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.