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.