New Low

I traded the NQ futures this morning and lost more money. Again, going long when the model is short and the market already down a lot, hoping to catch a falling knife and then doubling up to two contracts from one when I was already down. All the mistakes I could make, I made. Now reached a new low in trading profit and loss for the last six months.

On the other hand, yesterday morning I made simulated trades in the Australian (SPI) and Nikkei futures. I made three SPI trades which were all winners for a total of an imaginary $A800 or so. In the Nikkei I made ¥5,500. That's more than I lost for real this morning. Why do I trade better with imaginary money than real money? It seems a lot of people have exactly this problem. I'm going to do more simulated trading later today. I think this is the best thing to do at the moment.

Yesterday lunchtime I met a guy who works with Snork Maiden. He does stuff with neural networks but hasn't applied it to time series. He is also interested in trading and has read quite a bit but hasn't actually even opened a brokerage account yet. I guess it was mostly me telling him how tough it is and what does or doesn't work. Later I met a PhD student at ANU who wanted to quiz me on one of my research areas and I also worked a bit on a paper I am revising with a former student in the US. More people here are finding out that I've returned to Canberra. I bumped into one guy who was riding his bike on campus. He used to work as a non-faculty staff member in my department. In the meantime he did a PhD and is now a lecturer (assistant professor) at ANU. We haven't met in five years but he recognized me stopped his bike and we had a chat. Another guy sent me some stuff about jobs here. I'm not willing to give up on the trading dream yet as I have barely gotten started on trying to trade Australian and Japanese markets during the day here. If that doesn't work for me either then maybe I'll have to admit defeat.

My emotions now are different than they were after other recent losses. Then typical I couldn't bear to trade for a while and felt very upset and despairing. Now I fee angry with myself and frustrated. It would have been good not to go right back in and trade today. I guess "revenge trading" is what screwed me up today.

Short the Nikkei

I've now estimated my model for the Nikkei and it is pretty successful in backtests. The model says to look for short-trades in the Nikkei on Monday. I probably won't start trading it though till Tuesday due to a couple of meetings I have during the day on Monday. Perhaps more on one of those meetings with someone interested in trading and modeling after we meet. A lot is happening this week actually. Should be interesting. I'll keep you informed.

P.S. The US models would suggest to switch to long Monday except that even if the indices were unchanged they would fall deeply into the oversold zone, which says to stay short. So only a very strong rally on Monday would actually show to get long. There is a reasonable likelihood of a positive gap up at the open Monday, that might be what you need to get long.

Back to Square One Again

I shouldn't boast on this blog about making money, because I tend to go ahead and lose it immediately. The chart above shows the profit and loss on my Interactive Brokers account from 14th November till today. On 13th November I suffered a major loss (of $1750) and since then I have been struggling to rebuild my account. I've now been through three cycles of consistently making money only to blow it all up again. The positive aspect is I'm only blowing up profits I made since that day and so in some sense the situation is stabilizing. Three losing trades contributed to last night's blow-up - the first was excusable though silly, the next two were just plain dumb - going long on a down day in the market and holding on hoping for a turnaround. I could have gotten out of these two trades with a decent profit, but let them turn into losers. One lesson I think is not to daytrade overnight. Most of these losses recently have occurred late into the night. One of my rules is not to trade in the middle of the US trading day as I find the direction of the market very unclear. I need to stick to that and currently focus on trading the last two hours of US trade and then Australia and probably Japan. In the winter here (northern summer) I'd trade the US open and Australia/Japan. Some day I'd get around to trading my model with trades over a few days. But right now, just getting any kind of profitability is the focus.

Japanese Futures

During the 24 hour global trading day stock indices appear to be most influenced by the largest market currently open as well as catching up on what the US markets did the previous day. The day starts in New Zealand, a tiny market, followed by Australia - either the second or third largest Asian market depending on who you believe and an hour later Japan comes online with Korea, followed later by Shanghai, Hong Kong etc. At 7pm Eastern Australian time (3am on the US East Coast) the major European markets including London, the largest, open. US stock index futures tend to track what is happening in the largest open stock market. This is particularly clear once the London market opens. Volume on US future usually increases substantially and often volatility does too as the futures begin to track what is happening in London. The same is also true of the Australian stock index futures to some degree - once Japan opens the Japanese market has a strong influence on Australia. At the moment I am trading US futures during the time that the London stock market is open in our evening here in Australia. I can get up to date data on the FTSE index from Yahoo's website. Unfortunately though Nikkei data is delayed by 20 minutes and this is one more factor making trading Australian futures difficult (other reasons are the large size of the contract, the often think market, the staggered index open etc.). Interactive Brokers can provide data from the Osaka Futures exchange for 1200 Yen a month (USD 10.70).

You can then also trade the Japanese futures. So I am thinking of trying this out, maybe next week. It could help me trade the Australian futures but also I might actually trade in Japan. I will have to see what the market there looks like before committing to the idea, with some paper trades first. There are two contract sizes available:

Full size contract:
Value = ¥1000*Nikkei (i.e. USD135k per contract)
Initial margin = ¥750k (i.e. USD6,700)
Tick size = 10 points
Commission = ¥500

Mini contract:
Value = ¥100*Nikkei (i.e. USD13,500 per contract)
Initial margin = ¥75k (i.e. USD670)
Tick size = 5 points
Commission = ¥150

The large contract is about the same size as an Australian futures contract and the minimum tick size is equivalent to one S&P futures (ES) point. That means that you are down the equivalent of 1 point immediately (plus commission) when placing a trade. Neither of those are good for me. The small contract though is about the third of the size of a NASDAQ futures (NQ) contract and the tick is equivalent to half an ES point. ES and NQ futures tick size is 1/4 point, Australian futures tick size is one point which is the equivalent to the ES 1/4 point. The mini contract might be an attractive day trading instrument. And I could really "day-trade" as opposed to "night-trade", which is what I am doing at the moment.

BTW, the CME-Globex exchange offers Nikkei futures, but they only trade when the Japanese stock market is closed!

P.S. After a bad start to the month I am now about back to breakeven on my Interactive Brokers account. Though right this minute I'm in an ES trade that is not going well :(

P.P.S. I signed up for the data and trading permissions and already have it! Very cool. There are plenty of contracts being traded and the discrepancy between the mini and full-size spread is real - how weird.

Volatility

I'm now turning to looking at volatility of stock prices and seeing if it could be a useful addition to my trading model. More sophisticated investors and traders and familiar with measures of stock price volatility derived from the implicit volatility expressed in options prices according to the Black-Scholes options pricing model. The VIX and VXN are the best known of these and measure the volatility implied by options on the S&P 500 and NASDAQ 100 indices. But one can also measure volatility directly from stock prices. The most straightforward would be a standard deviation of changes in the index. The problem with this and the reason why the options based indicators are popular is there will be a different result depending on how many observations are used to compute the standard deviation. This indicator also doesn't address intraday volatility. A measure of intraday volatility is Average True Range. True range measures the range of prices from previous close to close (and therefore includes any gaps in the range). ATR is simply an exponential moving average of this. A problem with this indicator is it is dependent on the level of prices. Of course we can simply divide true range by average price over the day to get a unit free measure of the daily range as a percent of price. The chart tracks a five day exponential moving average of this latter indicator.

The late 1990s and early 2000s were far more volatile than today with volatility peaking with an average of a 9% daily price range over the a five day period. As the post 2002 bull market took off volatility declined to very low levels and has now begun to re-emerge but not to the extent seen several years ago.

Why might volatility be interesting?

1. While mainstream finance theory claims that it is not possible to forecast stock prices (this is true though direction of stock prices may be forecastable) it is believed to be possible to forecast volatility in the short term. Typically ARCH (autoregressive conditional heteroskedasticity) time series econometric models are used. Being able to forecast volatility is a big advantage obviously in option trading and a reason I mostly avoid option trading except using deep in the money options as proxies for margined stock or futures. Volatility is not a component of futures prices which makes trading them a lot easier.

2. Stock prices are far more volatile when declining than rising. Market tops are more commonly characterised by narrow trading ranges that finally fail than by volatile "blow-offs". Market bottoms typically show violent intra- and inter-day fluctuations. If one forecast rising volatility - declining prices might also be associated with that forecast. Of course it makes sense that volatility is higher with declining prices -a rise in volatility implies a rise in risk and higher risk implies that lower prices are optimal - investors should pay less for a given amount of earnings with higher volatility assuming risk aversion.

At least volatility might explain some things about stock price behavior that my current completely price based model does not. So I'm going to do a bit of research on this. My first problem though is deciding on an appropriate indicator of volatility.

November 2007 Report

All figures are in US Dollars (USD) unless otherwise stated. This month saw a fall in net worth in US Dollar terms partly due to the fall in the Australian Dollar and partly to poor investment performance due to the decline in global stock markets this month. Net worth also decreased in Australian Dollars terms. Trading results were negative but I managed a significant turn around in the last few days of the month.

Income and Expenditure



I've introduced a breakdown of investment and trading income for the first time in this month's report. The two sum to "core investment income" which together with "forex" sums to "investment income". I've used different size fonts to try to express this relationship. Not sure that it works :) I've also broken out "core expenditure" which excludes work-related and moving-related expenses.

Expenditure was $6,680 but this includes a large work-related expense for Snork Maiden (which resulted in us effectively buying two thousand or so Australian Dollars (expense in US Dollars, reimbursement in Aussie) and port-handling charges in Sydney for both of us. Core expenditure was well under control at $3,280. This included $A59.07 of implicit interest costs of owning a car.

Non-investment earnings ($7,119) included the refund of the work-related expenses from Snork Maiden's employer. She also again 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 were $1180.

Non-retirement accounts lost $19,364 with $8,315 of the loss resulting from the fall in the Australian Dollar. Retirement accounts lost $6,917 but would have gained only $249 if exchange rates had remained constant. This gain is due to the strong exposure to bonds in our retirement accounts and the stronger exposure to equities in our non-retirement accounts. In AUD terms non-retirement accounts lost and retirement accounts gained for the month.

Net Worth Performance
Net worth fell by $US24,563 to $US453,326 and in Australian Dollars fell $A3,171 to $A512,406. Non-retirement accounts were at $US241k. Retirement accounts were at $US212k.

Investment Performance
Investment return in US Dollars was -5.50% vs. a 4.38% loss in the MSCI (Gross) World Index, which I use as my overall benchmark and a 4.18% loss in the S&P 500 total return index. Non-retirement accounts lost 7.46%. Returns in Australian Dollars terms were -0.96% and -3.01% respectively. In currency neutral terms the portfolio lost 2.26%, which is relatively good compared to the performance of the indices. YTD we're up 20.4% (USD) vs the MSCI with 13.4% and the SPX with 6.4%. Our non-retirement accounts are up 24.8%.

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. My Australian funds all did horribly with Platinum Capital being the worst of all. I also suffered net losses trading SPI (Australian Share Price Index) and ES (S&P 500) futures but gained in NASDAQ trading. PSS(AP) is Snork Maiden's superannuation fund, where we are starting off with a loss...

Progress on Trading Goal

I lost $1,035 in trading following losses of $1,123 in September and $681 in October. The losing streak is depressing even though relative to net worth the numbers are small. The loss is 3.97% of trading capital vs a 6.69% loss in the NDX. My IB account lost exactly 6.69% for the month, though I gained 7.8% or $1,310 in the last week in this account. As far as my goal of achieving breakeven in my 3 US trading accounts, I have currently invested a net amount of $60k and the accounts are currently worth $54,230. At the end of 2006 the value stood at $41,042 so I have made progress even if it is slower than I would have liked.

Asset Allocation
Using the simple method of adding up the betas of each individual investment weighted by their portfolio allocation, at the end of the month the portfolio had an estimated beta of 0.42. Recent performance shows, though, that actual beta of my USD denominated returns is a lot higher than this. My time series estimate using the Kalman filter estimates beta to the S&P 500 at 0.90 and to the MSCI at 1.00. The reason for this is that the Australian Dollar is becoming increasingly correlated with global stock market returns due to the carry trade where traders borrow in low interest currencies like the Yen and buy high yielding currencies like the AUD and stocks. When their "aversion to risk" increases they sell both Aussie Dollars and stocks and buy Yen and US bonds.

Allocation was 29% in "passive alpha", 67% in "beta", 6% allocated to trading, 4% to industrial stocks, 6% to liquidity, 3% to other assets (including our car which is equal to 2.8% of net worth) and we were borrowing 15%. The biggest losses this month were in the funds that I have designated as "passive alpha". Those funds really contain a lot of beta of course too. I include all hedge-fund like and alternative investments under the "passive alpha" label and all long-only equity mutual funds under "beta". Our currency exposures were roughly 60% Australian Dollar, 30% US Dollar, and 10% Other (mainly global equity funds).

House Price Update

Thanks to financial reality for the graph. House prices continue to fall in the US. However a renewed decline in house prices is yet to get underway in Australia. There was a decline in prices in Sydney and a slowdown in other cities earlier in the decade and since then prices rebounded. The following are year on year changes for September 2007:



Data are reported on a quarterly basis by the Australian Bureau of Statistics. Only Perth is now showing the beginning of a slowdown though price actually rose in the last three months there.

Trading Update

This month's trading result is again negative due to a few big losses. But this week (so far) is the best individual week since May, which is encouraging (a couple of other weeks since May came pretty close to this one). The loss for the month is now less than the single biggest losing trade. What am I doing - pretty much pure day-trading with minimal use of "the model".

P.S. 1 December

Trading loss for the month was $1,004. I was down around $2,500 only three days ago so have done very well since then. I'd like to think that that is the beginning of the turnaround. Time will tell. I'm holding one trading position over the weekend - 300 shares of QID the double short NASADQ 100 ETF. Up $279 on that trade.

Update on Goals

I've kept the 2007 goals on the sidebar but I've taken down the goals for 2008 and beyond as they are looking increasingly unrealistic. Exchange rate fluctuations mean that a goal in any particular currency is hard to hit as do stock market fluctuations for buy and hold investors. Perhaps I could come up with a currency neutral measure of net worth gain. But probably I am going to go for aspirational goals going forward: Increase net worth (increase non-retirement net worth - which is harder), increase trading income, etc. It's easier also to set goals for investment and trading performance relative to a benchmark (Increase non-retirement net worth faster than the MSCI index?). As for the goal of a net worth of $1 million, I now project that that could occur by the end of 2012 rather than 2010. It remains an interim goal but setting any date on achievement of the goal is too hard. I'll do a revised set of goals later in December.

Is that the Bottom?

Howard Lindzon is calling a bottom in the stock market here. Is this the bottom? My model appears to be exiting the noisy conditions that made using it almost impossible and is now giving a much clearer signal. Expect some downside starting most likely on Monday. It is also signalling that we remain oversold not overbought. Conditions look very similar to early August where a consolidation in the market was followed by a plummet to the final lows on August 16th. This could happen and looks like the likeliest scenario to me and is supported by a lot of other stuff I am seeing. But this could be the bottom. We'll only really know when the next low occurs next week - will it be a higher low or a lower low? In the meantime enjoy the rally :) The fundamentals behind this rally are supposed to be the investment by Abu Dhabi in Citigroup and the possibility of rate cuts. Both facts show that things are very bad but help is on the way to stop them getting even worse. The fact that Citigroup needs this capital injection on such bad terms is very bad news. But I guess the market thought that things could be worse and noone might come to Citigroup's rescue.

Australian Election

I voted yesterday in the Australian Federal Election. Snork Maiden came along, even though she can't vote here, and I was surprised to find we had to stand in line to vote, like (now former) prime minister John Howard in the picture. I didn't encounter that in previous years here (or in England). I voted Labor for the first time here in Australia. Labor seem to have finally moved much closer to the centre than in any time in their eleven years out of power. The Hawke-Keating Labor government before 1996 was a very reformist administration, but after they lost power the party swung left and stayed out of power till now. The Liberal Party didn't seem to have much of an election pitch except to warn of the dangers of electing Labor claiming them to be inexperienced and extremist. Many people seemed to have also decided to give the other guys a chance. Labor's main difference with the Liberals was on their plan to roll back some of the Liberals labour market reforms - this would have put me off voting Labor. What swung me to Labor was their more convincing approach to climate policy. In fact I voted Green with my second preferences to Labor. In Australia we get to order candidates according to how much we prefer them rather than just choosing one candidate. If your first choice candidate doesn't get enough votes to win a seat your votes are transferred to your second choice candidate and so forth. Another unusual feature of Australian elections is that voting is compulsory.

Here in the ACT it is pretty much guaranteed that Labor will win both lower house seats and that the Senate will split one Liberal and one Labor senator. So voting for a minor party can indicate a policy preference while your vote in the end goes to one of the major parties. I've long thought it would be nice if we could de-bundle political parties - choosing different parties to represent us in different policy areas.

Searching NetWorthIQ by Country

Networth IQ has finally added the ability to search by country. Not surprisingly, Australia seems to be the best represented country outside the US. I wonder though how many profiles are in Australian Dollars in fact and how many in US Dollars. Not that it makes a huge difference for Australia at the moment. I know for example that Enoughwealth's profile is in Australian Dollars, while mine is in US Dollars. A nice feature for the site would be allowing people to enter data in their native currency and then for users to read profiles either in the original currency or in US Dollars.

Monday Night Trading

I lost money today, but not too badly which was partly the result of a little skill and a lot of luck. Again I got too caught up in thinking about what the model said rather than what the streaming charts were telling me. The NDX model was stopped out again. So it isn't exactly much use at the moment. I went long per the model after the market had declined before the official open - a gap down was likely and this happened. Then shortly after the market (US) opened there was a good opportunity to close my trade profitably. But I stupidly hung on for more gain and ended with a loss instead. Letting your winners run is one of the most common pieces of advice given to traders but it can be very dangerous. I managed to close the trade with only a small total loss by doubling down (a big no-no in the standard advice for traders). Then as I was feeling good at not suffering a huge loss I entered another trade assuming the market was going to continue rising. The market immediately started falling towards the close instead. I closed that trade for a larger but still reasonable loss after the market close and Hewlett Packard's earnings announcement. I did some other every quick trades that won a few bucks here and there. But that second trade was a totally arrogant trade - again believing that the market would rise as the model dictated irrespective of the evidence. I'll slowly hammer this behavior out of my mind - at least until the model begins performing better again. Anyway, I lost half the profits I made since the big loss a few days ago. Am still down badly for the month, but feel I am learning something despite all these errors, or rather because of them.

Petrol Consumption

Amazing that Australia uses more petrol than France that has three times the number of people. Price of filling up a Honda Ciivc here is currently $US60. It would have been lower last November probably when this table was created.

Big Picture Update

A good article about where we currently seem to be in somewhat longer term market cycles. I am also looking for the market to go down after a Thanksgiving rally to a bottom at a similar level to the August 2007 low. In fact I am looking for the final leg of this big triangle to play out:



Support for this idea is provided also by the McClellan Summation:



The stochastic on this chart has plenty of space to fall yet... There are likely several weeks till the bottom is reached. The NYSE McClellan Summation presents an identical picture.

At that point I am thinking to make a major change in strategy and significantly increasing the beta of my portfolio as well as buying financial stock funds like FF and XLF. If the market gets back to the August lows the atmosphere is likely to get very bearish - when everyone agrees on something in the investment world it is probably wrong. Everyone currently thinks the US Dollar will fall and the Australian Dollar Rise. Until very recently they've been right. I've been taking the contrarian bet to a minor degree. 61% of my assets are in Australian Dollars and I aim to reduce that to 50% over time - so I'm not making any big bets on the US Dollar rising - on the other hand we've tried to avoid spending our US Dollars and I haven't converted any of them into Australian Dollars since March 2006. In fact I bought US Dollars in April and May 2007.

Change of Trading Tactics

Since the big loss on Tuesday I've swtiched trading tactics. I now plan to do pure day-trading in the near term - only betting on the direction of the market for the next few minutes or hour - though I have an opinion based on the model about what will happen in the course of the day I'm not explicitly betting on that outcome. However, I am using the model to decide on the predominant direction to place trades. So for example, on Friday the model was long and so I looked for long trades. If the model was correct these trades would get some extra lift from the overall trend for the day. I've seen some good short trades in the last couple of days but not taken them. As I get more confident I may add these too. I'm spending some time in the evening here after the European market opens to trade and in the morning in the last couple of hours of US trade. The speed and momentum feels very different in these two periods. During the Asian session momentum (volume) is so low it is hard to trade the US futures at all. I've made $550 in these two days. At this pace I could get back to my peak profit level in one and a half months. But there are no guarantees that my success rate - win percent 83% and win-loss ratio of 16.3 - will continue. The win loss ratio (average win per contract in winning trades divided by average loss per contract in losing trades) certainly won't remain so elevated!

Day Trading Environment

Current market conditions are only suitable for day trading in my opinion. The SPX model has been stopped out (1.25% or greater market move against it intraday) 5 out of the last 7 sessions and only one of the model's trades - short on 12th November was a winner (a 1% gain). The model is back where it was on 29th August - ignoring any slippage, commissions etc that would have been incurred in trading it. The NDX model has been stopped out 4 of the last 5 trades with a winning 2.5% trade on the 12th November (and winning trades on the 7th and 8th November, six and seven days ago). I had another small winning trade this morning and then a losing trade where all I lost was the commission (entered and exited at the same price). Still, so far I only made back 10% of my big loss earlier in the week. It is so much easier to lose money than make it (though at least I am more likely to make money on any given trade - 2/3 of my trades win). The models are still long despite the decline of the last two days. It doesn't look that corrective though - a corrective move here would imply that another rally similar to Tuesday's was coming up.

Globex Glitch Trade

Some glitch took down Globex (the Chicago Mercantile Exchange's electronic futures trading platform). I was actually watching the open of the Australian stock exchange and Australian futures at the time. Then I noticed that the NASDAQ futures were down 12 points or so from the close of futures trading. I couldn't see any fundamental news and the S&P 500 wasn't down as badly. I switched out of my simulation account at Interactive Brokers and into my real trading account. The technicals also looked like a very short term bottom was being made. The Australian market was flat roughly after an initial small sell off (only the Australias and New Zealand markets were trading at this point globally). The model is long though a gap down overnight is possible. So I decided to go long the NASDAQ futures on the assumption that the steep decline was caused by the glitch. I'm also tracking the S&P (ES) market as the trade progresses. The latter market is the most liquid after hours futures market and it is easier to see what is happening in it. The NASDAQ futures can have a spread of a point or more during the Asian trading session and so it can be hard to see what the price action really is by looking at a chart.

11:15 Eastern Australian Summer Time

Japan opened up after the US sold off. This supports my trade idea. Let's see how this goes.

11:25 Eastern Australian Summer Time

The trade finally moves into profitability.

11:40 Eastern Australian Summer Time

I got out of the trade with only a 1.5 point gain. On second thoughts the current price is close to where the stock market closed at 4:00pm US time. There was a big rise in price in the futures after 4:00pm. Maybe the sell-off in NASDAQ futures was justified? Anyway the 5 min stochastic was showing signs of topping out. Is this a case of selling a winner too soon?

Starting Over

All my stuff that I shipped from the US was delivered this morning. I haven't done any unpacking yet apart from removing and throwing away the packaging that the shippers wrapped the furniture items in. Now my part of the move is over - Snork Maiden's stuff is still to arrive - and it's time to start rebuilding in a sense as I've mentioned before. Hopefully, the same can apply to my trading. It's been a crazy 5 months - moving internationally, quitting my job, dealing with US immigration issues (and Australian ones for Snork Maiden), setting up home in Australia, and losing money trading pretty much continuously. The investment side of the equation hasn't been too good either, though the soaring Australian Dollar has made USD returns look good. Somehow I don't feel so bad about last night's loss. It's so bad I'm almost not afraid of losses anymore. Not sure if that is good or bad. It is good if it means I have gotten over my loss aversion - unwillingness to take small losses which then turn into large losses.

The Problem is Me

It's not the market nor the model, the problem is me. I just suffered my second worst loss per contract since I started trading futures. The model started the day short but predicted there could be a bounce. I got long the bounce for a while - this first trade was good. Then I switched to short. I knew there was a potential for the model to reverse if there was a strong enough rally. But a rally of that size seemed unlikely. Looks like we got it. I stayed short. Missed the opportunities to get out with reduced losses and then finally gave up. No stop and no discipline. I haven't destroyed all the profits I made earlier in my Interactive Brokers account, but I am getting there. Three bad undisciplined losses this month and this is the worst by far. The model is making money this month. There is no reason why I should be losing. I'm not sure what to do. Do I keep trading and try to stick to the discipline? Stop trading? Paper trade? I really don't know.

Effect of Exchange Rate Fluctuations on Returns

My recent net worth reports have shown huge fluctuations due to the volatility in the Australian Dollar-US Dollar exchange rate. Returns are strong in US Dollar terms when the Australian Dollar is rising - even though this is making us poorer in Australian Dollar terms. Each month I calculate the contribution to investment returns from the change in exchange rates under the heading "Forex" in my income and expenditure table and my table of returns on individual investments. In the last few days the Aussie has plummeted resulting in strongly negative investment returns for the month to date. This table shows just how much difference changes in the exchange rate make:



Stripping out the exchange rate results in lower average returns for the year so far (12.8% vs. 20.7%) but greatly lowered volatility and hence a higher Sharpe Ratio, which is a measure of the excess return (above a 5% hurdle in this case) divided by the standard deviation of returns. Both Sharpe Ratios exceed those for the MSCI and SPX total return indices. The SPX has risen less than the 5% hurdle so far this year (3.1%) and thus has a negative Sharpe Ratio. The MSCI has returned 12.8% at this point. A large part of that return is due to the fall in the US dollar. This is a global index measured in US Dollar terms. So really I'm doing neither as good, nor as bad as it might seem. I'm probably really beating the MSCI but not by as much as the crude numbers suggest. I've had two negative months - but both have come in the second half of the year, which has made me feel a bit despondent but the two indices have had four or five negative months.

Here is the same data for the more visually oriented:



BTW I haven't seen any comments in the personal finance blogosphere (obviously there's plenty on trading blogs) so far about this month's so far sharp fall in the indices. I guess it will come soon.

Following up from yesterday's blog. Actually, the model has been doing fine this month so far with only one stop-out so far (Friday). But I've been scared to get back on board due to its poor performance from the beginning of September to 2/3 the way through October. There were heaps of stop outs in late July and early August too. I wish there were a futures contract smaller even than the NQ (NASDAQ E-Mini) and I would be trading it overnight my time (US day time).

Stuff Arrives

Just got a call from the shipper this morning. They will deliver my stuff tomorrow. They could have done today but I need to accompany Snork Maiden to an appointment this afternoon (I'm the navigator). Pick up date was 3rd August, so it's taken a little over 3 months, which is roughly what is expected. Maybe this will help me feel a little more stable once everything is organized. By the way there was a fee of roughly $700 at this end for government fees etc. in passing through quarantine and customs. Snork Maiden is heading for the Melbourne area this evening - her first trip out of Canberra. Unfortunately she won't be in the city and instead in about the most boring bit of countryside one could find (just north of the airport). She gets to go to Perth in December and will be near the city centre but that trip will be extremely rushed. The election campaign is heading towards the final two weeks now and both parties are making more and more ridiculous promises. We need a Libertarian Party here :) Well a real liberal party would be good. I don't agree with many libertarian positions.

P.S.

The Australian Dollar is down 3 cents today alone and now around 7 cents from it's high. This is the classic "unwinding of the carry trade" - the Yen is up against the US Dollar and all the high yielding currencies are down. I would like the Aussie to go down (so that our US investments are worth more in Australian Dollars), but a slower decline would be prettier for the net worth figures! (as expressed in US Dollars).

Model Facing a Crisis

My trading model has been performing poorly in recent months - the model is frequently stopped out - the market moves more than 1.25% in the opposite direction - far more than in other periods in recent years. As a result I have low confidence in placing trades according to the model. I've been in a desperate search to find a way to improve the model, but haven't found anything better than what I already have. The question is whether this is a temporary phenomenon or are the markets changing in some fundamental way? In the meantime, the best I can do is use the model as a guide to doing some intraday (or intranight) trades. I haven't done many of those recently either. I'm going to experiment a bit with some nonlinear model ideas, but I don't think they are likely to yield anything either.

Need to Focus on Trades with an Edge

This morning I fell victim to over-trading/over-confidence. I had been doing pretty well this month so far and then decided to make a trade in the Australian Share Price Index futures. Partly to get over my fear of the size of the contract (about twice the size of an E-Mini S&P contract, four times the size of an E-Mini NASDAQ contract). The results were two losing trades in a row more than wiping out my profit for the month so far. This is the equivalent of my GOOG and AMZN trades last month which turned what would be a winning month trading US index futures into a losing month. I need to focus on the trades where I have a documented statistical edge and not experiment with other sorts of trades where I am just guessing. I haven't succeeded yet in modelling the Australian index. It tends to follow the US market but not sufficiently so for the US models to be reliable indicators. And the contract size is much bigger than what I am trading in the US, so any mistakes can easily wipe out my US-based profits.

Price Dispersion

This is purely anecdotal, but it seems to me that there is more "price dispersion" in Australia than in the US. Price dispersion is the variation in prices charged by different sellers for the same item. It's closely related to price discrimination but the latter is intentional charging of different prices by the same firm while price dispersion is charging of different prices by different firms, though it would also include charging of different prices in different outlets by the same firm which is possibly price discrimination (it's not price discrimination to the extent that costs differ across locations).

Prices certainly do vary in the US from luxury outlets to discount stores and from poor to rich neighborhoods but I don't remember seeing as big a variation between stores that are more or less side by side. For example, you can buy an Oral-B or Colgate toothbrush for anywhere from $1 to $7 within a few store fronts in the Canberra Centre (the big mall in Canberra City). The $1 toothbrushes were apparently intended for the Vietnam or Thai market but are being sold in Australia. Large ranges also exist for food items (particulary fruit and vegetables) at side by side stores. Also for items like bed sheets the range can be very wide for a given quality level. Are Australians less willing to shop around the stores to find bargains than Americans? ("Shopping around" would result in competition and convergence to the same price), or do I have the wrong impression of the US? Or is this just a Canberra (the wealthiest metropolitan area in Australia) phenomenon?

P.S. Just one price I noticed today - haircut at a franchised chain - $A22, U.S. price $US14. Another example of where the exchange rate ought to be - though 63 U.S. Cents is a bit at the low end (it's currently at 92 U.S. Cents).

Writing Off Croesus Mining

I finally decided to write down Croesus Mining's value in my accounts to zero. The stock was suspended from trading ont he Australian Stock Exchange in March 2006. There has been an ongoing story of the restructuring of the company and stock and the company wants to be relisted on the ASX - though the valuation would be miniscule compared to the last quoted price. So I decided that I will write the price down to zero and if the stock is ever traded again, put that increase in value down as a profit for that month. I am taking the whole loss in March 2006, which now saw a -3.05% return for the month or a loss of $US8,939. I've updated all net worth figures back to March 2006 on NetWorthIQ.

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.