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.