October 2007 Report

All figures are in US Dollars (USD) unless otherwise stated. This month saw a record gain in net worth in US Dollar terms, mainly due to the continuing rise in the Australian Dollar. Net worth also increased in Australian Dollars terms. Underlying investment performance was also strong - strong enough to result in investment gains in Australian Dollar terms despite the drag exerted by the appreciating currency. Trading results were negative but getting better.

Income and Expenditure



Expenditure was $5,940. We paid a year's car insurance and also depreciated the car immediately by $A1250. Dividing the insurance by twelve and using a typical month's implicit car costs (depreciation plus interest) we would have spent $US3,944. This calculation is useful for forecasting future expenses.

Non-investment earnings ($13,280) included a refund of relocation expenses from Snork Maiden's employer. She also got paid by her previous employer. We've told them to stop paying and we may need to pay this money back, but for the moment I am counting it as income. Snork Maiden's retirement contributions ($784) also started kicking in (in theory - we only got the application forms for her superannuation today!).

Non-retirement accounts gained $15,951 with $8317 coming from the continuing rise in the Australian Dollar. Retirement accounts gained $7,964 but would have gained only $948 if exchange rates had remained constant. In AUD terms non-retirement accounts gained and retirement accounts lost for the month.

Net Worth Performance
Net worth rose by $US31,322 to $US490,433 and in Australian Dollars rose $A10,517 to $A529,111. Non-retirement accounts were at $US271k. Retirement accounts were at $US219k.

Investment Performance
Investment return in US Dollars was 5.21% vs. a 3.92% gain in the MSCI (Gross) World Index, which I use as my overall benchmark and a 1.59% gain in the S&P 500 total return index. Non-retirement accounts gained 6.41%. Returns in Australian Dollars terms were 0.49% and 1.67% respectively. YTD we're up 27.3% (USD) vs the MSCI with 18.6% and the SPX with 11.0%. Our non-retirement accounts are up 34.3%.

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. The Google and Amazon trades were two of the negative contributors. Symbion also fell in the wake of ongoing shenanigans orchestrated by Primary Health, which is attempting to block the merger with Healthscope. Nice gains were seen in listed and unlisted funds and some individual stocks (e.g. Rick's Cabaret). Index trading only saw small gains.

Progress on Trading Goal

See the trading report.

Asset Allocation
At the end of the month the portfolio had an estimated beta of 0.51. Allocation was 31% in "passive alpha", 65% in "beta", 4% allocated to trading, 6% to industrial stocks, 5% to liquidity, 4% to other assets (including our car which is equal to 2.93% of net worth) and we were borrowing 15%. Our Australian Dollar exposure rose to 62% partly due to the rise in the Aussie.

October Trading Report

This month was again a poor one for trading and a good one for investing. It's somewhat arbitrary what I count as an investment and what I count as a trade. Obviously day trades aren't investments and stuff I hold for more than a year are probably investments rather than trades. In between is fairly murky - I don't count all trades that result in short term capital gains or losses in my trading numbers in these reports. I exclude all Australian trades to start with... Then, for example I sold half my IBKR this month. I held for less than a year obviously. So was that a trade? Or an investment I decided to reduce. Anyway, it isn't included in the numbers either. Nor is my much more successful investment in RICK, which has doubled my original investment at this point. Anything that I might hold for the long term isn't counted in the trading results.

US based trading lost $681 or 3.9% of trading capital. The model gained 2.9% and the market gained 7.1%. Most of the month the model struggled to make any headway and when the model is struggling I usually lose money (negative alpha with respect to the model). Also I didn't trade for the first week and a half of the month. But that was when the model was struggling more... I did better than September but still lost money and had a negative residual relative to the model - in other words I underperformed relative to the model even taking into account my usual negative alpha. From July to now I have had negative residuals even though I made money in August it was still less than typical given the model's performance in that month.

Major losses came from earnings related trades in GOOG (-$706) and AMZN (-$252). Without those non-model based trades I would have had a positive month. I feel that I am turning the corner - my behavior is getting better and I am interpreting my models better now that I am running both SPX and NDX models on a daily basis. I made 2.1% in my Interactive Brokers account after losing 8% in September, 4.4% in August, and 11.5% in July. Progress was very erratic though:



The total value of my Ameritrade and Interactive Brokers accounts were at $57,747 against the goal of $63k (total investment in these accounts since 1997) a gain of $2874 for the month. My goal for trading income for the year is $18,000. At the end of October I am at $12,776. It'll be hard to reach the goal in the final two months of the year, but you never know.

Optimally Using Multiple Indicators

I've tried estimating a single model for both the NDX and SPX. The rationale was that taking itno account the correlation between the indices would use more information and, therefore, provider better signals for trading both indices. The results though were disappointing. Almost all indicators were almost exactly the same as those generated by my current individual NDX and SPX models. One exception - my furthest forward forecast for the SPX was severely degraded. Of course, this model fits the data better than my individual models. But it generates equal or poorer indicators. This is the usual situation in technical analysis. A simple moving average is not a good statistical model. But might be useful as a technical indicator.

But I am finding that using the raw predictions of the SPX and NDX models together is already leading to better decisions (BTW the model is long with Thursday being the likely start of the next decline). The next research exercise is working out how to use the two model signals together in an optimal way. For example, is it best to only take trades when both models indicate the same direction? It is easy to backtest this in an Excel spreadsheet (All my backtesting is done in Excel - I don't use anything more fancy - specific trading software wouldn't be able to run my model anyway).

P.S. I ran the tests - only taking a trade when both models (SPX and NDX) give the same signal actually makes NDX trading performance worse. Something more subtle is needed...

Sold Half My IBKR

In after hours following the earnings release. I've long wanted to reduce my position for a decent price. I may buy back later if the price falls. The results look good. Otherwise, I managed to screw up what started as a good trading day with an ill-judged intraday futures long position that I didn't close fast enough. I missed the chance to get out with a 3 point gain and then things deteriorated rapidly. I'm not much good at these day trades without a model based plan and shouldn't try to do them. In the end I got out without severe damage but it's making it harder for me to come up with a positive month's trading for a change. I've made a bad trade in GOOG and now stupid ones like this and an AMZN trade which isn't working out. Now I see that after hours the futures went back to my entry price! The upside is I'm no longer afraid of the market. Even if I'm not trading very well at all.

Trading Update and Travel Finance

Fifteen minutes is a tricky thing. It caused me to miss Apple's spectacular post earnings rise yesterday. But I still captured some of the effect by being long QLD (levered NASDAQ 100 ETF). I'm now beginning to regularly update both NDX and SPX models. This provides more information and makes it easier to make decisions when just looking at one index leaves one rather uncertain about what to do. Amazon earnings have pushed the market down after hours. The model is long though. After a large positive gap opening up on Tuesday a negative gap for Wednesday is likely. A good trade idea is playing the gap closing.

I'm now going to resort to a withdrawal from my Australian margin loan as the quickest way to get the money for the car and then juggling things around afterwards. I am supposing these various cards have limits on foreign transaction size which is what is causing them to be rejected. Snork Maiden's cards were now rejected by the bank for making a cash advance too. Beware if you are planning on travelling overseas and using credit cards for big bills. Or get some super-platinum card that you know won't have a problem. Just make sure it is widely accepted (i.e. not Discover or something, even American Express is less widely accepted than Visa and Mastercard). Maybe travellers cheques still have a role to play?

P.S. Australian margin loan money is on its way to us - we should have it Friday and the car soon after.

Fifteen Minutes

Not of fame but of volatility. Something that I am gradually (and painfully) learning is it often pays to wait 15 minutes after news is announced or the market opens to make a trade. During those 15 minutes the market is often very volatile. Often the initial market direction after news is announced is opposite to its eventual direction: a so-called "headfake". In many cases, after fifteen minutes, market direction is much clearer. I'm thinking about Google earnings releases, FOMC announcements etc as volatility inducing events. Of course, if there isn't such a period of volatility you may miss the move. You miss out on making money, but at least you didn't lose any.

Similarly, I've recently discussed when to trade the market open. A well known strategy in the US markets is to trade a breakout from the range of the first 15 minutes of trading from the market open.

What do you think?

Choosing a Superannuation Asset Allocation

I checked out the "product disclosure statement" a.k.a. prospectus for Snork Maiden's superannuation fund a.k.a retirement account. One interesting point is that under the "superannuation choice legislation" you can opt out of the employer sponsored fund for a private provider but then instead of contributing 15.4% of pay (North Americans with employer "matches" will be envious of this number) the employer may only pay the legally required minimum of 9%. The employee can contribute between 2% and 10%. I am supposing the default is 2% - I will find out when I get to see a pay stub. We will stick with 2% for the moment. 17.4% is a very high rate of contribution as it is. Though when I worked in Australia before our required total employer-employee contribution was 21%!

On asset allocation I am thinking to allocate 90% to the default Trustee Choice and 10% to the "Sustainable Option". The sustainable option is managed by AMP and invests in Australian Shares selected according to various ethical and environmental considerations, both positive and negative. The Trustee Choice is allocated:

Australian Shares: 30%
International Shares(hedged) 22%
Long/Short Equities: 5%
Property: 15%
Cash: 2%
Bonds/Fixed Interest: 16%
Market Neutral Strategies: 10%

This is fairly typical of current endowment or pension fund allocations - 52% allocated to equities, and about 15% to each of hedge funds, bonds, and real estate. For those concerned about management fees they are 0.77% on the Trustee Choice plus an average 0.05% in performance fees and 0.51% for the Sustainable Option. No, there are no index fund options, but I expect a chunk of the Australian and International Share exposures are index tracking.

There is an "Aggressive Mix" that cuts out the bonds, slightly reduces the hedge funds, and increases straight equity exposure to 70%, but I prefer to go for more diversification.

Payment Difficulties

We got our Australian credit cards (credit limit $A3,000) and immediately put $A1,550 of the outstanding balance for the car onto it. We need the card to buy car insurance etc. so we can't max it out. I then attempted to put the remaining $A7,000 on two of Snork Maiden's US visa cards. They didn't work. Neither did my HSBC credit card. In other words, none of our US credit and debit cards apart from my Citibank Credit Card (which I made the initial $A200 deposit with) worked in this dealer's machines. There's nowhere near enough available credit on that one card though to complete the deal. So plan B is for Snork Maiden to go to the bank on Monday and attempt to get a cash advance on her HSBC debit card. If that doesn't work, Plan C is for me to do a wire transfer from one of my US brokerage accounts (free transfer but borrowing on a margin loan) to our bank here and then go to the branch of our bank in the dealer's neighbourhood and take out the remaining $A7,000 in cash and take it round the corner to them and get the car. I'll then set up an ACH transaction on my brokerage account to repay the loan from Snork Maiden's HSBC account. The wire transfer might take a little time to actually show up in our account here, which is why we are trying the cash advance first. However, the wire transfer approach is cheaper as it avoids the transaction fees on using credit or debit cards overseas. HSBC's debit card fee is though only 1% until November 5th when it rises to 3%.

Biggest Purchase Ever

After some more to-ing and fro-ing and a couple of car inspections we bought the red car. It was either that one or the next model up from one year newer. The mechanic said to get the red one. Snork Maiden bargained them down around $A2,500 and we had a deal. We just need to pay for it now. Of course most of our debit cards either had a low daily limit or turned out completely invalid on the dealer's terminal. This is common for foreign credit cards (in our case US cards) by the way. A good reason to have several cards when travelling overseas. So we went round the corner to the bank and withdrew $A8,000 in cash. The most cash I've ever handled for my/our biggest purchase ever. My biggest previous single purchase was my shipment of my stuff here to Australia ($US4,185). Snork Maiden did buy a car previously for $US6,000. We still need to piece the rest of the money together. So the dealer still has the car. When we got home (after letting down the other dealer) there was a letter from our bank about the Australian credit card we applied for. Alas the card itself was not yet there. Snork Maiden will receive her first pay on Monday. Now we could just go ahead and give them the numbers for our US credit cards. But Snork Maiden thinks we should save as much of the 3% fee on foreign transactions as we can. Which in this case does add up to quite a bit. And then there is the question of whether we should use Australian Dollars or US Dollars.

Pro Forma Earnings :(

I got messed up by this again today. I decided to play the Google earnings announcement. Up pops the EPS number on the Dow Jones newswire: $3.38 per share. OK, that's below the $3.78 analyst consensus. And the stock was falling. I never rely just on my own interpretation of any news numbers I also watch what the stock, or index, or bond price, or currency is doing. So I go short. But then GOOG reverses and moves up and I get out at a loss. Actually, GOOG beat the analyst consensus. $3.78 was the pro-forma number - I knew that - $3.38 was a GAAP number. Why don't the newswires actually publish the numbers that analysts are tracking? I've seen this time and again. Stocks swinging one way and another as traders seem to be confused about which number is which.

The only positive thing I can say is I lost less than I made last time I played Google earnings.

Couple of Trades

Did an NQ trade tonight (Wednesday morning in the US) that got back what I lost last Friday. This was an "overnight trade" though it involved more of our night time than the American night-time :) I bet on the opening gap closing following the release of the CPI and housing starts numbers at 8:30am US time. Eventually it worked, though rather better in the SP500 than the NASDAQ. Now I've gone long QLD, the levered NASDAQ 100 ETF. The model is long. Upcoming market moving news is the Federal Reserve's Beige Book at 2:00pm US time. It's looking like maybe I should have waited for the NASDAQ gap to close too!

More Test Driving

Today, Snork Maiden got to drive a Holden Commodore (employer's car), a Ford Taurus (1997 model), a Holden Vectra, and a Ford Falcon (2004 Futura model). The verdict: the Falcon is best. We have another deposit down. So now we've gone from one extreme to another sizewise. It's a bit over our initial budget too, but after the $A20,000 initial loss in value and so depreciation after this should not be a lot higher on a 2004 model than a 2002 or 2000 model. It is highly reccommended in online reviews. Main concern is the high fuel consumption of this 4.0L 6 cylinder car. It looks exactly like the one in the picture, even down to the colour. There aren't any palm trees on the lot though :)

Trading Strategies

I'm putting together a suite of several different trading strategies. Diversification is good as it leads to more stable returns. Here are some candidates:

1. Trading the "model": I'm planning on making very small trades initially. My approach will be to buy 100 QLD shares are hold them (QLD is a two times levered QQQQ fund). Then when I go short, short 1 NQ contract. This will mean my long and short exposures will be roughly half an NQ contract or 400 QQQQ shares. Very small trades. Over time I'll increase the trade size as my confidence increases. Then the QLD position will play the function of eliminating the model's slightly bearish stance. My own trading has typically had an even more overly bearish stance as measured by my beta to the market. Eliminating the negative beta raises the Sharpe Ratio of the model strategy. These trades are systematic technical analysis based trades.

2. "Overnight trades": These trades may be either in the model direction or against it. As the market is typically less volatile during the US overnight these trades would increase my exposure. Trades would be typically put on at the US market close (when we change our clocks here and that will then be 8am Canberra time) or around the Australian open and closed either soon after the European session opens in the Australian evening or around the US open depending on opportunities. These are discretionary, opportunistic trades based on news and technicals to some degree and some degree based on the model.

3. SPI: This is the Australian "Share Price Index". I'm currently doing simulated trades on the Interactive Brokers platform to get an idea of the best way to trade this. The Australian market tends to follow the US lead on the whole. Trades will probably be made near the market open here. The futures open 10 minutes before the actual market. But the market itself takes 10 minutes to open all stocks, with each stock opening in alphabetical order over those ten minutes. So there is a lot of uncertainty about market direction until 10:10am. When is the best time to place a trade? These trades are similar to the overnight trades in nature.

4. Closed-end funds: I have a couple of longer term trades of this type currently open. The idea is to buy a closed end fund when it is selling at particularly steep discount to the fund assets and sell when it is near or above intrinsic value. This is a strategy used by the TFS Market Neutral Fund. I am trading Australian funds. This is trading on fundamentals. Though I also have technical indicators here.

5. US Earnings: I've made money trading US stocks after hours after their earnings release. I'm planning on giving Google a shot this Friday morning our time. I bought a new battery for my alarm clock to wake up in time. During our summer this will be easier as the US market close will be at 8am. "Daytrading" the news.

Accounting for a Car

I've been thinking some more about how to account for a car in net worth and spending following my discussion with commenters on this post. From an economic perspective we shouldn't really account for a car differently just because it was financed in a different way. Buying a car with cash means losing a say 5% return on the cash (i.e. risk free return) while buying using a loan means paying out 10% in interest say. The 5% and 10% are the opportunity costs of buying a car using cash or a loan. The loan is more expensive. But there is still a cost to using cash. If we treat the 10% interest as spending we should treat the lost 5% interest as spending too. So I propose accounting for a cash-bought car in the following way:

1. Put the current value of the car on the net worth balance sheet.

2. Calculate spending on the car (not including the actual cash expenditures on maintenance, insurance, taxes, and petrol etc.) as the interest on the outstanding value + the depreciation in the value that month.

This will have the effect of adding the lost interest to our measure of investment rate of return for the month. From the point of view of measuring investment performance it will be as if we still have that cash but spend the interest and some of the capital each month on transport.

For a car bought with a loan, in theory, you should only include interest on the loan and depreciation in your measure of spending each month. Principal repayments are saving, not spending (the same goes for buying a house on a mortgage).

A leased car is easiest - you can just count your lease payments as spending (ignoring the downpayment).

What do you think?

The Secret of Technical Analysis

I understand technical analysis to be any method that attempts to predict market moves based on past price and volume action rather than fundamentals. This includes the use of charts and also more sophisticated modelling. Most finance academics believe that securities follow simple random walk paths and technical analysis cannot predict anything. Now, much technical analysis probably isn't much use, its practitioners haven't tested the trading results based on it in a statistically valid way. The reason many traders probably make money is the use of stops. They stop their losing trades before they lose too much and let the winners run. Trend following approaches are similar. You will hear this advice very often when you start to study trading. In this case entry points can be more or less random. The profit-making assymetry is all in the stops.

In the last few days I've been researching various ideas I've had for improving my trading models. So far I haven't found anything better than I'm currently using. Some of the models fit the data better but aren't any better for trading. In fact they are worse. This is the secret. Models that fit the data well and have high levels of statistical validity are often not much use for trading. The type of models that no self respecting econometrician would choose are actually the best for trading purposes. This a major reason why academic finance rejects technical analysis in my opinion. The models they optimize to the data aren't actually useful for trading. But it is non-optimal models that can actually generate profits.

Test Drive

We almost bought this car. As I write we have a 24 hour deposit on it. But after reviewing lots of websites we decided against it. We were offered $A15,000 + stamp duty for a February 2006 model that had driven 14,000km and was still under the manufacturer's warranty. 1.6l engine, automatic transmission and most of the amenities you expect on a modern car. The passenger seat seemed as roomy to Moom as a much larger car as we zoomed up ANZAC Parade and onto Limestone Avenue (that's where the Australian National War Memorial is at the foot of Mount Ainslie). Moom reckoned the driving position was just about acceptable to him too. But stumbling out of that position his trousers caught on some huge lever attached to the driver's seat and it snapped right off. "Don't worry: we'll get it fixed under warranty". But we began to wonder how good a car was where that could so easily happen. Earlier we test drove a Toyota Echo.

Here Moom's knees were almost knocking against the dashboard on the passenger side. The ride was harsh on the bumpy Australian road. It looks like we'll go for a much larger car a few years older. The downside of large cars is their high urban fuel consumption. Petrol costs nearly $US5 per US gallon here. We don't expect, though, to spend time stuck in traffic jams. A Holden Commodore gets about 21 mpg in urban driving and 34 mpg in highway driving. It has a 3.8l V6 engine. Maybe we don't need to go to that extreme. But Moom didn't seem to fit into a Mitsubishi Lancer for example.

I also testdrove the Australian medical system on Friday. The doctor took the documentation I brought from my previous doctor in the US and took all of it and what I said at face value. He checked nothing. Then he charged me $A60 for the visit on top of whatever Medicare (the government) gave him. He did prescribe me 400 days of medication for a condition I have and said to come back when it was near finished! Maybe he'd do some tests then...

So far this month we're spending roughly in line with Snork Maiden's salary (she hopefully will get paid this week). This means that whatever I can make will go towards increasing net worth or non everyday expenditures, which reduces the pressure to make winning trades, probably a good thing.

Made a Trade

And promptly lost. But everything wasn't bad about this trade. The model was short and I went short. I waited for the index to rise to what seemed like a high point first and I got out correctly too though there was a chance to get out with a $20 profit instead which I missed.

This was the first day that the model was indicating short following the sharp intraday reversal on Thursday (US time). But I felt that the market might instead rebound some. So I didn't go short early in the day and waited for an opportunity. This seemed to arrive following the US PPI release at 8:30AM New York time. Non-core inflation was unexpectedly high and bond futures dived as traders assumed the Fed would be more reluctant to cut interest rates (or even might raise them again). But core inflation came in close to expectations and a strong retail report was also released. Stocks reaction was to rise and this is where I went short on the assumption that the bond market was right. Also Oscar recommended shorting the ES (SP500 mini contract) around this price level (though I was trading NQ).

Initially the trade appeared to pay off, then things reversed, then just after the open the market pulled back again but I didn't get out and then it soared about 15 minutes in and I bailed. It kept rising from there, so I was right to get out.

I'll keep doing some research on new models and get ready for another trade...

P.S. The model was stopped out two days in a row. This did happen before in late July (that was when it was long and stopped out twice, this time it was long and then short and stopped out) and before that on 24-25th January. It didn't happen at all in 2006. The model is also down on the month to date and underperformed the market in September. Trading conditions are tough for my "style".

Can't Pull the Trigger

Or press the button, or whatever. I've been tracking the market closely for a few days now, keeping the model updated etc. Last night in the US (US daytime) the market suddenly reversed in the afternoon and switched the model to short mode. But I still dont seem to be able to place a trade. I've been looking at the SPI futures market (Australian Share Price Index) this morning and have seen a couple set ups (really I should have been short from the open) and I can't make the decision to do that either. The upside is I'm at least not making bad trades against the model. Last night we met with one of my friends again (funny that both times we met so far it rained and those were the only serious showers since we've been here). He said: "You had better do something big soon". He was kidding, but maybe not really.

Buying a Car?

Looks like some of the cash I discussed yesterday will go towards buying a car. We've been debating how much needs to be spent on a car. We don't need it for commuting at the moment as we live within walking distance of Snork Maiden's office. So it would be mostly used for shopping and "leisure" trips. Grocery shopping could be done more cost effectively using taxis if we don't want to carry the stuff as there is a taxi rank a block from the main food stores in the City and we live less than a kilometre from there anyway. But buying a car does seem to be inevitable. Given we don't need it for commuting, Moom thinks the car does not need to be extremely reliable. On the other hand it shouldn't be so decrepit that we are always spending money on fixing it. Snork Maiden would like a car that is newer than her previous one so we could keep it several years. What is the optimal amount of money to spend on a car? The car is likely to be something like a Toyota Corolla or Mitsubishi Lancer. The question is how old a model to buy. Then there is the question of whether to pay cash or finance it. I don't yet know what interest rates are available for buying used cars here in Aus.

I think I will treat a car as pure consumption and not include it in net worth. Financing may not make the most financial sense unless the rate is ultra-low but would make the dollar hit psychologically easier to take by spreading it out over time.

I don't think I mentioned that we don't have any phone service here for the last day and a half. Snork Maiden phoned the phone company (the ubiqitous TRANSACT) from work and they told her it was our phone, no problem with the line. So she brought her work phone home and it didn't work either... I'm less and less impressed with these guys.

Allocating Cash

We are about to receive a refund from Snork Maiden's employer of moving expenses. They've agreed to pay more than originally proposed - a total of more than $A8,000. We will now have about 8% of net worth in cash outside of trading accounts. This is while we are borrowing almost 16% of net worth on an Australian margin loan at just over 9% interest. We only have about 3.5% though in Australian Dollars cash. The options are to:

1. Put most of this refund into a high interest money market account (about 5.5% interest) as an even larger cash buffer than we currently have (about $A7,500 in there currently and dividends and mutual fund distributions pay into this account).

2. Use it to reduce our margin loan. This has a higher certain return. We can always withdraw money from this account later though this probably requires sending a fax.

3. Transfer it to the US, buying US Dollars on the assumption that they are undervalued. This is possibly a high return (4.5% interest plus or minus change in value of the US Dollar) but risky.

Maybe we should do a little of each?

I still haven't placed any trades since we moved here. I now have the model up and running. In September and so far in October the model has underperformed the market. It doesn't do well in strongly overbought rallies as it has a somewhat bearish bias. So this has been as good a time as any not to trade. The last couple of days the model has been long and correct and the potential gain was $US400 per NQ contract. I didn't trade because the NDX seems exceptionally overextended relative to Bollinger Bands (i.e. the index is beyond 2 standard deviations from a moving average of the index) and my older "autoregressive model" is indicating a turning point is near. The model was short last Friday and would have been stopped out. The index rose 2.1%. I am waiting for the first good short opportunity. I have been doing some work on my modelling - continuing my earlier attempts to see if I can get a better edge in placing overnight trades (our daytime). I've come up with some regularities but nothing that seems reliable enough for systematic trading. The overnight sessions are less volatile but less correlated with the model than the intraday sessions. The two - overnight and intraday - have little correlation with each other. Perhaps it is best just to blindly place trust in my model and follow its signals. If I can actually do that.

I Didn't Hear it on the Grapevine

This morning I couldn't access the internet at all. After playing with all kinds of hardware and software settings for maybe an hour I phoned our ISP's technical support line. Our ISP is called "Grapevine". Eventually I get through to a technical support person who quickly comes up with the problem - our account was suspended because they didn't have a direct debit order with a signature lodged. This was somewhat unsurprising in retrospect. We first signed up for ISP service at their "storefront" on 21 September. When we moved into our apartment on 28 September they had no record of this transaction at all. So I signed up over the phone all over again. I provided my bank account details but wasn't told I needed a signature. So I went into the storefront again this morning. Oops, I didn't have my bank account number with me - I assumed they had it and all they needed was a signature. So I had to go home again.... and come back again. I also paid this month's payment in the store and was told that the service would be turned on again right away. When I was finally back home again, I tried it after about 3 hours. Nothing. Another phonecall, this time to billing. Another long wait on the line being bombarded with messages about water conservation (Grapevine is owned by ACTEW/AGL/TRANSACT which stands for ACT-Electric-Water-Australian Gaslight.... covers all utilities). No record of me having paid this morning. Anyway, she agreed to unsuspend our account till 26th October. I'm now going to pay our rent online before anything else goes wrong!

After being here a few weeks and seeing the country again in a fresh light, Australia seems somewhere between the United States and somewhere like Sweden. Superficially it looks a lot like America but with sharper average design standards. But then there is a feeling of a bit more scarcity than one is used to in superabundant North America. Many reasonable prices, but many outrageous ones. Recent noted high prices - a busride costs $A3 - it was $US1 in my former city. Postage to the US - $A1.95 vs. $US0.80. Rather restrictive shopping hours for most stores. The typical size of a coffee. Of course, ACT planning is reminiscent of Sweden. The US is often criticized as the country of unhealthy eating. But here, organic food is decidedly unmainstream - very expensive and only sold in very small specialist outlets. Fast food restaurants do not offer diet drinks. In fact I haven't seen a diet drink. I guess they must exist here.

On the investing front, I see that Symbion and Healthscope are both halted, so they must be about to announce a new transaction to supercede the previous one. Word is that this will involve selling Symbion assets for Healthscope shares which will then be distributed to Symbion's shareholders after which Symbion would presumably be wound up. Such a transaction would not require the approval of a 75% super-majority of shareholders. I'm thinking of reducing my position in Allco Equity Partners. Following the approval of the IBA-iSOFT merger which AEP will fund the company will have little cash remaining. Therefore, it is no longer the simple "Graham style" play of buying shares for less than the net cash per share, which was my original reason for buying in.

September 2007 Report

All figures are in US Dollars (USD) unless otherwise stated. This month saw very positive investment performance in USD terms, due to the sharp rise in the Australian Dollar (AUD). Underlying performance was also positive. Trading results were negative - I only traded during the beginning of the month before our move. Spending, not surprisingly, was at record levels. Net worth rose in USD terms but fell in AUD terms

Income and Expenditure



Expenditure was $11,812. My previous highest monthly expenditure was $10,174 in August 2002 when I moved from Australia to the US. We can attribute $9,582 to move related expenditure. We also paid $A744 ($US659) in rent for part of the month. Taking out the move-related spending and adjusting the rent to a full month's rent we would have spent $US3,263. For comparison this is roughly double my individual expenditure last month after removing moving-related expenditures and the cost of the laptop I bought that month. So spending is actually very much under control at this point. Snork Maiden earned a total of $2,336 from her previous job, her moving sale etc.

Non-retirement accounts gained $16,520 but would have gained only $1,943 if it were not for the sharp rise in the Australian Dollar. Retirement accounts gained $13,273 but would have gained only $1,474 if exchange rates had remained constant. These gains are both at record levels. In AUD terms both account types lost money for the month.

Net Worth Performance
Net worth rose by $US20,008 to $US458,963 and in Australian Dollars fell $A20,020 to $A518,309. Non-retirement accounts were at $US249k. Retirement accounts were at $US210k.

Investment Performance
Investment return in US Dollars was 6.79% vs. a 5.40% gain in the MSCI (Gross) World Index, which I use as my overall benchmark and a 3.74% gain in the S&P 500 index. Non-retirement accounts gained 6.83%. Returns in Australian Dollars terms were -1.74% and -1.68% respectively. YTD I'm up 20.9% (USD) vs the MSCI with 14.1% and the SPX with 9.3%. My non-retirement accounts are up 26.0%.

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. Mutual funds made nice positive contributions as did a few US individual stocks. Australian listed funds and stock indices generally lost money.

Progress on Trading Goal

US based trading lost $1083 or 5.9% of trading capital. The model and the market both gained but I don't have the exact figures at the moment. My Ameritrade and Interactive Brokers accounts were at $55,873, down $100 on the month, against the goal of $64k. So negative performance on my goals in this area.

Asset Allocation
At the end of the month the portfolio had a beta of 0.54. Allocation was 35% in "passive alpha", 65% in "beta", 4% allocated to trading, 6% to industrial stocks, 8% to liquidity, and we were borrowing 18%. Our Australian Dollar exposure rose to 61% partly due to the rise in the Aussie. The move reduced "liquidity". We will reassess this level of liquidity when things have settled down some more from the move to Australia.

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.