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.

Recap for Week Ending 8/17

Net Asset Value: -15.88%
Change in Contributed Capital: 0
Cash Reserve (USD): 48%
Change in Purchasing Power: -19.29%

Greed and fear dominated the market this week. The surprise (at least to me) came Tuesday when the Bank of Japan drained ¥600 billion ($5.08 billion) from the money market, after injecting ¥1.6 trillion over the previous two days. The interest rate on interbank borrowings had dipped to 0.1% -- a figure well below the BoJ's target of 0.5%. In response, the BoJ sold off ¥600 billion worth of treasury bills, to suck out excess liquidity and bring Japan's interbank borrowing rate to a more respectable level.

Participants in the world's financial markets reacted almost immediately. Margin players began liquidating their carry-trade positions in large numbers. The NZD, AUD, GBP, CHF and even EUR came under heavy selling pressure. Suddenly it became fashionable to ditch emerging markets currencies like the TRY and THB for safe havens like the USD and JPY. Between the Greenback and the Yen, however, the Yen had a much, much higher number of bidders.

On Wall Street, news that Countrywide Financial Corp. (NYSE: CFC)'s "mortgage funding volume declined 14 percent on a sequential month basis" sent the Dow further into the red. Risk aversion snowballed over the European and Asian equity markets, even though on paper mortgage companies in those markets may not be as overextended as U.S. mortgage companies in the sub-prime sector. Rumors that hedge-funds were disallowing asset withdrawal also added to the downward spiral. Oil and gold prices declined too, as traders pared exposure to these assets to cover losses elsewhere.

Everywhere I turned, it was red. Yesterday the Dow hit a low of 12,517.94, about 130 pts. from my 78.6% Fibonacci retracement mentioned weeks ago. In four trading days, EUR/JPY went from ¥162 to ¥149. GBP/JPY from ¥239 to ¥219. USD/JPY from ¥118 to ¥111.50. AUD/JPY from ¥99 to 89. XAU/USD from $672 an oz. to $642. Market sentiment was unlike anything I had experienced. In fact, in my wildest dreams, I could not have seen it coming. How could a currency pair move so much in such a short amount of time? How could something remain sold below an RSI value of 20, or remain bought above an RSI value of 80, for so many hours?! It didn't make any sense.

Still, I remained faithful to my trading system. After one of my sub-accounts got wiped out, I got somewhat gun-shy. But I kept trading in the direction I had been trading, cautiously. That is, with small portions of my trading capital and not allow myself to be overexposed to anything.

Then this morning, at the start of the New York session, the Fed announced a 50-basis-point reduction in the discount rate, the interest rate the Fed charges to make direct loans to banks. This makes credit and liquidity more available for companies that need it. (As for the more important Fed Funds rate, the rate banks charge each other, the Fed held steady.) The decision was met with enthusiasm. The Dow opened gap up and closed up 233 pts. for the day. Forex traders are starting to sell USD and JPY again. I myself have got a sizable a paper loss that is now becoming a sizable paper gain.

The million dollar question is: Does today's rally have staying power? Or is it just a dead-cat bounce? Extension or retracement? This is where Robert T. Kiyosaki and I may have a little disagreement. He is into receiving proceeds from a business; he would hang on to my position for carry interest. Me, I would do the same thing . . . if only I'm certain of the direction of the market. Cash flow is good, as long the market is on your side. But if the market turns against you, you'd better book your profit quickly before the market takes it all back. Hmm, sell the property now for a SURE $160,000 capital gain? Or hang on to your property and MAYBE receive $1,800 a month in rental income? Always choose cash flow over capital gain? I don't think so.

Here's how hot money moved this week:

	10-Aug	17-Aug	long USD	short USD
CHF	1.1983	1.2077	0.78%	-4.20%
CNY	7.5715	7.5896	0.24%	-3.65%
EUR	0.7305	0.7424	1.63%	-5.04%
GBP	0.4944	0.5049	2.13%	-5.54%
JPY	118.34	114.3	-3.41%	0.00%
XAU	0.00149	0.00152	2.30%	-5.72%
ORORCL	classified	classified	15.88%	-19.29%
DJIA	13,239.54	13,079.08	1.21%	-4.63%
Nasdaq	2,544.89	2,505.03	1.57%	-4.98%
S&P 500	1,453.64	1,445.94	0.53%	-3.94%

Notice how the USD strengthened against ALL U.S. stock indexes and foreign currencies except the Japanese Yen. 3.41%, that's how much purchasing power the USD has lost in one week vis–à–vis the JPY. And if an investor bought gold with U.S. dollars last week, he would have lost a whopping 5.72% of his portfolio in purchasing power this week. If he invested the same amount of money in my portfolio, he would have lost close to 20%.

Next week should be interesting. We know the global consumption machine cannot function without ample liquidity; that's why the Fed was so serious about "the restoration of orderly conditions in financial markets." We also know that in the long run Japan's export economy cannot function with a strong Yen. Once enough people understand and act on these two facts alone, the USD and JPY will be sold again. The pendulum has simply swung too far to the other side, at least in the short run.

Six down days followed by an up day. Day 6 features a dragonfly doji star with heavy volume. Day 7, long white candlestick. Morning star, anyone?

Recap for Week Ending 8/10

Net Asset Value: +12.94%
Change in Contributed Capital: 0
Cash Reserve (USD): 61%

This week was a doji (Japanese for blunder) in and of itself. The length of the weekly candle is extended, yet the body (i.e. the difference between the open and close) is razor thin, if not virtually unchanged. Whether this turns out to be part of a morning star pattern remains to be seen.

The beginning of the week was pretty bleak. I booked some profit from pullbacks of the Yen's rally last week. But during mid- and late-week, things became interesting. Equity markets seesawed on Wednesday and Thursday on the same question: Will problems in the sub-prime market spell trouble for the financial markets and for the larger global economy, yes or no?

Words following interest rate decisions spoken by central banks' officials have a calming effect, yet recent actions taken by central banks themselves indicate otherwise. The ECB added €61 bln in a three-day tender. Fed entered the market three times, first time to add $19 bln in 3-day repos, second time to add $16 bln in 3-day repos targeting mortgage-backed securities; third time to add $3 bln buying treasuries, agencies & MBS. The BoJ injected ¥1 trillion into money markets, after it got off the phone with the ECB and the Fed overnight.

The Bank of Canada added $C2.3 bln in two operations. Australia's, Hong Kong's and other smaller central banks followed suit. Pundits are saying central banks haven't injected this much liquidity into the market since Sept. 11. This goes to show that central banks were, at least, somewhat concerned with the widespread subprime mortgage problem and are willing to take preemptive actions should threats of adverse developments materialize.

In other words, we raise interest rates (or keep them steady) to show that we're serious about fighting inflation, to keep savers happy. But we have to buy back low-demand financial instruments with fiat money to prevent more people from running for the exit. Fearful investors make exit disorderly and unpredictable. Eventually, the stock market and the economy will tank, but we want a soft-landing, you see. If we were truly serious about long-term economic growth, we would have lowered interest rates already. But not so fast, because then we'd lose our credibility.

Whatever. I'm indifferent to market interventions. With them, the market and I get along just fine. Without them, I could churn up bigger gains in a shorter period of time, but I could also incur bigger losses in a shorter period of time. Or I couldn't make any money at all, who knows. I work with what is, not what could be or ought to be.

My profit this week came from trading XAU/USD short, net TRY/JPY long and net NZD/JPY long. What I hadn't expected to find was that the range of AUD/NZD was rather limited. In contrast, EUR/TRY moved like an arrested heart on a chart of heartbeats. My preset TP and SL orders were simply too narrow to accommodate ebbs and flows in EUR/TRY. One time, the bid and ask spread got to be 300 PIP's. 300 PIP's on XAU/USD is understandable, but on EUR/TRY? WTF? I called my broker, but they just give me the canned response: "illiquidity." So I have to adjust my SL orders manually from now on.

	4-Aug	10-Aug	long USD	short USD
CHF	1.1903	1.1983	0.67%	-2.11%
CNY	7.56	7.5715	0.15%	-1.59%
EUR	0.7263	0.7305	0.58%	-2.01%
GBP	0.4901	0.4944	0.87%	-2.30%
JPY	118.01	118.34	0.28%	-1.72%
XAU	0.00149	0.00149	0.02%	-1.46%
ORORCL	classified	classified	-12.94%	11.50%
DJIA	13,181.91	13,239.54	-0.44%	-1.00%
Nasdaq	2,511.25	2,544.89	-1.34%	-0.10%
S&P 500	1,433.06	1,453.64	-1.44%	0.00%

Looking at this table gives me an idea. What I'm looking at are really assets at the core. I'm an owner of capital; I've got some discretionary USD in my pocket. I can either keep it (long it), or invest it in something else (short it). Weekly return varies, depending on market sentiment. In the long run, I'm confident that the USD will depreciate because of U.S. persistent current account deficit and budget deficit. But in the intermediate- and short run, I don't really know, until after the fact. So why am I keeping 61% of my portfolio assets in USD long. I'm not achieving the maximum return on my capital. Must improve this.

Recap for Week Ending 8/3

Net Asset Value: -8.12%
Change in Contributed Capital: 0
Cash Reserve (USD): 68%

This week was roller coaster for the equity markets. Of course, Wall Street mood swings spilled over to the cash markets. I decided very early on that these market conditions were not my game. I'm more of an align-the-odds-in-your-favor kind of guy. I don't trade when the market is indecisive, and I try not to make too many interest-negative trades in the medium to long term. The bulls and the bears can fight for control of the market, but with patience and a little capital, birds like me will benefit without losing our shirts.

The daily chart of the DJIA doesn't look too hot. Daily RSI is 38.95, with wider range and larger volume on down days. Trouble in the sub-prime mortgage market is causing broad re-evaluation of assets in the derivative market. We should be looking at a 78.6% Fibonacci retracement of the move from 11,939.61 to 14021.95. That is, a low of 12,385.25 for the Dow is likely. If that support is broken, I will consider entering the market.

	27-Jul	4-Aug	change	real return
CHF	1.2079	1.1903	-1.46%
CNY	7.558	7.5600	0.03%
EUR	0.7337	0.7263	-1.00%
GBP	0.4941	0.4901	-0.81%
JPY	118.56	118.01	-0.46%
XAU	0.00152	0.00149	-1.76%
ORORCL	classified	classified	-8.12%	-9.88%
DJIA	13,265.47	13,181.91	0.63%
Nasdaq	2,562.24	2,511.25	1.99%
S&P 500	1,458.95	1,433.06	1.77%

In terms of purchasing power, the dollar lost most of its value against gold: 1.76% nominal. But because both the Nasdaq and the S&P 500 went South for the week, U.S. cash became more valuable as an asset. Someone who buys the indexes at the close this week can actually acquire 1.99% more of the Nasdaq and 1.77% more of the S&P 500.

I incurred the -9.88% loss in purchasing power, in part due to gold appreciation and in part due to the automatic execution of stop losses at the beginning of the week. Most of these stop losses were hit at the top of valley or at the bottom of a trough. I can either blame luck for it or hold myself accountable. The second option seems more attractive. Perhaps my stop losses should have been wider. And perhaps I should not have been so penny-wise, pound-foolish when I placed my USD/CHF short order a few PIP's from the top, before 1.46% dip.

Oh, well. You live and learn. You don't make the same mistake twice. That's all that matters.

Recap for Week Ending 7/27

Net Asset Value: -24.25%
Change in Contributed Capital: 0
Cash Reserve (USD): 62%

The market experienced a major reversal this week. Monday, Tuesday and earlier Wednesday saw a further strengthening of the old trend, which had favored high-yielding, risky assets. On late Wednesday, after several central bank decisions (including a hike by the BoE and the RBoNZ), the market decided that that was the end of the tightening period and ran for the exit.

My portfolio was built such that I was net long AUD, CAD, EUR, GBP, NZD, TRY and USD, equally, and I was net short CHF, JPY, and XAU equally. When the market started going against me, I added more to my losing positions, using my cash reserve. Hey, I was averaging down; I reasoned. It had worked before, it will work again, right? Wrong. I turned a 11% gain into a 2% loss, into a 5% loss, into a 10%. Then I manually closed out all positions and rebuilt a brand-new portfolio from the ground up when the market paused.

The pause was more dangerous than I thought. It gave me time to doubt myself and my system. I ended up ignoring signals on daily charts in favor of signals on 15/30-minute charts. A new trader's mistake. What's more, I placed more trades more frequently and without preset stop loss orders. Another newbie mistake. I closed the week with a loss that more or less offset all the gains I have made this month.

In retrospect, if I had just sold USD/JPY when I spotted the MACD crossover on the daily chart, I would be in a better shape. In fact, the USD strengthened against most currencies and gold last week but weakened most against the JPY. At any rate, the value of the U.S. worsened and I incurred a net loss of 26.44% in purchasing power.

	20-Jul	27-Jul	change	real return
CHF	1.2004	1.2079	0.62%
CNY	7.568	7.5580	-0.13%
EUR	0.7235	0.7337	1.41%
GBP	0.4865	0.4941	1.58%
JPY	121.22	118.56	-2.19%
XAU	0.00147	0.00152	3.36%
ORORCL	classified	classified	-24.25%	-26.44%
DJIA	13,851.08	13,265.47	4.23%	2.03%
Nasdaq	2,687.60	2,562.24	4.66%	2.47%
S&P 500	1,534.10	1,458.95	4.90%	2.70%

There is a probability that the Japanese yen will further strengthen against the USD and other high-yielding currencies in the coming week. But let us not forget the Japanese consumer numbers prior to the big unwinding. Deflation is still an issue in Japan. The BoJ will not raise interest rate just to combat interest-seeking Japanese grannies. The carry trade will once again be attractive. Oil and gold will once again rally against the USD. Fundamentally, China, India and other emerging markets are growing, maybe not as fast as the market perceived last week, but fast nonetheless.

All things considered. The move from hi to low-yielding assets was too excessive and without significant retracements; therefore the downtrend has no staying power. Support should be around 115 for the USD/JPY and 650 for XAU/USD.

Recap for Week Ending 7/20

Net Asset Value: +0.83%
Change in Contributed Capital: 0
Cash Reserve (USD): 53%

This week saw a further decline in the purchasing power of the U.S. dollar. The Greenback depreciates against most major currencies and especially vis-à-vis gold. In the first case, devaluation of the USD is needed to make American exports more attractive to non-U.S. consumers; this helps to reduce/eliminate U.S. current account deficit with the rest of the world. In the second case, oil and risk aversion are to blame. When financial assets are downgraded left and right, it's sensible to increase one's holding in the precious yellow metal.

The portfolio I had built last week worked very well this week. On Tuesday, when I checked, my net asset value had gone up 7%. For fear that I might give back some or all of those gains, I decided to close my EUR/TRY short and CAD/JPY long positions. Then I waited for EUR/TRY to rebound and CAD/JPY to dip to reset. EUR/TRY never rebounded until early today at the end of the London session and into the New York session, at which point the risk-averse crowd ruled the market.

While Japanese grannies unloaded their NZD/JPY contracts, I was snoozing like a baby. See, I was so confident that everything was hedged that I didn't even bother to add to CHF/JPY short position before I went to bed. As a result, this mistake caused me to be in near-zero-return territory for the week. 0.83% is pathetic, really. In real terms, I have actually lost some purchasing power.

	13-Jul	20-Jul	change	real return
CHF	1.2022	1.2004	-0.15%
CNY	7.5655	7.5680	0.03%
EUR	0.7257	0.7235	-0.31%
GBP	0.4917	0.4865	-1.07%
JPY	121.89	121.22	-0.55%
XAU	0.00150	0.00147	-2.41%
ORORCL	classified	classified	0.83%	-1.58%
DJIA	13,907.25	13,851.08	0.40%	-2.01%
Nasdaq	2,707.00	2,687.60	0.72%	-1.69%
S&P 500	1,552.50	1,534.10	1.19%	-1.22%

Once again, the USD lost most of its purchasing power to gold. 2.41% in one week is hard to beat. All the U.S. major indexes are actually in negative territory for the week. Yesterday was good when the Dow broke the 14,000 psychological resistance and made an all-time high. Today, ha! I'm just glad I don't bet the farm on U.S. common stocks as I once did.

Recap for Week Ending 7/13

Net Asset Value: +14.01%
Change in Contributed Capital: 0
Cash Reserve (USD): 62%

This week turned out pretty much as I had expected. On Tuesday night/Wednesday morning, the widely anticipated 25-basis-point rate hike by the Bank of Canada materialized. The statement following the decision, however, was not as hawkish as the broader market had hoped for but exactly as dovish as I had foreseen.

USD/CAD went from Monday low of 1.0481 to 1.0612, adding 131 PIPS. I took advantage of this and unloaded half of my long position @ 1.0567, booking a 72-PIP profit. The other half, I did not want to close right away because I had no reason to believe that the rally had stopped. Instead, I used CAD/JPY long, CHF/JPY short and USD/CHF short as hedges against the remaining USD/CAD long position. My net exposure was nil in CAD and USD and slightly short in CHF and JPY.

Since I was not in the market to break even, I shorted EUR/TRY for carry interest and I used its price movement and direction as an indicator for risk appetite. If EUR/TRY was rallying, market participants were becoming more risk-averse. If EUR/TRY was dipping, market participants were more risk-loving. I bought and sold CAD/JPY accordingly. Since it was more volatile than the other pairs, I did not waste much time waiting to rebuild the hedge after profit-taking. And since I was both long and short CAD by the same amount, my exposure to the Loonie was never more than zero for an extended period of time. This strategy worked last week; we'll see if it works again next week.

There was a brief article last night about Iran demanding Japan to pay for Irani oil in Japanese Yen that sent both CAD/JPY and USD/CAD to new lows. A few months back, when news, that the People's Bank of China plans to diversify their 1 billion USD cash reserves, hit the wire, the market was spooked, too. The fact that no one is as willing to hold the greenback as they were 20, or even 10 years ago is not new. The greenback has been gradually depreciating against the majors for who knows how many years. Since the institution of the euro in 1999, the USD has lost about 30 - 38%. 40%/8 years = an average of 5% per year.

If this trend accelerates, the scanty 12% average return per annum that Wall Street boasts will easily be wiped out. WIPED OUT! This is why I have been hesitant about buying and selling U.S. common stocks. They're still USD-denominated assets. You're just exchanging one class of assets for another less liquid class of assets. There is no diversification. You're still bearing ALL the currency risk in the USD if you're only buying USD-denominated assets.

When I'm in the forex market, I can actually diversify away from USD-denominated assets and into foreign assets, temporarily. But even if I didn't diversify, my capital would be protected. As long as my nominal return (in USD) exceeds the highest possible rate of USD depreciation, I still come out ahead. The following incorporates actual portfolio performance and quotes from this and last week and it lends support to the previous argument.

USD depreciation v. CHF: (1.2022 - 1.2175)/1.2175 = -1.26%
USD depreciation v. CNY: (7.5655 - 7.5930)/7.5930 = -0.36%
USD depreciation v. EUR: [(1/1.3779) - (1/1.3623)]/(1/1.3623) = -1.13%
USD depreciation v. GBP: [(1/2.0338) - (1/2.0104)]/(1/2.0104) = -1.15%
USD depreciation v. JPY: (121.89 - 123.3)/123.3 = -1.14%
USD depreciation v. gold: [(1/665.67) - (1/654.6)]/(1/654.6) = -1.66%

real FX return = 14.01% - 1.66 = 12.35%

nominal DJIA return: (13.907.25 - 13.565.84)/13.565.84 = 2.52%
real DJIA return: 2.52% - 1.66% = 0.86%

nominal Nasdaq return: (2,707.00 - 2,666.51)/2,666.51 = 1.52%
real Nasdaq return: 1.52% - 1.66% = -0.14%

nominal S&P 500 return: (1,552.50 - 1,530.44)/1,530.44 = 1.44%
real S&P 500 return: 1.44% - 1.66% = -0.22%

Thus, if your portfolio consisted of small-caps or all-caps stocks, you would have lost money in real terms. You need more USD this week to finance the purchase of the exact same stuff last week. Blame Bernanke.

Oh, and the reason for the discrepancy between DJIA and Nasdaq returns is this: Large companies are multinationals, and as such, they stand to profit from the weak USD, especially if a large percentage of their revenue sources come from overseas. Small companies tend to be smaller in the scope of operations. They tend not to have business modules overseas; their negligible overseas profit does not get inflated by the weak U.S. dollar. Corporate profits reported by large companies do include gains from currency translation. Corporate profits reported by small companies do not. Beware of companies whose core business operates in the red but report a net income.

Back to the point. Really, a supernormal return is the best way to combat persistent weakness in the USD, whether or not the USD is the functional currency of the account. Wall Street reported returns are usually not discounted for inflation, nor are they adjusted for the weakened U.S. dollar. The 3 - 4% annual dividends paid by blue chip companies are laughable if one were to consider the fact that during this week alone, the U.S. dollar lost 1.66% of its purchasing power.

To remain one's purchasing power in the U.S., one's total assets must somehow generate at least 2% per week. At least. There involves leakage in the form of tax payments. It's funny because the 2% weekly return only covers the loss in purchasing power of the dollar and the Internal Revenue Service (under the U.S. Department of Treasury) considers it a wealth-creating activity.

Happy Friday the 13th!

Recap for Week Ending 7/6

Trading was choppy this week due to the U.S. holiday on Wednesday. Most of the action occurred on Thursday and Friday, when the BoE voted to hike its benchmark rate by 25 basis point and when CAD-positive hit the wire. Unfortunately, I missed most of that. In fact, my portfolio gave back 1.40% this week.

Because there were no major movements on Monday, Tuesday and Wednesday, I got bored and started playing around with synthetics. At one time, I built a zero-interest portfolio with AUD, USD and TRY long, CHF, EUR, NZD and XAU short, and CAD and JPY neutral. It worked pretty well. The value of the portfolio (in terms of USD) didn't fluctuate at all for about 72 hours. But this exposure-neutralization got old quickly and eventually I took up a whole other distraction: Prison Break Season One on DVD.

Wednesday next week should be interesting as the Bank of Canada meeting unfolds. The market expects a 25-basis-point hike and most of this has been priced in. If the BoC acts according to market consensus, USD/CAD bearish sentiment will be even more bearish. In contrast, if the BoC appears indecisive, sounds dovish, or does not raise rate, then the current USD/CAD technical selling will reverse course. Either way, my exposure should allow me to extract some profit.

The problem is, my functional currency is the U.S. dollar; I cannot diversify away from it. If the U.S. keeps running a current account deficit with the rest of the world, the value of (and profit generated from) my portfolio will evaporate with the erosion of the U.S. dollar. This means I'm losing real buying power even though my capital keeps multiplying itself in nominal terms. Someone who is mediocre at trading could be becoming wealthier than me because he is holding a currency that does not depreciate in real terms. Perhaps I should shift my focus from nominal to real terms. Or not.

Recap for Week Ending 6/29

Well, the market brought it on, and I won! Last week, my portfolio chipped away 5.63%; this week, it grew by 56.25%. I've still got my market mojo, haha. The spot forex market this week was a traders' dream. It didn't matter what commodities or currencies you traded, or whether you were long or short. As long as you were there to accommodate the changing taste of Mr. Market, you made money.

Risk aversion caused a mass unwinding of carry trades from Monday to the close of the New York session on Wednesday afternoon. The yen strengthened against ALL other currencies. In fact, all low-yielding currencies strengthened against all high-yielding. A lesser-known public watchdog had issued an official statement warning the public of a reversal of the apparently excessive weakness of the yen. Everyone took that as cue to book profit on their short JPY/crosses positions and ran for the exit.

Since I had been short CHF/JPY at an average price of 100.41, and hanging on to the position meant I had to forgo about 1-2 PIP's a day in interest payment, I didn't feel comfortable holding it for too long. So when CHF/JPY went from 100.87 to 100.16, (in less than 12 hours), I immediately realized my profit and went short JPY by going long AUD/JPY, CAD/JPY, EUR/JPY, and GBP/JPY. I shorted NZD against USD and also managed to squeeze out a modest profit. Of course, if I had hung on to CHF/JPY and taken profit @ 99.73, the profit would have been more rewarding (in terms of costs and benefits).

Anyway, during the London session Wednesday night and/or the New York session Thursday morning, something incredible happened. News, that U.K. economy isn't growing as slowly as market participants had thought, hit the wire. The global stock markets rallied. Crude oil futures spiked. Thus, the reversal of a reversal began. Risk-averse traders became risk-loving. Gold, which had gone down from 650 to 640 USD an oz., found its way back to 645 and now @ 648.35. The strength of the JPY turned into weakness and the yen-bearish momentum continues. And here we are, exactly where we left off last week. Well, almost exactly.

The only way a trader could have lost money this week was if he was USD-bullish and he had believed that the Fed would raise interest rate yesterday. The Greenback lost ground against most currencies this week, from the Aussie, to the Loonie, to the Euro, to the Cable, to the Yen, to the Turkish Lira! I myself would have lost A LOT on long USD/CAD, if it weren't for the profit booked on rebound from 1.0527 to 1.0614. Again, if I knew the pair would retrace all of its downward move completely, and then some, I would not have closed that f***ing profitable position so soon.

But like George Soros wrote in one of his books, "a high degree of success is often the precursor to a severe setback." I have to be careful.