sell the yen?

**Followup 31/01/2010, notice as soon as I say something the market moves in the opposite direction. This post will now be buried and never talked about again. If however it had moved in my direction I would have bleated loud and long and pointed often to my savvy prediction. Follow the gurus in the media, and this is exactly how they do it. Its all about quantity.

Original: "Japan unveiled a record $1 trillion budget on Dec. 25 designed to lift the spending power of households and switch the economic focus from public works spending." "Federal Reserve moved closer to withdrawing stimulus measures that helped cause the greenback to fall 4.2 percent for the year."

The Fed Reserve doesn't do anything other than swap assets and liabilities on their spreadsheet (but that's another story). The US Congress however, is primed to start getting the budget into surplus (Obama's rhetoric is along the same lines). This will mean lower growth and higher dollar, all things being equal.

Sell the yen, buy the US? (PS. My track record is pathetic only a fool would listen to anything I say about finance). Note, the market probably discounted this back in November.

Regards

TheBagwan

Action and result...its all in the way you think...

The Interday and Intraday Patterns of the Overnight Market: Evidence from an Electronic Platform

"This paper examines the interday and intraday dynamics of the euro area overnight money market on the basis of an original set of market activity and liquidity proxies constructed from both pre- and post-trade data. The empirical literature provides extensive evidence supporting the rejection of the martingale hypothesis both between days and within days, primarily for interest rates and volatility. We extend this analysis and investigate the seasonality of market activity and liquidity in a market dominated by utilitarian traders. We provide evidence that the Eurosystem's operational framework and calendar effects cause the observed regular patterns. We additionally show that utilitarian trading intensifies at the turn of the reserve maintenance period. The increased un-certainty associated with greater information asymmetry between market participants when reserve requirements become binding lead to a deterioration of market liquidity. Our analysis additionally turns out to be sensitive to the implementation in March 2004 of structural changes to the operational framework and to the more frequent occurrence of fine-tuning operations since October 2004. "

Warren Buffet on Market Efficiency:

“Observing correctly that the market was frequently efficient, they [academics, investment professionals and corporate managers] went on to conclude incorrectly that it was always efficient. The difference between the propositions is night and day.”

Psychological Traits and Trading Strategies

"We measure psychological traits and show that they significantly affect behaviour and performance in a financial context. Based on the answers of 184 subjects to a psychological questionnaire we measured their degree of overconfidence, ie. the extent to which they overestimate the precision of their information, and self-monitoring, which is a form of social intelligence. The subjects also participated in an experimental financial market under asymmetric information in the spirit of Plott and Sunder (1988). In line with the hypothesis that they suffer from the winner’s curse, overconfident subjects are found to earn relatively low trading profits. In contrast, our finding that high self-monitors earn relatively large trading profits is consistent with the hypothesis that they are relatively good at anticipating the trading motivations of the other traders"

Regards
TheBagwan

Some things never change

Wall Street Journal: Thursday August 21 1930.

"New Australian plan for balancing budget coming under criticism for bias toward tax increases (including new 2.5% sales tax) rather than cuts in expenditures."

"Baar, Cohen & Co. believe stocks headed higher, “and we think within a few days sufficient momentum will be generated on the bull side to start the advance in earnest.” Foresee general business improvement, even if only seasonal, and halt in commodity price decline."

Interesting:

"Actuarial Society of America survey reports death rate for passengers travelling on scheduled airlines is 1 in 5,000, or 200 times railroad death rate; safety increases by 63% after pilot has had 400 flight hours."

Regards
TheBagwan

Revelation of the week

If you buy Aud/Jpy and sell Usd/Jpy you end up with a synthetic Aud/Usd. Terribly exciting stuff for those that have only just figured this out. Lock/hedge by selling Aud/Usd. Take away one side of the equation and voila.. the opposite position instantanously appears at no cost. Hours of fun to be had.

Regards
TheBagwan

Yield Theory of Asset Valuation

I've always been a proponent of the idea of investors requiring a certain yield before investing. For some, unscientific, gut feel reason it just makes sense to myself, after all, isn't corporate finance built on this foundation? CXOAG investing notes summarises the Required Yield Theory of Asset Valuation.

I would however, dispute one finding: Treasury yields are a function of short-term productivity growth relative to its long-term trend. The RYT Model fits the yields on 1-year, 10-year and 30-year Treasuries with adjusted R-squared statistics over 66%.

In the short term Treasuries reflect the rate central banks choose for them, this can also be present at the long end, central banks can price these securities at their choice of rate (prevailing orthodoxy leads to central banks staying out of the long end). There is discussion at the US Central bank now that will lead to interest being paid on bank balances at the Fed, this will lead to the abolition of the short term treasury. I give as an example Canada or Australia, which do not have short term treasuries. Maybe I've gotten off the track here.

Regards
The Bagwan

Financial Modelling

I've been working on various types of trading models for years. Its frustrating work because of the amount of dead ends the field leads you into. After a while you tend to catch on to the fact that most of what is available in books and on the web for the small investment hobbyist, is in fact a complete waste of time. I would go so far as to say that most of what you read in the paper or in books is simply away to create liquidity for other institutional players.

I'm self taught, in order to do this I have had to teach myself how to use higher level statistics and programming in order to chip away at the problem. And, all this takes a lot of time, effort and motivation. But, I guess, moving into this field was always my dirty little secret professional fantasy, which I never told anybody about. In that sense I'm proud to be "livin the dream" and actually doin it even if I'm not re numerated to test and trade these models. It is kinda like an addiction when I'm driving, listening to music, surfing and relaxing its always bubbling away in the back of my mind, and sooner or later out will pop another idea.

For the past six to eight years I have been particularly interested in market making, spread and arbitrage models. The distribution below shows the amount of wins at each risk step over one thousand trials. The largest amount of wins are around seven risk steps. My current model folds above 30 risk steps. Meaning that I basically would expect to lose about three percent of the time.

Returns reduce as a percentage of risk the more risk steps are added.

Risk of ruin calculations indicate that at a 10% loss rate the probability of getting six losses in a row is about one in one million.

A nice set of numbers derived from simple high low close data for the Aud/Us. Risk steps are my short hand for persistence. These calcs do not include frictional costs. But opens your eyes to the advantages of the market makers as opposed to the price takers and why there is so much effort made in the financial system to induce smaller traders to invest/trade in certain ways.

Regards
TheBagwan