Recap for Week Ending 9/14

Net Asset Value (nominal): -23.92%
Purchasing Power (real): -26.43%
Change in Contributed Capital: 0

Due to lack of liquidity, I decided not to trade this week. Still, my XAU/USD short position was badly built. Oil and gold prices kept rallying on expectation of a Fed funds rate cut. As a result, I accumulated even more losses.

This morning, 2 hours into the New York session, gold's bid price went past $717 per oz. Then it started to dip from there to the current level. Down $10+ per oz. in 13 hours. Too bad I wasn't there to sell more. Too bad. Really.

Will the USD-short sentiment continue? Very likely, especially if the Fed does in fact lower the Fed funds rate by 25 basis points or more. At that point, we'll probably experience stagnation--inflation without growth in GDP. Let's see how the new Fed chairman handles this.

I'll probably jump ship, i.e. close my XAU/USD short position (and perhaps even buy gold), if the Fed lowers rate by 50 basis point. Back in 1980, gold was trading at $800+ per oz. As long as there is demand and new buyers, gold will return to that level. The demand for gold will multiply once conditions for inflation in the U.S. are in place. Let us hope and pray that the Fed isn't so short-sighted and that it learns from its past mistakes. If it considers them that.
Incidentally, 1980 was the year of a presidential election in which Jimmy Carter lost his presidency to Ronald Reagan. While, in theory, the Federal Reserve Board is an independent entity, completely separate from the executive branch, the Fed's accommodative monetary policy back then might have been influenced by the White House. One may argue that the Fed will once again ignore price stability to pursue economic growth as secretly directed by the White House. If large hedge funds believe and act on this, gold prices will peak in 2008 and plummet thereafter.

Here are the numbers:

	7-Sep	14-Sep	long USD	short USD
CHF	1.1882	1.1892	0.08%	-2.59%
CNY	7.5295	7.5138	-0.21%	-2.30%
EUR	0.7266	0.7210	-0.76%	-1.75%
GBP	0.4930	0.4983	1.06%	-3.57%
JPY	113.33	115.31	1.75%	-4.26%
XAU	0.00143	0.00142	-0.98%	-1.53%
ORORCL	classified	classified	23.92%	-26.43%
DJIA	13,113.38	13,442.52	-2.51%	0.00%
Nasdaq	2,565.70	2,602.18	-1.42%	-1.09%
S&P 500	1,453.55	1,484.25	-2.11%	-0.40%

Recap for Week Ending 9/7

Net Asset Value (nominal): -69.15%
Purchasing Power (real): -73.07%
Change in Contributed Capital: 0

I had an abysmal week this week.

Early in the week, I was caught in a market that couldn't decide whether to buy or sell CROSSES/JPY. Using technical analysis, I sold when the market bought and I bought when the market sold. It's obvious that overbearing market sentiment made my trading system invalid, ex-post. But at the point of execution, I believed my system was giving me the correct signals.

Later in the week, I lost the farm selling XAU/USD. Due to my home-country bias towards the U.S. dollar, I was prevented from seeing the U.S. dollar's persistent weakness. I continued to sell gold even after the EIA released disappointing inventory numbers yesterday and after U.S. Department of Labor reported that payrolls had dropped by 4,000 in August, the first decline since August 2003. There was news of terrorist attack threat in Nigeria, but I ignored that too. In fact, there was nothing supportive of the U.S. dollar. But none of that mattered, because I thought I was right. To a certain extent, I still think I'm right.

At the core of my trading system is the belief that excessive price movements in one direction causes excessive price movements in the other direction. The idea of self-fulfilling and self-defeating processes are nothing new. George Soros verbalized them in his book The Alchemy of Finance two decades ago. It's not evolutionary, either. Like a pendulum, the market swings one way, then the other, until an equilibrium is reached. More often than not, however, supply and/or demand shocks prevent the market from ever reaching a equilibrium. Thus, our pendulum never stops moving.

XAU/USD has been exhibiting such excessiveness. 699.40 - 671.99 = up 27.41 USD per oz., or 3.92% in one week. ONE WEEK! This is THE reason why I'm still selling gold after 2, 3 margin calls within one week. After I lost about three quarters of my portfolio's purchasing power. On the other hand, the market doesn't adhere to my schedule. She goes up and down of her own accord. Just because I consider this an excess, doesn't mean she does. Excesses can easily be outdone by bigger excesses. Oil supply squeezes are not going away. U.S. current account deficit is not going away. The battered sub-prime market is not going away. A rate cut in the Fed funds rate will result in higher inflation and yet lower demand for the U.S. dollar. That'll translate into a higher demand for gold. But I'm probably mixing up the short term with the long term right now. Anyway, I've placed my bet. All hands are off the table.

Here are the numbers:

	31-Aug	7-Sep	long USD	short USD
CHF	1.2079	1.1882	-1.63%	-2.29%
CNY	7.541	7.5295	-0.15%	-3.77%
EUR	0.7340	0.7266	-1.01%	-2.91%
GBP	0.4959	0.4930	-0.58%	-3.34%
JPY	115.72	113.33	-2.07%	-1.85%
XAU	0.00149	0.00143	-3.92%	0.00%
ORORCL	classified	classified	69.15%	-73.07%
DJIA	13,357.74	13,113.38	1.83%	-5.75%
Nasdaq	2,596.36	2,565.70	1.18%	-5.10%
S&P 500	1,473.99	1,453.55	1.39%	-5.31%

While my ex-ante forecast for the Dow's close was right on (see evening star confirmation below), I was not able to profit from it. The only way I can still profit is by shorting future contracts. However, futures trading is an onerous activity, one I do not want to be involved in at the moment. Considering the Fed's surefire rate cut in the Sept. 12 meeting, shorting U.S. stock futures now is like asking the market fairy to grant you a death wish.

Recap for Week Ending 8/31

Net Asset Value (nominal): +0.92%
Purchasing Power (real): +0.16%
Change in Contributed Capital: 0

What a week, what a week. I was a happy camper, longing and shorting GBP/JPY and generating unconscionable profits up until Thursday night. That was when I decided to play my little hedge: XAU/USD short and AUD/JPY long.

Fundamentally, this hedge makes sense. The Australian dollar is a commodity currency, and as such, it usually moves in line with gold. When risk appetite increases, the AUD and gold strengthen. When risk aversion dominates, the JPY and USD strengthen. In the mean time, carry interest is accrued. Granted AUD/JPY and XAU/USD don't correlate perfectly (i.e. there's friction, maybe lagging), most of the time the hedge works. We saw it in action two weeks ago when nearly all the central banks in the world were pumping cash into the financial markets to prevent a global meltdown. Anyway, the hedge was supposed to protect me from surprises arising from the Bush Administration's announcement and Ben Bernanke's speech Friday morning, while I was sleeping.

Three hours into the New York session, at 10 EST, Chairman Bernanke proclaimed that the Fed will not bail out "investors and lenders from the consequences of their financial decisions," as if to prevent a case of moral hazard. This innocent disclaimer sent a large wave of a JPY long orders into the cash market. Due to the preset 2% stop loss, I was flushed out of my sizable AUD/JPY long position, along with other Crosses/JPY long positions. On top of that, oil and gold prices did not budge. As a matter of fact, they actually went up slightly. WTF?!

But in the next paragraph, of the same speech, Bernanke added that the FOMC "will act as needed to limit the adverse effects on the broader economy that may arise from the disruptions in financial markets." Talk about mixed signals.

In less than 6 hours, the market took back almost everything I had amassed 4 days ago. Thanks to you, Dr. Ben Bernanke, and your ivy-league education. Here's a hint for next time, though. If you want to be a good policy maker, pick a side and stick to it. Don't be wishy-washy like a politician and try to please everybody. Please. For the good of the American people. Government intervention is supposed to reduce risk, not multiply it.

Shortly thereafter, starting at 11 EST till NY close, the Yen weakened. This appeared to be a 50% retracement from overnight levels of Yen weakness. However, I was not able to take advantage of this. My capital got tied up in XAU/USD, and I did not think it wise to buy AUD when the market was becoming so risk-averse.

Here are the numbers:

	24-Aug	31-Aug	long USD	short USD
CHF	1.2002	1.2079	0.64%	-1.40%
CNY	7.5576	7.5410	-0.22%	-0.54%
EUR	0.7315	0.7340	0.34%	-1.10%
GBP	0.4966	0.4959	-0.13%	-0.63%
JPY	116.39	115.72	-0.58%	-0.19%
XAU	0.00150	0.00149	-0.75%	-0.01%
ORORCL	classified	classified	-0.92%	0.16%
DJIA	13,378.87	13,357.74	0.16%	-0.92%
Nasdaq	2,576.69	2,596.36	-0.76%	0.00%
S&P 500	1,479.37	1,473.99	0.36%	-1.13%

The DJIA weekly chart, depicting a dragonfly doji candle (where prices opened high, plummeted, and then returned to the opening price), suggests that last week's temporary rally was a retracement and this week was a period of indecision. Next week's bearish candle should confirm an evening star pattern.

Recap for Week Ending 8/24

Net Asset Value: +21.81%
Change in Contributed Capital: 0
Change in Purchasing Power: +18.95%

This week saw a return of risk appetite as traders rebuilt their JPY-funded carry positions and unloaded their U.S. dollars for oil, gold, foreign currencies and U.S. common stocks.

Everything that was supposed to happen happened. Global equity markets rebounded from last week's record lows. Emerging markets currencies strengthened against the USD. The JPY weakened across the board. Oil and gold were up slightly. The Bank of Japan left key interest rate unchanged on Thursday as anticipated. No surprises. Not really. The only event that may qualify as a surprise is Bank of America's $2 billion bid for Countrywide's preferred stock. This has the effect of removing the second company from the "endangered species" list and boosting investor's confidence.

The majority of my profit this week came from shorting EUR/TRY. But I could have easily generated the same amount from buying Crosses/JPY. In fact, I could have done both and generated twice the amount shown above. But trading volume was thin and there wasn't much on the calendar in terms of market-moving economic events. In addition, since the pain of large losses I had endured last week still lingered in my mind, I was psychologically unable to allocate a significant amount of my trading capital on any trade. Consequently, I only extracted the least I could have extracted from the market.

Here's how hot money moved:

	17-Aug	24-Aug	long USD	short USD
CHF	1.2077	1.2002	-0.62%	-2.24%
CNY	7.5896	7.5576	-0.42%	-2.44%
EUR	0.7424	0.7315	-1.46%	-1.40%
GBP	0.5049	0.4966	-1.65%	-1.21%
JPY	114.3	116.39	1.83%	-4.69%
XAU	0.00152	0.00150	-1.57%	-1.29%
ORORCL	classified	classified	-21.81%	18.95%
DJIA	13,079.08	13,378.87	-2.29%	-0.57%
Nasdaq	2,505.03	2,576.69	-2.86%	0.00%
S&P 500	1,445.94	1,479.37	-2.31%	-0.55%

The Dow doesn't look too hot. Sure, the index of 30 blue chips companies closed up 2.29% for the week. However, weekly MACD is bearish; weekly RSI, bullish. The fact that volume is about average indicates some reluctance to take sides among traders. Some bulls (or bears) have become birds, due to risk aversion; or maybe they're still re-assessing their own risk exposure.
Same story on the daily chart, with the exception of a bullish MACD crossover. As a matter of fact, daily volume is slowly drying up, indicating floundering buying interest. On a side note, the morning star pattern suggested last week did, in fact, materialize.

But it looks like a lot of traders are happy being on the sidelines. Like them, I will join the bulls if and only if the Fed lowers the Fed Funds rate as widely anticipated. For now, that decision is only a fantasy that has been widely priced into market prices. If I enter the U.S. equity market now and the Fed decides to leave rate steady in September, I will lose my shirt.

Actually, I'm more afraid of the Bank of Japan than the Fed. Lately the BoJ has been involved in too many open market operations that it's difficult to predict what its next course of action would be. Inject liquidity, or reject it? Which is next? Personally, I would like to take the BoJ's side. I would like to help the BoJ accomplish its long-term objectives, but it seems like the BoJ is stuck between a rock and a hard place that it acts to appear active. It's acting like a day trader, pumping money into the money market one day and pumping money out of it the next. Is that good? I don't know. But it's making me nervous, extremely.