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!
No comments:
Post a Comment