice a big a position overnight as intraday has a higher Sharpe Ratio (return/standard deviation essentially) than a strategy that always has the same size position. It has lower returns, but can be leveraged up more. I haven't yet computed Sharpe Ratios for the separate sessions individually. Probably something I should do. I also experimented with different stops. There is a risk-return tradeoff there too. A 1.25%-1.33% stop has maximum return for the NDX. A 1% stop strategy reduces the beta of the strategy to the index to zero (from about 0.15) but reduces returns (alpha is constant). Going to a 1.5% stop and above reduces alpha. In fact a no stops strategy in the last two years has a higher Sharpe Ratio than 1.5% or 2% stops. The key thing here is a setting a stop at a point where if the index reaches that point it tends to run away to the upside. The market often improves after going 1% in the wrong direction. It has much less of tendency to improve after going 1.25% in the wrong direction.

Optimism and Pessimism About Finances

It is easy to be optimistic about your financial situation when you are looking at projections of future finances. Well, as long as that is a positive picture. It's quite different when you aren't earning money and spending heavily in reality. At the moment I am pessimistic on our finances. Snork Maiden is naturally more optimistic than me, we balance each other. But that can lead to disagreement on what to do. This will apply also to retirement planning or trying to be a long-term investor in the face of market volatility. You may believe that in the long-term the stock market goes up, but it is hard to maintain that belief in the face of immediate contrary evidence.

Anyway, yesterday we did buy a solid wood table and six chairs for $A599 ($US500). We thought this was a good deal. So now we have something to sleep on and something to sit, eat, work at. We bought another couple of small electrical items and planned other purchases. We also looked around used car dealer lots. I really don't want to get a car until we get a clear picture of our ongoing finances but seems there are some decent deals to be had. Used Australian cars (Ford and GM Holden) are much cheaper than Japanese ones. We also looked in bicycle shops. I tried out a secondhand mountain bike that was a priced at $A95 and was a great deal. I didn't buy though.

All in we probably will end up spending around $A5000 (almost not worth converting these numbers to USD anymore given the strength of the AUD, but that is $US4350) on setting-up house expenditures. We will spend several hundreds on car hire, luckily we didn't have to pay rent at this furnished apartment for the two weeks we were here (would be $A1050). If you want to know how much it costs to move country then you need to add in the $US7-8K we spent on shipping, the $US2,400 on plane tickets, $1-2k on SM's visa expenses and more things I am sure. We should get back around $A5.5k(plane ticket + $A4k) from SM's employer. Either an "emergency fund" or a good credit line could handle such a move. But someone in significant debt couldn't do it.

Friday

We got all our utilities ordered, though to actually get phone/internet service a guy needs to come out to the unit. Likely we won't have a phone there until 1 October at the earliest. We did get a mobile phone (cellphone) while we were signing up but after getting it home were confused on how to set it up. We'll call the company on Monday. After the US, the shortness of business hours here is very frustrating. Most stores in the Fyshwick industrial area which we visited on Friday afternoon shut at 5pm. Much of the CBD does too and phone helplines tend to have very limited hours too. This is good for the work-life balance of the people who work at those places perhaps but not for the people needing the services. In the afternoon we visited lots of furniture stores and ended up buying a bed and getting delivery set up for after we get into the apartment. Something to sleep on is the #1 priority. We are now looking at giving back the hired car on Sunday and then getting it back on Thursday for our actual move in. Snork Maiden would like to buy a car but Moom is worried about getting tied to big expenses (insurance, maintenance etc.) until we get to see what our real life budget is likely like and how we are handling our lifestyle. We are paying extra rent to get an apartment within walkable or short bikeable distance of work, stores, and public transport. We've also been discussing which of our various accounts to use for what, the financially cheapest solution isn't always the one that feels best psychologically for Moom. We see this with a lot of PF Bloggers debating whether to save money in savings accounts or pay off credit cards. Here we have money in accounts in different countries in different currencies. Some are more immediately accessible than others. I feel we need a big emergency cash buffer in Australian Dollars (that can easily be transferred online) at the moment. On the other hand, the only way we can use that money at the moment is to take it out as cash from a teller in the bank (or use a check or set up an electronic transfer (BPAY) online). We haven't got debit cards yet. Our foreign (American) accounts and credit cards have fees involved (1-3%) in making purchases here and the US Dollar is also very weak, on the other hand we have cards we can use to spend that money in stores but transferring the money here will be pretty involved. We would need to transfer it to a brokerage account first and then do a wire here. I've never actually done the latter from those accounts.

I finally got 6 hours of sleep last night and am feeling a lot better.

Rented Apartment Moving On To Next Steps

We signed the lease on an apartment yesterday but can't move in till next Friday. They approved our application without even apparently contacting our references. The current occupant is the owner. This building has a "Mediterranean" style and maybe 20 or so apartments on 3 or so floors. On the other side of the street is a park. We can just see the mountains on either side of the Canberra Valley from our two balconies. And we're walkable distance from the CBD (downtown for Americans) and to Snork Maiden's office.

My cold got worse and am not sleeping much at all, so huge effort getting stuff done, but still it is happening. Probably today we will sign up for all utilities - ACTEW/AGL/TRANSACT covers electricity, water, gas, phone, and internet in one office/bundle. We don't need water but do need the others. Unlike the US, internet packages here come in different prices according to maximum allowed downloads. The problem is that upfront I have no idea how much download capacity we need. You can check how much capacity you are using so far in the month at any time and they also send warning e-mails. Over-running the package results in charges of 13 AU cents per MB! You can change the package for $A20. So I guess we'll get a midrange one and change it if neccessary.

Yesterday was our first day of browsing in the industrial area of Fyshwick. We got a basic idea of what is available in appliances but can't buy until we get into the unit and measure the space available to fit a fridge etc. We need to move out of this accommodation a week from Saturday so it is going to be a big time crunch. Therefore, our priority is that a bed can be delivered Friday or Saturday. Any other stuff is lower priority.

Last night I tried to log on to Interactive Brokers TraderWorkstation but couldn't. After discussion with one of their support people seems that the university, whose campus we're staying on has a firewall that blocks that application from reaching the IB servers.

Not Very Frugal

We looked at 4 apartments today ranging in rent from $A290 to $A450 per week. We only looked at the $A290 one to see what you could get for that much. Inside it was a lot nicer than on the outside but it was rather small. The first one was on the 8th floor with a very flimsy looking balcony parapet that I'd said looked scary before we even looked inside. Great location though. The last two were being shown by the same agent. $A400 and $A450. The latter nearer the city center and larger. Moom thought the $A400 one was more "homey" and well located for a bus to Snork Maiden's employment location. But SM thought it was too small and it didn't even have a bathtub. So we will look around the $A450 apartment's neighbourhood tomorrow and then likely file an application with the agency. I think we should act when we have a viable opportunity. If we pass this one it could be a while before we find a place without competition to rent it that we actually like. Now the challenge is going to be earning enough income to cover our future expenses. The opposite of the usual PF frugality. I am still sufferring from jetlag and last night I didn't sleep at all as this was compounded with worries about whether we would qualify for an apartment we actually want to rent due to our "odd finances" and about earning enough to cover everything. The agent at least thought we would be approved. Based on my observations, the rental market here is fairly inefficient compared with the US. First, almost all rentals are condos owned by individual landlords. There are no rental complexes. At least none I've ever seen. Second, most agents put minimal effort into marketing rentals. In the US it was the norm for agents to drive clients around several apartments in an hour or so. Here the most common approach is a "viewing" - a quarter hour slot when the apartment is open for viewing. Times of viewings are only known a couple of days in advance almost by word of mouth. Most are on Saturdays. However, three of the units we saw today were not viewings - we were the only people seeing them.

Househunting

Today we saw one apartment and one house. The apartment was in a brand new luxury building. Rent $A450 per week ($US1666 per month). It was nice with plenty of balconies etc. but maybe not my "cup of tea". Snork Maiden was impressed and seems that is the standard that other places will be judged by. Later we saw an old house in a suboptimal location. On the outside it looked nice. Inside the floor plan and decoration was chaotic, like a crazy maze. I always sketch out a floorplan of the places we visit to help me remember them. Halfway through, Snork Maiden said: "Don't bother". The rent was $A400 ($US1480 per month). In between we gathered plenty of information. We have several lined up tomorrow. Looking at one of the rental applications I am feeling a little scared about whether we will be accepted as I don't meet usual criteria for identification or income. How much rent will they allow us on SM's salary? I guess we'll soon find out. SM definitely prefers areas within walking distance of the city centre now. Before we came here, she told me she'd like to live further out in a house with a garden. But the reality is that even Canberra's centre is very quiet. This suits me, as long as we qualify for the rent on a place that is big enough for us.

Driving on the Wrong Side of the Road

We rented a car to help with our first week of looking for somewhere to live. Snork Maiden's first experience of driving on the lefthand side of the road. These signs above are pretty useful :) First we aimlessly drove around some quiet neighbourhoods getting the hang of things and then started serious exploring of the neighbourhoods we'd probably like to live in, so she could get a feel for what they are like. We also did some more shopping. By the end of the morning she was getting noticeably better at making the right moves without my reminders about what side of the road to drive on, which way to turn, and not to veer towards the curb. The windscreen wipers got a good workout as that switch is in the position where the indicator switch is on lefthand drive cars.

An Economist From Birth

Once I told my father's cousin-in-law (is there such a relationship?) in Israel that I liked to visit stores when I travel and see what the prices are like in different countries. She said: "You are an economist from the womb and from birth", which sounds a lot better in Hebrew: "Ata kalkalan mibeten umilayda!" Anyway we just made our first shopping trip in Australia. I did live here before but that was five years ago and the Australian Dollar has appreciated tremendously since then. Conclusion is that Americans will find prices reasonable here for groceries and meals but some things are especially expensive. We checked McDonalds for the "Big Mac Index". Actually the "Value Meal Index" - One combo was priced at $A5.65 which is $US4.75 and so cheaper than in the US. At the supermarket some particularly expensive items were:

Apples: $A6.99 per kg = $US2.67 per pound
Bananas: $A3.99 per kg = $US1.54 per pound

We didn't buy any, but salmon is $A26 per kg = $US9.93 per pound

As I remembered, wine isn't especially cheap, which is surprising. Only a few bottles below $A10 (=$US8.50). I guess the price is comparable to the US.

Now we are in the process of trying to rent a car.

Terra Australis Incognita

For me it is a very familiar country. But Snork Maiden hasn't been here before. Both of us have done this before - move to a country on perhaps a permanent basis that we have never visited - when each of us came to study in the US.

Anyway, we were met at the airport by the guy Snork Maiden will be working for and a cab driver they hired, loaded all our bags somehow or other into his car - the trunk - or should I say boot - was open and another two jammed between me and Snork Maiden on the back seat. We are now settling into our temporary apartment on the university campus. I stayed in the same complex 11 years ago when I first came to Canberra. Snork Maiden seems extremely happy with Canberra and Australia so far and is recording her first impressions. Maybe I'll have some guest blogs from her.

* Terra Australis Incognita - the unknown southern land - was what early mapmakers called the supposed great southern continent combining both Antarctica and Australia. Eventually, explorers found that there were in fact two much smaller southern continents.

New Beginning

Today is Rosh Hashana, the Jewish New Year. It is traditionally the day the world was created. I know this is far from a traditional way to celebrate this day, but today we are on our way to a new beginning too.

Moving to a new country is like a minor form of death and rebirth. You break so many of your attachments to your previous country, get rid of many possessions and then squeeze what is left down into what can come with you through the metal tube in the sky. Then you pop out in a new country and start rebuilding. There are few people who have moved country as much as I have. This will be my second time living in Australia after my third time living in the US. I've also lived in Britain (3 times?), where I was born, and Israel. Snork Maiden is also moving to a country she has never visited. Each of us has done that before when we first came to study in the US. I was very nervous right before that first move to the US in 1990, wondering whether I had done the right thing. And though we've spent several weeks together at a time we haven't lived together longer term. So that is a new beginning too.

The art work above by the artist Yaacov Agam is titled "Rosh Hashana".

Back To Square One

At least I can say I followed the model today more or less. But I still lost money. Looking back at the last 2 1/2 months I lost $3140 in July (in trading) and then gained $1028 in August. Then the first trading day of September I was down a couple of thousand. In the last week I clawed it back until I was down $160 or so for the week at the end of last week. But today and yesterday I gave a lot back and now am down $1133 for the month which takes me back to the end of July pretty much. I think I will now give trading a break until we arrive in Australia. Hopefully I learned something from all this meandering up and down in trading equity over this summer. On a positive note, this is my best trading year ever. You can see how bad the others were. Last year I made $5,958 in short term capital gains and futures profit and loss. This year I have made $11,628 so far or $13,447 using the method I use for my monthly reports.* In 2002-5 I lost money at trading. In previous years in Australia there were some years I made money and some I lost but none as good as this. The statistical analysis is still showing some significant edge despite my poor recent trading. So I'm determined to keep on going.


* Taxable capital gains includes Australian trades and all short-term gains on what I consider to be long-term investments (not including mutual fund distributions). This includes some "strategic trades" aimed at realizing tax losses. The monthly report method only includes my US accounts and measures account equity irrespective of realizing trades. It also includes trades in my Roth IRA and net interest on the accounts.

Snork Maiden Got Her Visa!

Everything is ready, only final preparations to go. Now I feel like the countdown for one of those moon or shuttle missions is on :)

Symbion Health - Healthscope Merger Scheme Defeated

This evening (US time still) was the shareholder meeting to approve, or as it turns out reject the Symbion Health-Healthscope merger scheme. The scheme was defeated because Primary Health voted the 20% of the company it had acquired against the deal. 99.2% of other shareholders voted in favor. But not enough other shareholders voted for the yes vote to pass the required 75% threshold. I'm glad though that my little parcel of 4000 shares wouldn't have made the difference. They needed another 1.1% of the total number of shares to be voted in favor. But right now the stock is only off about 1/2% and Healthscope and Primary are both up. Healthscope and Symbion will now see if there is another way to do a deal.

Snork Maiden made it OK to Washington. Hopefully, everything will go smoothly at the Embassy in the morning. This is what credit cards are for.

Last Minute Craziness

Snork Maiden got the e-mail this morning granting her Australia visa. But it said that the visa needs to be "evidenced" at the Australian Embassy. I phoned them and asked them what that means. They said: "she needs to send the passport in to get a label put in it". "But we're going to Australia on Thursday!" They told me she could do it in person at the Embassy in Washington between 9 and 11 am. So I booked her flight for this afternoon and a hotel for tonight and hopefully she'll get it all sorted out tomorrow morning. I was doing all this while her movers were taking her stuff out of her apartment. She only slept a couple of hours last night in a last minute rush to pack everything. Cost is around $1000 for this trip. It's good we don't live on the West Coast. The flight will be a direct 1 1/4 hours each way.

At my end things are a lot calmer. I'm having a big giveaway on Wednesday afternoon. I invited all the grad students in my former department to come take stuff. Wednesday night I'll be staying at a hotel a few blocks away. My landlord is very laid back. They just told me to leave the keys in the apartment when I'm done....

Weekly Trading Report and Goals

This isn't a regular feature of any sort, just an update on my trading one week into the month. The model is still short but I closed all short positions before the close today, worried about rumors of the Fed making a surprise interest rate cut on Monday morning based on the employment report that came out Friday morning that showed that employment in the US fell for the first time in four years. I doubt they will do this, but you never know what might happen. The 1998 scenario is still playing out perfectly just faster than things happened in that year. If we continue to follow the script there is only about a week to the second bottom of the market paralleling the second dip in October 1998. Unfortunately we are travelling to Australia on Thursday and Friday next week, so I am not sure how to play this. If we are still on the short side for Thursday I may keep my Ameritrade account in a hedged position (short enough SPY to hedge away market risk). This will reduce my overall portfolio beta from 0.5 to 0.4 or so and mitigate the effects of any severe drop in the market.

I ended the week down $167. I was down around $2000 on Tuesday after a stupid NQ trade. I posted that bear picture as I was feeling like a bear getting run over by bulls or maybe by a truck full of bulls. Again I was trading against the model. If I hadn't taken that trade I would be up $1100 on the week. If I'd taken the trade in the direction of the model...

My aim at the moment is very modest - earn $1500 a month from trading for the rest of the year. That would bring my total to $19000 or so which was my original goal for the year. It also means maintaining the same average pace for the rest of the year. My goal for next year - I know it is a bit early to be setting next year's goals - is to double this to $3,000 a month or $36,000 a year. That is only half way still to the real goal of making $75k per year from trading, replacing my previous salary. The $36k goal looks very doable if I reduce the number of very bad trades - all the majorly losing trades against the model for instance - and only slightly increase capital deployed. I'm also setting a goal of adding $100k in net worth next year. Here is a budget - in the same format as my monthly reports that shows how we achieve this:



I know it is silly to include everything down to the last cent but I can't be bothered to round this forecast from my projection spreadsheet.

Current other income is the sum of Snork Maiden's salary and tax payments. I will be paying taxes on investment and trading income and I've deducted these here. Half of the current investment income comes from trading and I'm expecting the Australian Dollar to rise to 87 cents by the end of 2008. The non-trading, non-forex rate of return implied is 10.5%, which does not seem unreasonable. We'll be earning $68k from salary and trading income after paying all taxes and spending $47k. Our savings rate from this active income is therefore 30%. I put this in for Enough Wealth :) Snork Maiden and her employer will be contributing $9000 a year to her superannuation fund. So, if everything goes to plan, it should be doable.

Another Great Bear Picture

Stock Market Participants' Returns are Lower than Index Returns

Just read a very interesting paper in the American Economic Review (here is an earlier version). The author demonstrates that the average stock market participant - we're not talking just individual investors here but all participants - earns less than the index return. This is because companies tend to issue more stock when stock prices are high and make more distributions - dividends and buybacks - when prices are low. For 1926-2002 on the NYSE/AMEX exchanges the buy and hold index return was 9.9% and the dollar weighted actual return experienced was 8.6%. On NASDAQ the respective numbers for 1973-2002 were 9.6% and 4.3%! That's the effect of all those dot.com stocks issued at the height of the 1990s boom. Similar results are found for other countries. In some the effect is larger and some smaller (e.g. Australia). This drag on performance isn't quite the same as that of brokerage and management fees (though those can be reduced too) because at least in theory :) you can avoid buying overpriced IPOs. Though if a stock you own is issuing more shares causing dilution I guess that is part of this effect too. And this is also before the fact that small investors tend to be less knowledgable (but maybe overconfident) and underperform large investors.

Bears in the Road

Poor bears.

I'm still suffering from bearish wishful thinking.

The Rich Have Capital Gains the Middle Class Capital Losses

This table which I derived from a spreadsheet I downloaded from the IRS website * contains stunning data. You have probably heard that most traders lose money in the stockmarket but maybe you didn't know how badly most people lose money and how strongly the propensity to lose is related to income. This data is for 2005 and I am guessing contains loss carryovers from the great 2000-2002 bear market. Looking at short-term capital gains, the only income groups that had a net gain in aggreagte were those earning more than $5 million dollars a year. All other income groups had an aggregate net loss. For the $75,000 to $100,000 bracket for example the returns reporting net losses reported losses around four times greater than the returns reporting net gains. It gets worse for lower income groups. For long-term capital gains all income groups earning more than $100,000 reported an aggregate net gain. Again the ratio of gains on tax returns with net gains to the losses on tax returns with net losses rises directly with income.

I excluded the number of returns from the table to make it more legible. The tendency is for the lower income losing returns to lose far more than the winning returns gained. Not for there to be much larger numbers of losers.

If I've interpreted this data incorrectly, let me know. I'm planning on doing some more posts based on this data.

* The New York Times hid the information about this data deep in this article.

August 2007 Report

All figures are in US Dollars unless otherwise stated. This month again saw negative investment performance in USD terms, though this was due to the sharp fall in the Australian Dollar and underlying performance was positive. Trading results were positive but volatile and spending was very high. At the end of the month I merged my finances with Snork Maiden for purposes of reporting net worth etc. The income and expenditure figures for this month are mine alone, but the final net worth figure is our joint figure. Net worth fell in US Dollar terms and rose in Australian Dollar terms post-merger. Both figures fell on a pre-merger basis.

Income and Expenditure



Expenditure was $7,959. More than half the figure was moving expenses and more than a quarter the cost of my new computer. Other expenses totalled only $1625. Yes, there is a retirement contribution ($901) there though I am no longer employed.

Non-retirement accounts lost $11,332 but would have lost only $2214 if it were not for the sharp decline in the Australian Dollar. Retirement accounts lost $4151 but would have gained $2693 if exchange rates had remained constant. Net worth declined by $23k on a pre-merger basis. At one point in the month it was down around $50k.

Net Worth Performance
Net worth fell by $US5755 to $US439,155 and in Australian Dollars gained $A20817 to $A538,576. Non-retirement accounts were at $US242k. Retirement accounts were close to $US197k.

Investment Performance
Investment return in US Dollars was -3.75% vs. a 0.23% loss in the MSCI (Gross) World Index, which I use as my overall benchmark and a 1.29% gain in the S&P 500 index. Non-retirement accounts lost 5.13%. Returns in Australian Dollars terms were 1.36% and -0.02% respectively. YTD I'm up 12.9% vs the MSCI with 8.3% and the SPX with 5.1%. My non-retirement accounts are up 17.4%. So I'm not too concerned about this month's performance, especially as we gained in Australian Dollars!

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 losses appear at the bottom of the table together with the sum of all other investment income and expenses - mainly net interest. The biggest positive contribution came from the CFS Conservative Fund which has a 30/70 equity/fixed income mix. Interactive Brokers began to rebound this month. Voltality (of the right sort) should help the stock. The investment in Hudson City Bankcorp also began to pay off as it is seen as a solid bank in a shaky environment. Something similar could be said about Berkshire Hathaway. Trades in IYR, Lehman, Toll Brothers, Beazer, and the S&P 500 made nice contributions. All three of my earnings plays (AAPL, GOOG, DELL) did not work out and neither did NDX trading this month. The quant fund meltdown resulted in a huge loss in the hedge fund of funds management company Everest, Brown and Babcock and to a lesser degree in their fund of funds EBI.AX. The latter is very undervalued at the moment.

Progress on Trading Goal.

Asset Allocation
At the end of the month the portfolio had a beta of 0.50. Allocation was 35% in "passive alpha", 63% in "beta", 4% allocated to trading, 5% to industrial stocks, 10% to liquidity, and we were borrowing 17%. My Australian Dollar exposure fell to 59% partly due to the fall in the Aussie and partly due to the merger which brought in $US17k in US Dollars. The merger also increased "liquidity". We will keep this very high level of cash through the move to Australia. We'll spend quite a lot more in the process and then reallocate our cash when things have settled down in October.

Retirement Account Beneficiaries

Here's a more serious post :) Following on from the "merger" I am updating the beneficiaries on my retirement accounts. This is known in Australia as a "binding death nomination". The U.S. term sounds a lot less gloomy! It is important to do this whenever there is a change in who you would like to receive your retirement money if you were to die before them. Otherwise your money will go to who you previously designated. The money so designated does not go through the same process as your other assets would in case of death (probate) instead it goes directly to who you specify regardless of any laws on who receives the assets of people who die without a will (intestate) or whatever else the will says. The US tax implications are complex but generally it is better to direct the money directly to who you want to receive it rather than to end up paying it to your estate (the default with no beneficiary designated). When the money is paid to an estate it loses its retirement account status - if paid to a specific beneficiary they may be able to retain it as an inherited retirement account.

In Australia there is no estate tax and following the new super legislation I am supposing that there is no income tax on a dependent receiving a death benefit, however large. There used to be income tax above the "reasonable benefit limit". But if the money was paid to the estate much more income tax might be due ("the benefit is taxed as an ordinary eligible termination payment ")? Anyway, it sounds like it is a good idea to designate a beneficiary. It's important to remember that the designation is only valid for three years, after which it must again be renewed (how annoying). At the moment my Australian designation would go to my estate as no-one qualified for the limited categories of beneficiaries allowed.

I changed my US beneficiaries online. The Australian fund (Colonial First State) needs a hard copy form signed in the presence of witnesses that will wait till we get to Australia.

Merger of Moomin Valley and Snorkdale

The merger of Moomin Valley and Snorkdale was announced today. In a stock for stock transaction, Moomin Valley, as the larger of the two enterprises, acquired all outstanding shares in Snorkdale in return for shares in Moomin Valley. Following the merger, the combined organization will move its headquarters to Australia to pursue new opportunities in supplying scientific and research services to the Australian government.

The merger is effective from the close of business on August, 31, 2007. Pre-merger the shareholder equity of Snorkdale was $17,672 and that of Moomin Valley $418,857. The tangible assets of Snorkdale consist of $19,140 in cash and deposits and $1468 in credit card debt. Moom, CEO of Moomin Valley, who will be CFO of the joint venture, was quoted as saying:

"The net financial assets of Snorkdale are obviously much lower than those of Moomin Valley, but we are pursuing this merger to combine the unique and significant human capital of Snorkdale with that of Moomin Valley. The intangible assets of the new organization will certainly be very extraordinary, dare I say peculiar :)"

Commenting on the financial status of Snorkdale, Moom further commented: "Snorkdale is a much younger organization, and as such has developed an amazing financial track record to date. At the equivalent stage of development (in 1994), Moomin Valley had net assets of around -$11k. I believe this bodes well for our combined financial future."

The combined enterprise, which is yet to be named (suggestions?) will be reporting its first accounts for the month of September and despite the move to Australia will still report in US Dollars in order to better inform the worldwide community of PF Bloggers. Moomin Valley's net worth for August, which will be reported soon, will reflect the merger though the August accounts in terms of expenditure and income will be pre-merger.

Dr Yoyo, CEO of Snorkdale, was unavailable for comment at our press deadline.

Congratulations to Snork Maiden a.k.a Dr Yoyo!

Snork Maiden a.k.a. Yoyo successfully defended her PhD dissertation on Friday. You can read all about it here.

Trading Report for August

I gained $1028 in trading in my US accounts. That's 5.6% of the capital allocated to trading. The month started well and then things got worse and worse. By last Friday I was down $1900 for the month. Then on Monday and Tuesday I gained $3400 to be up $1500. Since then the market rallied again and the gains have been gradually bleeding away. I'm sure you can imagine how demoralizing this chart would be:



Obviously, one reason I feel more comfortable trading on the short side is that I am long my investment portfolio. When I trade on the long side I am adding to my risk. When I trade on the short side I am hedging my risk. The latter feels more comfortable. Many of the more bullish people on the internet only invest or only have a small trading account. The former have to feel bullish and the latter don't have as much on the line when they go long. Many famous investors like Buffett or Soros usually sound bearish. A lot of people online who do both investing and trading also tend to sound bearish. I need to be able to separate the activities better in my mind. My trading has a beta of -0.61 to the NASDAQ 100 index. Objective evidence of bearishness. Of course I have an alpha of 5.0% per month or I would have lost money in the last year. The model I am trying to follow is market neutral.

The theoretical model gained an amazing 22.5% this month. The NASDAQ 100 index rose 2.9% in August.

On my annual goal of breaking even on my US trading accounts I am now at $55,972 and have contributed $64,000. US trading has gained $14,839 so far for the year. With this month's data my alpha relative to the model is now -2.1% per month, which is a big improvement. My beta is 0.79, which is lower, showing I am reducing my risk. I think it is good to reduce risk and focus on increasing alpha at the moment.

My overall investment return will be negative for the month in US Dollar terms but probably positive in Australian Dollar terms reported net worth will probably rise in Australian Dollar terms and fall in US Dollar terms. This is because of the steep fall in the Australian Dollar this month. At the worst point, my net worth was down around $US50,000 on last month. The quant fund meltdown also had a very negative effect on underlying returns this month. I'll post a full report in a few days time.

Even though my trading gains were rather meagre this month, the fact that I was in the black gives me a nice psychological boost. Two negative months in a row would have been rather depressing at this point.

New Computer, Google Analytics, Market Direction

The finance person in my former department told me yesterday they want my laptop back (not sure what they plan on doing with a Mac laptop in a PC oriented place - though I have one former colleague who is another big machead who maybe could use it - the forward cursor key doesn't work but otherwise it is a fairly new computer). So I went to buy a computer at the Apple Store at our huge regional mall last night. Cost $2159 including tax the base model MacBook Pro. You can buy one of those white plastic Mac "consumer" laptops with a smaller screen for not much more than half this price. But the MacBook is the most beautiful computer ever built I think and I was using one up till now. If I bought the cheaper model I would be annoyed every time looking at the thing that I didn't get the MacBook Pro :) Besides, for trading, the bigger the screen the better. Maybe I can deduct it as an investment expense in my Australian taxes next year?

I signed up for Google Analytics. This is the first time that I have any analytic capability on my website beyond the Clustermaps application. Expect some geeky reports coming up!

Obviously I was right to close all remaining shorts yesterday morning. The strength of the rally switched the model to long. This is my current Elliott-Wave scenario:



There is a lot more upside coming if this is correct.

Covered Real Estate Shorts

Kept the Beazer puts though. Thought about putting a hedge on the US portfolio (BRKB, FLIP, HCBK, IBKR, NCT, RICK, SAFT) for the rest of the day but the odds seem in favor of more rallying today so I didn't. Off to a couple of meetings with grad students - the first is trying to sort out one of my students committee going forward after I've left. There is not much enthusiasm to take her on. The other is a farewell lunch with grad students.

Golden Bear Day

Today was a great day for being a bear. However, I closed all my index shorts towards the end of the day. The market closed at the low of the day and near the low of the last five days and so there is a good chance of a bounce tomorrow though the model is still formally short. Also there is a very nice 5 waves down from Friday's top. I did keep my real estate related shorts (LEH, BZH, IYR, TOL). The Case-Shiller house price index reported today - all cities that they cover are now down year on year. The Fed released the minutes of the last FOMC meeting, which essentially said nothing much. There was also a consumer confidence number which just met expectations. Basically the technicals are pointing down and so the market is going down. I don't know if we are immediately heading to a new low or whether this is wave B of a B wave that started with the August 16th low or what. I'd think we need more time before retesting the August 16th low based on the weekly charts, McClellan Summation, and past experience. But you never know. There's also a chance that we won't retest it but I'd rate that pretty low.

Glad I'm not Teaching

Today is the first day of the semester at my former university. I'm glad I don't have to teach today. Maybe some day I'll come back to it. But I need a break from it and academia in general. I've been doing academic research for 20 years since I worked on the project when I was an undergrad that became my first published paper. I'm burnt out. I'll keep doing a little of this at my own pace. For example, right now I'm working on reviewing a paper for a journal. But I'm also rejecting a lot of review requests. That's nothing new for me as I was getting requests to review far more papers than I could.

Sold Ansell

I just sold my 500 shares of Ansell @$A12.59. The stock spiked up 4-5% today and I'd been wondering recently whether to hold onto it. Some people are bullish on the stock but recently it has been negatively affected by fluctuations in the price of latex and the stock price has been pretty volatile. The company has a consistent growth plan and has been acting on it. I first bought the stock six years ago when it was in the middle of restructuring as a value/turnaround play. The company was formerly known as Pacfic Dunlop and produced everything from tires to clothing. The new focus was on gloves - surgical and industrial and condoms. The investment has been very successful yielding a total profit of $A9300 over those six years. Looking at the chart the stock has gone through five major waves a typical Elliott Wave signature of a complete bull run. Today the price was hitting the recent highs from several weeks ago after a dip as low as $A10.85.

When you are using margin as I am you need to evaluate each investment against your margin loan rate, which is currently 9.25%. I'm not certain that this investment can return more than that going forward, I'm bearish in the near term on the general stock market. I've had a great run in the stock and decided it was time to say goodbye. Yes I'll have to pay long-term capital gains tax though that is quite a way off. And because I have bought the stock and sold some now and then, only $A1500 is liable for tax, while I save the interest on all $6250 that I sold. And I received the dividend as the stock just went ex-dividend a couple of days ago.

Trading Psychology

Every time I "blow up" I get to work on both my model and my psychology. I try to find tweaks to the model that would have given me a more definitive signal. For example the problem this time was that at the start of the Friday session the model was saying to be short at the close. But that was based simply on one of the stochastics I follow (slow(5,3)) crossing over (which is one of the sell rules when we are overbought - a state where the stochastics are above 80. But if the market rallies that signal is negated. And that is exactly what happened. So based on that indicator there was no sell on the close signal at the end of the day. But I have other indicators to signal when to sell in the overbought state. One of them is based on the forecast of the stochastic for the next day and its moving average. Direct forecasts of the stochastics are generally poor indicators - not a lot better than a random walk in the one step ahead forecast. But when there is very strong momentum in the market they have enough time to eventually give the correct forecast. Anyway, I tweaked this indicator and backtested it and this seems to work much better. It is saying sell on Friday's close. So overall I would say one could take a short position but cautiously.

But the other half of the story is that no indicator said I should go short before the market close on Friday! My impatience in wanting to be contrarian and bearish as soon as possible is what got me into a classic bear trap when what I saw as a head and shoulders formation over the last three trading days did not play out as expected. So the other half of the work that needs to be done is on my psychology. There are lots of good resources in print and online on trading psychology. These are some of the websites I know about:

The Other 2%
Afraid to Trade
Trader Feed - Brett Steenbarger's website.
Trading Psychology - Bruce Hong's website.

Keep Losing Money

I seem to have developed something like a death wish regarding my trading accounts. I know exactly what to do, and then do the exact opposite. And keep losing money. I don't understand it, but something is emotionally wrong.

I know that I feel most comfortable going against the trend, being outside the mainstream and the consensus. It might come from being an outsider in many ways growing up. But this is a very destructive tendency in trading. Especially, going against the model I created myself! If I could stop this delusion, I could make a lot of money at this.

Closed my Chase/Amazon Credit Card

I hadn't used it at all for a while and think a credit line on my remaining US credit card accounts of $10,500 is perfectly adequate. So why not just leave it open? Well they keep sending bills, many of which include convenience checks which I carefully cut up and throw away. I don't want those to get in the wrong hands. There was no option online to redirect mail to Australia. And what would I want that stuff for in Aus anyway? I might go through all my store cards I've collected and cancel those too. Once I got through the touchtone options it was all over at Chase in a minute. Very painless. I'll still have HSBC and Citibank credit cards.

New Trade

Shorted 100 LEH (Lehman) @ 58.99. Don't know how long I'll hold this one, will see how things develop.

PS 12:38PM

Another new one: Bought 2 Beazer $15 puts in my Roth IRA. I also reshorted IYR.

Craigslist Works - Fast

Snork Maiden advertised her car on Craigslist at 4pm this afternoon and by 6pm she had a buyer! And this is for a ten year old Subaru in a state saturated with Subarus. Agreed price $3300. I think she paid $6000 about three years ago from a dealer.

At my end, I've now worked out all my address changes and did a few already online. Will print the ones requiring hardcopy letters tomorrow and send out. A couple of financial institutions didn't allow a country outside the US on their online interfaces. TIAA-CREF specifically say to phone them about that. Chase credit cards don't mention it, though they do have a link to enter foreign phone numbers! I may close the Chase/Amazon card anyway. I'm not using it a the moment and don't need 3 US credit cards. Also I no longer care about my US FICO score. I plan to keep my HSBC and Citibank credit cards for the moment. Of course, the best address change form was on the website of the Association of American Geographers (it had better be!). It even had the Australian states on the menu together with US ones and Canadian provinces. I probably won't renew my membership though when it comes due...

Otherwise, more stupid trading today (against the model). I don't know how much pain I need to suffer until I learn my lesson.

Clearing Up

Today I did a final clear-up at my old office - erasing all my files off the computer, taking a bunch of files that were still there home, and handing in my keys. They already had the name of the visiting professor who will be teaching in my place on the door, but no sign of him. He got his PhD in our department a few years ago and has been teaching temporarily at various colleges and apparently doing some journalism too. I also helped a faculty member understand a bit about how to maintain our online working paper series which I was in charge of. He's not too computer savvy (in his 60s) but with some help I think he can get on top of it and learn some stuff about servers, using Acrobat, and editing webpages.

Today, exactly 17 years ago, I first came to the United States. Now I am in the process of leaving again (for the third time). I know it is a cliché, but it is amazing how time flies.

Real House Prices in Australia

Following up from yesterday's post I downloaded data on the Australian consumer price index and computed series for real (inflation adjusted) house price indices:



These series, like those I posted yesterday are for established houses only (not new houses). I used the specific consumer price indices for each city. The next graph shows the real year on year rates of change in hosue prices:



The average growth rates over the entire period for each of the cities is as follows:

Sydney 3.0%
Melbourne3.0%
Brisbane 4.0%
Adelaide 1.3%
Perth 5.0%
Hobart 2.7%
Canberra 2.3%

But as we can see readily from the charts the average rates for 1986 to 1999 were much lower than this:

Sydney 2.3%
Melbourne 0.5%
Brisbane 0.4%
Adelaide -2.7%
Perth 0.6%
Hobart -2.0%
Canberra -1.5%

Only the boom from the beginning of 2000 lifted the real rates of price change into the black for all cities. EnoughWealth's comment that the real rate of increase for Sydney is between 2-3% is accurate, but it's not true of other Australian cities if we assume that the 2000 boom was an anomaly. Based on the 1986-1999 period and what has been seen historically in US housing markets I'd bet that the true long term rate for other Australian cities is less than 1%. In the next few years I'd expect it to be even lower as prices revert to the mean trend. Of course I could be wrong and the other cities might instead continue to perform like Sydney. Theoretical this could happen if the supply of desirable locations is restricted in the future. When supply of land is restricted we should expect land prices to rise at the same rate as the rate of economic growth. This is what appears to be happening in Sydney. But desirable locations are not as restricted in the other capital cities.

Australian House Prices

I put together this chart of house prices for the six Australian State Capitals and Canberra from the official government data:



There is also data available for Darwin but it was too erratic and Darwin is so small that I dropped it. And I also computed the year over year rates of change:



Next, I'll try to come up with the real changes in house prices adjusted for inflation in the prices of other goods and services. That will give a better idea of what we might expect in the future. General inflation was much higher in the late 1980s than recently and so the average rate of house price appreciation over this period is misleading I think.

After the initial subsidence in prices around 1990 there was an "echo boom" that was more noticeable in some cities, particularly the smaller ones. And, again, recently the rate of price increases subsided or prices fell absolutely (in Sydney in particular) but now we are in a new period of house price inflation, especially outside of Sydney. The echo boom in Perth is much greater than the initial boom there. This is entirely related to the boom in the mining industry.

I've noticed that there is a four year cycle in the US housing market, just as there is in the US stock market. It seems this same four year cycle could be present in Australia, superimposed on the longer 16 year cycle. By this interpretation, we are now near the peak of a four year cycle and should see a reduction in the rate of increase in prices over the next couple of years. 2009-10 could be a good time to buy a house.

Quant Fund Meltdown Autopsy

The autopsy of the quant fund meltdown in the last weeks is beginning. In this article, Clifford Asness of AQR is quoted as saying: “We have a new risk factor in our world.” What is that factor? - some stocks are heavily owned by similar funds and others are heavily shorted by the same funds. This is an example of the "fallacy of composition" in economics. Something that works for one player at the microlevel does not neccessarily work for everyone at the macrolevel. For example, some traders have skill and are profitable but not all "traders" can profit (of course, if hedgers lose speculators could all win). Here one small fund could liquidate and exit the market profitably but not all can do this simultaneously.

TFS Capital has been looking at what factors were most responsible for the recent fall in value of quant long-short funds. They have put out a press release on their research. They identify short-covering rather than selling of long positions as the primary factor. And the stocks with the highest "short interest" - the most shorted saw the biggest moves. In other words it was a classic "short squeeze". I guess one could theorize that if a long-short fund liquidates all its positions it would be selling the long positions into relative strength as these are stocks that were identified as being good investments. Long term investors likely wouldn't panic and also sell these stocks due to the price falling a little. On the other hand covering its short positions would cause a scramble by other short-sellers to cover too. The good thing about identifying this factor is that the level of short interest in each stock is published monthly and could be included in a quantitative model. I guess one could try to track the holdings of similar hedge funds on the long side, but these are published quarterly with a lag so that data is less useful.

The bottom line is that many of these funds will rebound in value from this debacle and will have learnt from the experience and improved their strategies. In retrospect this "black swan" looks very predictable. But things are always easier in hindsight. For the individual investor it means that some of these funds are likely good values for investment now and also that if you are shorting stocks yourself monitor very closely any stocks which have high short interests.

Fed Cuts Discount Rate by 1/2 Percent

The Fed made a "surprise" cut in the discount rate - the rate it lends to banks at - of 1/2 percent this morning. The stock futures went crazy to the upside (NDX up 40 points). Interestingly, 10 and 30 year bonds futures fell sharply indicating expectations of higher future inflation. The Fed has not moved their main target the Federal Funds Rate. Yesterday, 90 day T-Bills were trading at yields in the mid 3% range. I think this is due to some money market funds having problems due to investing in short term corporate bonds that have fallen sharply in value or mortgage related instruments. Even those yields are rising today. Interesting that the Fed chose options expiry day to take this action...

Leaving Retirement Account with my Employer

I decided to leave my 403b account with my employer and invested in TIAA-CREF. Often I read about how this is a bad idea. But TIAA-CREF is a good (and cheap) fund manager. And foreign employer sponsored retirement accounts are exempt from Australian taxation as long as distributions are not taken. Distributions are subject to regular income tax just like a 401k or 403b is treated by the US IRS. A US IRA is (mostly) taxed just like a regular taxable account by the ATO (Australian Taxation Office).

The retirement specialist told me that retaining the account with them does not preclude rolling over the account at some later date to an IRA. Also they allow all of the distribution methods that TIAA-CREF facillitate. Not all employers do. And apparently there is no paperwork to complete.

Carry Trade Unwinding

The "carry trade" is where investors borrow in low interest currencies and invest in currencies with high interest rates, pocketing the spread. The main low interest rate currency has been the Japanese Yen and one of the main high interest currencies the Australian Dollar (AUD). In recent months the Australian Dollar soared higher and higher and the Yen mostly lower. In the current financial crisis the process is reversing and the Aussie has fallen around 10 US cents from its peak. It's down 3.5 US cents overnight, which is a massive move in a currency:



This is having a massive impact on my net worth measured in US Dollars as around 2/3 of my net assets are in AUD related investments. At this point in the month my rate of return on investment is -9.7% and net worth has fallen $US 47,000 from last month. In AUD terms, though, the return is -1.6% and net worth is off only $A 12,000. In USD terms this is the worst drawdown since the big bear market in the early part of this decade. But in Australian Dollar terms it is nothing remarkable. I lost more in June 2006 for example: -3.3%.

I am sufferring some big losses on investments, however, especially in the Everest Brown and Babcock Hedge Fund of Funds (EBI.AX) and the management company (EBB.AX). The latter has halved from its peak. I really should have sold some when it was so overvalued. I guess irrational exuberance and a dislike of paying taxes overtook me.



As for the fund of funds itself - it trades as a closed end fund on the Australian Stock Exchange and so the stock price can trade at a discount to NAV which is only announced monthly. Undoubtedly some of the hedge funds in the portfolio have suffered losses in the current market conditions. But I doubt this justifies the steep fall in price relative to the end of July net asset value. NAV was $A4.06 on July 31st. Yesterday, the fund traded as low as $A2.48 before ending up.

Many people claim they wish to emulate Warren Buffett and buy like crazy when prices are below intrinsic values. I have been doing some of that in recent weeks but have been wary that prices could fall lower. So I haven't been "buying like crazy". It's hard in practice to actually put such a plan into action when the time comes.

Wednesday Effect

The model was signalling to go long tomorrow. However, today is Wednesday which tends to be an up day in the markets. I was just searching for the link where I read about that statistically significant effect but I can't find it. Anyway in the last few years the market tends to go up on Wednesday. So I added a rule, that if the model is short on a Wednesday and Thursday is predicted to be long then I should go long on Wednesday. It improves the results. Just going long on Wednesday willy nilly, however, reduces returns. The reason for this is that on about half of all Wednesdays the model will be long anyway and that is a substantial part of the Wednesday effect. On the other half of Wednesday when the underlying model is short it is sometimes right and sometimes wrong. The times it tends to be wrong is when the signal is turning to the long side at the end of Wednesday anyway.

PS 4:25PM

The Wednesday effect obviously didn't work today though early in the day it looked like it was and I went long and made a profit. Then I went short, ditto. Then I went long near the close and the market kept falling. Then my internet connection went haywire :( I was stuck in the losing position and couldn't get out of it. When things were back to normal I was down more than 10 NQ points. There was a post-close bounce of sorts... deciding what to do now.

Buy: Symbion Health

The ACCC (Australian Competition Commission) approved the merger of Symbion Health (SYB.AX) and Healthscope (HSP.AX) today. Yet Symbion's share price is languishing below the implied value post takeover. Healthscope's price would have to fall considerably to make Symbion's current price a fair value. I guess people are concerned about just that and whether the whole deal will fall through in the current credit constrained environment. Another potentially disturbing factor is the stake that Primary (PRY.AX) has been building in Symbion. Anyway, I decided to do a bit of merger arbitrage and double my position in Symbion. At this point this is shaping up to be my worst month in terms of investment return since April 2005 when I suffered an 8.6% loss. That event got me to be more proactive again in investing in trading after letting things ride for a while. It was a great ride in the two years up to that point but this loss was a reminder that risk hadn't gone away. Apart from the generally negative direction of the markets I am being hit by the fall in the Australian Dollar and by the debacle in quantitative long-short fund strategies which is affecting several of my holdings directly or indirectly. In Australian Dollar terms this month is not particularly bad so far (but still negative).

Tourist Visa

I got my tourist visa or rather "visa waiver" and am back in the US in Snork Maiden's town. They asked me a lot of questions and I showed them my outbound itinerary to Australia, my resignation letter etc. I was the last one back on the bus. That's a relief. When I arrived some Egyptian guy was waiting and he was still waiting when I left. Next step in the moving plan is dealing with all the administrative stuff like changing addresses with financial institutions etc. I'm thinking now to exit my apartment at the end of August (I'll give them some excuse about visas) and fly back here and then on September 12 fly back to my hometown - I have a hotel booked for that night there anyway - and then on September 13th fly out to Australia. The flight would be cheaper than rent and utiltiies for another month. We can't reschedule the flight to leave from here (Snork Maiden town).

On another note, volatility in the stockmarket has now declined to a level where I am much more comfortable trading again. It hasn't been a matter of the daily moves but the intra-hour volatility or intra-5 minute volatility even. Now it is much easier to figure out where the market will be heading in the next few minutes. I am beginning to try more trades and make more money at them again.

Montreal

I'm in Montreal. I took the Greyhound Bus up from Burlington, VT this afternoon. I told the Canadian Immigration agent the whole story - how I was an H1B, quit my job, and was planning on re-entering the US tomorrow. She took my I94 (the little form that gets stuck in foreigners' passports when they enter the US) and let me in to Canada. So, so far, so good. This is actually my first blog post from outside the US. Haven't been out of the US or off the east coast for a while now. Since December 2005 actually. I usually travel more than this. The hotel I'm staying at is called: Hotel Montreal Espace Confort. It is just around the corner from the bus station on Rue St Denis, which is one of the nicer streets in Montreal. I'm not a big fan of Montreal - this is my fourth visit here. I get hung up on the language issue. If I speak English people often seem grumpy and annoyed and if I try to speak French they speak back in English. I can't win. I liked Quebec City more. France itself is a whole other story at least away from Paris. Most people I met there were happy I was trying to speak to them in French. Anyway, the hotel is very new, clean, modern design, and a good price in a good location. If you are happy to share a bathroom you can get it for $C50. I paid $C89 for a better room. There's an even more frugal option for this exercise - do the round trip by bus in one day - it's only 2 1/2 hours each way. But I didn't feel like doing this and thought it best to leave the country on the day I officially quit and then come back the next day in case there were any complications.

Submitted New Resignation Letter

I just now e-mailed in a new resignation letter with a resignation date of 13th August. I also e-mailed HR to ask if there is anything I need to do regarding my H1B. I want to keep it with TIAA-CREF for the moment. I booked a hotel in Canada for Monday night and will take the Greyhound bus up there. Tuesday, I will try to return to the US as a tourist. We will see what will happen.

Back to Visa Issues Again

The HR Department at my university won't approve my leave due to concern that immigration will take a "dim view" of it. The head of HR gave two options: Appoint me to a fixed term appointment from 1 July 2007 to 13 September 2007 or that I resign retroactively from 30 June and do the "B Visa", which practically means leaving the country and trying to re-enter again as a tourist. The problem with the first option is that I might need a new H1B. So now I've e-mailed the lawyer again on that. If it does need a new visa, it's not a practical route. Likely I will end up having to try to go to Montreal and back... At least now all the stuff I want to ship to Australia is on its way and Snork Maiden would "just" have to drive 150 miles each way to pick up the rest of my stuff if I got stuck outside the country. Everything else could be handled from there.

EBI Management Ponder a Buyback

I'm not the only one who thinks this investment is a bargain:

7 August 2007

ASX RELEASE

Everest Babcock & Brown Alternative Investment Trust (EBI)

EBI applies to ASIC for relief to conduct buy-back

Following the announcement of an unaudited net tangible asset backing per unit (NTA) of $4.06 as at 31 July 2007, the responsible entity of EBI announces that it is considering conducting an on-market buy-back of EBI units. It has today applied to ASIC for the appropriate relief.

As at close of 6 August 2007 the market price of an EBI unit was $3.18 being a 22% discount to the July NTA and EBI believes that a buy-back would be an efficient use of capital which would generate unitholder value.

Any buy-back is subject to ASX consultation, ASIC relief and potentially (depending on size) unitholder approval. At the time ASIC relief is obtained, the responsible entity of EBI will review the discount between the EBI unit price and its NTA and will determine its next course of action.

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The current undervaluation started with the botched capital raising in April. The capital raising raised the desired funds but resulted in a loss of net asset value to those who did not participate. This included me - I wasn't allowed to participate because I was a foreign investor. The loss of value as a result of the capital raising was very unfair. The stock price plummeted even further. More recently as hedge funds have changed from being the investment du jour to being very out of favor the discount to net tangible assets (NAV) has widened considerably.

Two More Buys

I bought one share of Berkshire Hathaway B (BRKB) @ $3615 and one hundred of Safety Insurance (SAFT) @ $33.26. I thought that Berkshire had another great quarterly report and it was time to double my position. SAFT is a stock I noticed a long time ago and occasionally checked in on but never bought. The negative for this stock is its position as a regulated insurer in the Massachusetts market is coming to an end. The positive is that the P/E is very low and the stock is trading at about book value. The big sell down in recent months has followed other financials and I expect is due to fears that the stated book value is not the true value of net assets when all assets are actually marked to market. It doesn't seem though that this firm's investment portfolio is signifcantly affected by these kind of issues.

Buying at a 28% Discount to NAV

Just bought another 2000 units of EBI - the listed Australian fund of hedge funds - at $A2.92. Today the manager announced that NAV for the end of July was $A4.06 per unit and the fund lost 0.25% in July. They also emphasized that they don't have any investments in mortgage funds. I guess investors might be concerned that the fund is structured using a total return swap. But otherwise this 28% discount to NAV seems a bit overdone.

House Prices and Interest Rates

Mortgage borrowing conditions are getting much tougher and interest rates, especially for large mortgages, seem to be going up. An interesting paper on Irish house prices uses a new approach to model the relation between interest rates and house prices. Most previous macro approaches (including my own published research on house prices - I worked as a real estate market analyst back in 1990) found a small effect for interest rates. They contrast this research with the "finance approach" which takes a very similar approach to my recent blog posts in comparing house prices to rents and alternative investments. The finance approach finds a strong effect for interest rates but can't model the effects of demographics etc. The new approach which combines elements of both finds that if interest rates had been 2% higher in Ireland than they were in fact, then house prices would have been 22% lower. A 25% cut in house prices in high end markets does not seem too extreme. It's already happened in some places like Florida.

Weekly Trading Report

In the first three days of this month the NDX is down 0.7% and my trading accounts down1.1%. The model is up 0.52% because it would have stopped out once the market fell 1.25% this afternoon. I'm losing money at a slower rate than last month, which I guess is a good thing :P

Looking forward to Monday a lot of people seem to expect the market to continue to fall or even crash 1987 style. From my modeling this seems rather unlikely. My best analog for Monday is January 29th this year where the stochastic fell but the market ended up slightly. This is my working E-Wave scenario, which is rather bullish for early next week:



i.e. there should be a "C wave" up following the B down, which would likely exceed the top of the "A wave". On Tuesday the Fed has a chance to say something. This could be a critical juncture for the market. Unfortunately I won't be able to trade at that time.

My Interactive Brokers account was down $603 or 3.53% for the week if I don't count the open position I had over last weekend. If I do count that position then I was up about $400 this week. For the week the market was down 1.9% and the model up 0.2%.

I updated an analysis of the performance in this account relative to the NDX using weekly data:



As you can see from the chart I have a negative beta to the market - actually a beta of -1.6. I'm too bearish - ideally I would have a zero beta as this is meant to be a market neutral strategy. My weekly alpha is 2.6% which is where the regression line crosses the y-axis. This alpha has a t-statistic of 1.59 which is significant in a one-tail test at 5.9%. On average I made 2.1% per week while the NDX went up 0.3% per week. Taking into account volatility the NDX had a Sharpe Ratio of 0.69 while the account had a Sharpe Ratio of 1.37. Here again is the data, which shows why I persist in the face of recent negative performance. I know I can outperform the market with a fairly low probability that my results are just random.

On the net worth front I am down $16,500 already this month. $11k of that is due to investment/trading performance. The rest is mostly the moving bill.

Trying too Hard to Make Money

I'm still trying too hard to make money and end up geting into lower probability trades with too large a position and losing. This week my account has been swinging up and down erratically as I make money and then try to make more and instead lose more. But I feel like things are getting under control. At least I know what I am doing wrong. Alternative investments continue to be hit hard. On a more positive note, the movers came this morning. We had planned on doing a "priority load". First load all my boxes of books and stuff and my custom made desk and then see if another two pieces of furniture would fit in the dimensions of the lift van (the huge crate my stuff will be packed into that will be placed inside the shipping container with other people's lift vans. The guys decided they would and so we are plus one futon on what I thought we'd be taking to Australia. Of course I gave them a tip!

Snork Maiden said that one of her friends was impressed by how easily I walked away from my past - for example quitting my job and giving up on the green card quest. It certainly wasn't easy but I try to rationally decide what is going to make me happiest in the long-run and I think the plan we are now embarking on has more good possible outcomes than not doing it. Maybe my training as an economist helps. Many people seem to do things because that is what everyone else is doing or it is what they have always done up till now. Of course, in many areas of life it makes sense to use "rules of thumb" to make routine decisions. But the big choices in life are worth deeper thought.

Is That a Hedge Fund? Ouch!

Anything that might be a hedge fund, mortgage fund, or have leverage is getting sold. In some cases this is somewhat rational. Case in point: Newcastle. This is a mortgage fund run by a hedge fund company. They do have sub-prime loans and lots of leverage. But subprime loans are a minority of what they have and they have sold off a lot of what they bought in CDOs (but retained some of the worst bits). The majority of their mortgages though are commercial mortgages. Cramer listed NCT in his "dirty dozen" and a Citigroup analyst downgraded the stock yesterday. It's dividend yield has gone up to 16%. Today, the company will report its second quarter earnings. Hopefully, they will give some forward guidance.

Less rational is the selling of the Everest Brown and Babcock fund of hedge funds listed in Australia. This stock is a closed end mutual fund invested in around 20 hedge funds via a total return swap that includes leverage that is equivalent to taking on a one to one margin loan for each dollar invested. The last reported net tangible assets was $A4.07 a share and last night the stock closed at $A3.05. The company has announced that the funds they invest in have no exposure to the subprime market. The yield is 22%.

Roadmap for the Correction

This is my best guess of how to interpret what has happened so far in the SPX and what might happen next, based on my idea that the correction needs to run for a while longer. Until the economy looks really much worse, though, it's hard to see a much steeper decline. I ripped this chart off of Macro Man's blog and then modified it.

PS

I did OK trading today up $300 or so. It all came in the final rally.