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?