Tuesday, December 31, 2013

When in doubt always refer back to Bob Farrell’s 10 Rules

I was reading ZH again, and I don't know why, but I finally today found out that it is Lance Roberts who comes up with the things to ponder about, which is a segment brought in by ZH which I quite enjoy. I have added them to my blog roll on the sidebar for all our future reading pleasure.

Anyway, while the article itself is pretty interesting, I think his recent 2014 market outlook report just 3 days ago is a very interesting read. Personally, I like his analysis, the way he structures his arguments, as well as his practical and slightly contrarian lean.

However, I think the biggest takeaway for me was what he put in the end of his report, which is just here below.

When in doubt always refer back to Bob Farrell’s 10 Rules:
(link goes to stock charts, which gives some great graphical examples)
  1. Markets tend to return to the mean over time
  2. Excesses in one direction will lead to an opposite excess in the other direction
  3. There are no new eras -- excesses are never permanent
  4. Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways
  5. The public buys the most at the top and the least at the bottom
  6. Fear and greed are stronger than long-term resolve
  7. Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names
  8. Bear markets have three stages -- sharp down, reflexive rebound and a drawn-out fundamental downtrend
  9. When all the experts and forecasts agree -- something else is going to happen
  10. Bull markets are more fun than bear markets

I especially like #4, #6 and his #7 is very similar to the $OEXA200R Chart that I also follow. I'm thinking of making this like my contrarian checklist.

I am going to do a bit of research about the interest rates and it being 4 standard deviations away from it's 50 day moving average. To me, that again feels like a strong contrarian buy for bonds! If my findings are supportive and conclusive, I think that it might signal me to load up on my investment grade bonds to meet my target allocation.

Monday, December 30, 2013

Just a Morning Rant

I know that I'm a bit outdated, but I only caught Mark Hulbert's article about his contrarian view on gold, though it has been around for about 2 weeks now. He makes some good points that refutes that this is the end of the trend. However, I don't think that sentiment is a very accurate indicator, and I feel that it has quite a large margin of error, though it is no doubt useful.

Interesting, Ric Spooner from CMC Australia just came out with a post titled "Gold Chart on the Contrarian's List". He also has a confluence of fibs that come in at about $1155, which I said was my line in the sand, that gold will very unlikely close under that price. The base of the double bottom might be happening right now, but I'll be keeping an eye open for gold.

The whole of this weekend I have been refining and improving the logistics and administrative workflow to execute my tactical rules for moving averages. I realized that Phillips will not do, because they take about 3 days to update their graphs with the most recent closing price. Considering that I'm already not using ETFs, I am already operating on a slight delay. However, a fantastic point to note is that I'm usually buying the Asian closing price, which is before the US open and before the US close. That means if I go in on a Monday, I'll be locking in at last Friday's closing price, which is what my data and decisions is based on.

Anyway, enough with all that mumbo jumbo talk. I've created a new Excel spreadsheet and I've listed all the funds that I'm tracking, and I'm in the midst of collecting all of their daily prices for the last 10 months, so that I'll be able to manually calculate the 50 and 200 day moving averages.

The best fund websites are clearly Fidelity and Templeton, because they are very open and transparent with their fund performance and data, which is available of their website. First State wasn't too bad, but only with 6 months data available. Kudos to JPM, but no prize, since their data is only available in the chart form, and not in a table. Same to DB, but they are a hella lot harder to reach their fund pages and products. UOB, Phillip and Legg Mason all tie in for the shittiest asset management groups based on their online fund data and transparency.

The main problem here is that from third party fund platforms like Phillip, FSM and Dollardex, they don't have that data available. Phillip and FSM are both basket cases, offering only daily prices for the past 3 months. Dollardex is a godsend in that aspect, because they have the daily prices for the last 6 months. 6 months still isn't good enough to construct a 200 SMA, but the bonus here is that they can recall back weekly data for a whole year.

So, I managed to directly download all the data for the 2 Fidelity funds and the 2 Templeton funds, and it's great. I immediately wrote some simple formulas so that in a simple glance, I know to update my moving averages green or red, as well as the gradient of the 200 SMA. For all the other funds that are listed on Dollardex, I used the weekly data to construct the 10 and 40 week SMAs, which are a smoother, less noisy, but less robust in data, and of course, a bit more lag because it is weekly. That's the best I can do given the lack of daily data available. However, the DB and JPM funds aren't listed on Dollardex, and their data extraction is much harder because they are in the graphical form. For these 5 funds (2 DB, 3 JPM), I extracted the past 3 months prices off Phillip, and I'll be manually, slowly updating the dates and prices for the past 10 months. That is gonna be about 800 manual entries of dates and prices!

Meh, I am not looking forward to that. On the bright side, the DB funds are definitely in no rush since they seem to trend much better. For the JPM funds, I hope to get started and be done with it by 2 week of January, hopefully! Actually, maybe I'll just use the weekly prices for the next 7 months, but still collate the daily prices, so that I can transition into daily prices in July. Hmm... Anyway, this will help me be a lot more objective and strict when it comes to my tactical moving averages rules, so I'm sure this will be useful in the near future.

Lastly, I'll be posting up the final week update of 2013 in terms of moving averages and drawdowns, and then I'll be working on finishing up the Dec portfolio update. Come end January, I'm hoping to release a full and proper monthly update of my entire hedge fund. This will help me with a better bird's eye view of my entire portfolio, because I feel like I need to value average into certain positions, but I feel like I don't even have a proper snapshot of what I am currently doing! It's just all too messy for me to see and approach in a very clean manner, so I'll be working on improving that.

Saturday, December 28, 2013

Possible 2014 Contrarian Trade?

After reading this post on Zerohedge, I went to do a little research on how Thailand is doing.

First, I went to find out the list of investible unit trusts that focus on Thailand from the list of Phillip funds available. It was a long list, just about maybe 6 funds on it.

I did a quick scan, comparing long term returns and volatility, and I've shorted Aberdeen Thailand Equity Fund to be the best fund available, should I decide to buy Thailand equities. With annualized returns over 10% and consistently beating the benchmark, which is the SET, I think it makes for impressive performance.

However, the country seems to be facing a lot of problems recently, especially in terms of politics. And as you can see from the Zerohedge article, investors are abandoning the place.

A quick check on Dollardex showed me some interesting statistics. The worst drawdown for the fund ever since record was from July 07 to Dec 08, the Great Financial Crisis. That period saw the max drawdown hit 53.4%. The current market peak was last year, and since then the index has been on a steady decline and has now lost 25.5%. So, it's about halfway through it's worst drawdown ever.

Looking at the recency of events being aggravated, I'm very sure that this correction isn't nearly done yet. Perhaps the index will bottom out after the fed finally stops QE? Whatever the case is, if the index continues to plummet further, it could make for a very potentially profitable purchase.

Once the drawdown crosses 40%, I might perk up a bit more and see how things are going. If it reaches near 50%, I might be ready to pull the gun at any time! Ideally, this does not coincide with a global slump, because then other markets will also present very valuable opportunistic contrarian trades. However, if that does happen, well I guess it then wouldn't really matter where I throw my money!

Friday, December 27, 2013

Margin of Safety for the Long Term Investor

The Aleph Blog is a treasure trove of wisdom when it comes to practical and usable nuggets of information for the average non-savvy investor.

So, here's his take which strongly reinforces my contrarian strategy:
"For those with a long time horizon, the safest assets are those that are misunderstood and hated, with low prices relative to intrinsic value.  The downside is clipped, and the upside could be considerable, with decent probability."
"There are times when the market is irrationally bearish.  That is the best time to invest, but wait until things stop getting worse before investing."
Like I like said before, irrational market behaviour pushes down asset prices to lows, which limits their downside and makes for a very good probabilistic chance of positive returns in the future.

I am a bit fearful that I am searching for a lot of confirmation bias, especially since so many of the sites that I follow mention and cite each other from time to time. Or perhaps I really am following the right group of people?

Everything That Shines Ain't Always Gonna Be Gold

But how about gold miners?

I have bought into UOB Gold & Gen about 2 months ago in October, when gold prices were at $1330 USD/oz. Back then, gold miners have been drawndown about 60% from it's last all time high. The deepest drawdown took place between Feb 1996 to August 1998, and that cost miners 73% of their peak value.

Since then, gold and gold miners have been steadily declining, hitting lows of $1187 last week. That particular unit trust have taken a hit of about -16%.

Anyway, recall my post at the start of the month, "Greed is... Gold?". Here's what I said then.
"My best bet and prediction is that the price of gold is going to continue to drift lower, not going lower than $1145, definitely not closing below $1155. This price target should be hit either in the last week of December, or by the end of the first week of January. I can't call the bottom with any accuracy, but I would guess between $1180-1155. After this is hit, I honestly expect a spectacular rally over the next year or two."
Well, since then, other than the recent price action in gold, a few other things have reaffirmed my affinity for this contrarian trade.

1st, The Daily Gold has done some great historical comparisons of bear markets for both gold and gold stocks.
"Moving to the gold stocks, we can see that the current bear market (in black) only needs to go a bit further to be on par with past bear markets. Note that the three bear markets that lasted the longest were far less oversold at the current point. This suggests the current bear should end quite soon."

2nd, The Short Side of Long also echoed this similar rationale in a post 2 days later, which referenced The Daily Gold's video about a week earlier, showing the historical bear market length and depth.
"In other words, a major bottom and a rebound could be much closer then majority of the Wall Street think, unless this is historical anomaly (rarely do we see those). This view is also confirmed by my own personal the chart below, showing how the current 12 month rolling period is one of the most oversold for the HUI Gold Bugs Index in almost 3 decades."

I think these viewpoints have given me quite a strong case for deciding to take up a contrarian bet in gold miners. Gold itself seems to have more downside to go, but the miners look about done. And based on history, miners usually recovered ahead of gold prices rising.

Occurrences like these which are over 1.5 standard deviations mathematically occurs 13.4% of the time. And if we're talking about downside standard deviation, it would be just 6.7% of the time. And given that all assets have a positive Sharpe ratio in the long run (general tendencies for upside risk higher than downside risk), I would place of odds of this scenario at 5%. Also, there have been very rare instances where the prices managed to stay on one side of the 200 SMA for so long. Mean reversion is the name of game for those arguments. Coupled now with the fact that there is some confluence from past historical drawdowns and a major support, all these points gives me a nice and comfortable margin-of-safety.

The current spot price of gold is at $1210 USD/oz now, and I have decided to put test the waters a little bit. Current drawdown is at 64%, which isn't as deep as the previous 73%. Therefore, I do feel that further downside is very possible, perhaps making a final bottom by the 1st or 2nd week of January. However, I still think that the case is very strong to invest in gold miners even at this point of time.

Should prices decline to my previous targets over the next few weeks, I will definitely be looking to stack up on these all the way, either downwards or upwards. If prices start to recover, I'll be aiming to accumulate under $1250 USD/oz.

Thursday, December 26, 2013

Year End Financial Spring Cleaning

Now that 2013 is coming to a close, I feel that I should do some spring cleaning, regarding all my finances since I was born, until year end 2013. This will require some work, but as an investor, I need to track down and value the current net worth of all the assets credited to my name. I have to figure where I am, if I want to know which direction to head to get to my destination
  • Rummage through all drawers, old wallets, red packets and hidden stashes for money
  • Note down any of my hard assets (jewelry) and collectibles
  • Keep vintage notes
  • Consolidate remaining cash
  • Sort based on currency
  • Gather all coins
  • Sort coins based on Series
  • Encash 2nd Series coins at the Mint
  • Consolidate all bank accounts and credit/debit cards
  • File all monthly account balances
  • File all unit trust dividends and summaries
  • Cancel cards no longer in use
  • Replace cards that are old
  • Apply for new cards if needed
  • Consolidate all existing insurance policies
  • Print and keep all the terms and conditions of policies
  • Evaluate possible new insurance policies
  • Contact CIMB regarding fixed deposits
  • Prepare income tax filings
  • Find out about tax credits applicable
  • Understand more about tax credits, CPF monies and SRS account

Monday, December 23, 2013

Tactical Asset Allocation

Here's a fantastically awesome piece of work that I feel is quite a great elaboration onto what Mebane Faber has done with his IVY5.

Empiritrage has come up with yet another great piece that supports diversification and tactical allocation to portfolio strategies. Here is the full pdf report.

The main takeaways are:
  • Tactical allocation = changing your baseline allocation weights
  • Diversification improves Sharpe and Sortino ratios
  • Tactical allocation by minimum variance, maximum sharpe ratio, risk parity or momentum enhances performance
  • Moving average rules does not affect CAGR much, but reduces volatility and max drawdowns substantially
  • Bonds as an asset class are essential for improving volatility measures
This research, along with the Ivy Portfolio book is what that has strongly pushed me towards the direction of creating and managing my very own portfolio that uses very simple rules.

Week 51 / 2013 Update

A really lag update, been having problems with the Phillip site as well as my browser! Anyway, here we go.

The major changes are as follows:

  • DM equities are back on their feet and steaming ahead
  • Asia-ex Japan looks like it might make a turn for the better very soon
  • Global real estate is trying to coming back, but I'm still dubious
  • Global HY is falling out of place
  • EM bonds looks like it has bottomed out
  • Commodities are back in the drain

 The major changes are as follows:

  • Equities are bouncing back
  • Real Estate getting better
  • Non-traditional bonds are split. HY doing worse, EM and Corporates are improving
  • Commodities have gone no where
  • Traditional bonds aren't going anywhere either
So, the follow-up action that these seems to be telling me is that:
  • Be open to Real Estate rally if economic sensitive sectors are rallying
  • EM bonds and Inflation bonds are looking like a bottom to me
  • Gold seems really ripe for the picking
I'll be posting up my new fangled strategy soon. I've got to really clear my mind and get all my worksheets and tools in order for me to make it work. I'll be trying to sort that out over the next few days!

The Single Greatest Predictor of Stock Market Returns?

I was link hopping around again, and I landed on the front page of Abnormal Returns, which had this fantastic graph!

How good is it at predicting 10-year returns? Well, everyone thinks that the Shiller-PE or the CAPE is one of the best predictors of market returns. Let's see some stats in comparison.

Holy shit, do you see that? Most investors use the trailing PE and forward PE metrics. Shiller-PE is catching on after his Nobel prize. Tobin's Q is a pretty accurate measure too, though I'm not sure how to use it to forecast returns, though it's likely the same as the PE ratios. Over-extension from the long term means will produce bad returns if bought at those pries.

I know Warren Buffet uses Market Cap to GDP ratio, and that is an amazingly fantastic ratio to be using as well, it trumps all the previous methods listed here.

But WOW, I'm just blown away by how strong this new metrics is at predicting long-term returns of the S&P. I am very impressed. The link to the entire article is here, while his pre-made graph from FRED is here (which I think I may consult on a quarterly baisis!). He also writes a follow-up piece regarding curve fitting and the other valuation measures here.

Anyway, I have to say that his blog is a great read if you're down for some gritty dirty action with accounting and market behaviour. I really liked his piece of the Pro-forma Shiller-PE.

Personally, if you ask me, what would I do?

I would take down all of these metrics, graph them with returns. Perhaps I can even combine them, assigning weights and making a rough threshold level to buy or sell equities in the long term. Hmmm.... Definitely something that can be used in my contrarian investing toolkit! Must be further investigated!

Sunday, December 22, 2013

Weekend Musings

I was just reading a recent post on Monevator, and there was a video link to an interview by The Motley Fool with Barry Riholtz from The Big Picture. It kind of seems like the people I all follow have quite a tendency of finding the same people and ideas very interesting.

The best part to me is from 16:46 - 17:42. Here are just some of the things that Barry said that really resonates with me:
  • "I don't even look at daily charts. Everything we look at is weekly... Why is that? The day-to-day stuff is noise. We want to smooth it out and think longer term"
  • "The idea is that you have a broad allocation of different asset classes. We never knew each year what asset class is going to do the best. We own all of them and so when something goes up, we can take advantage of that"
  • "I think that is the lowest risk, lowest volatility way to go after returns, rather than chasing whatever is the hot name of the day"

Another thing that has stared me in the face from Monevator's post was a single line that said:

"Be diversified or be contrarian, but don't be a clueless latecomer."

And with both of these nuggets of wisdom, I have become slightly more confident about my "hedge fund" strategy that I'm looking towards engaging in.

Finally, to end of my rambling, congrats to Ciovacco Capital for winning the poll as the most helpful Twitter trader. Here is their weekly video, which is very practical, logical, informative and also emotionless and actionable.

That's all folks!

Saturday, December 21, 2013

An Interesting Week

This week while I was away doing... stuff, I kind of learnt how to just sit back, relax and not worry so much.

Honestly, I'm pretty impressed by my portfolio and how it's been holding up so far. Despite the crazy markets, I have yet to have a drawdown below 2%, which I think is just a amazing feat so far!

Anyway, since I was with alone with my thoughts for a whole week, I had plenty of time to think about a lot of things, and one of the things that I was thinking about was investing.

I was thinking that I should set limits with some leeway for my allocation of my savings into my different strategies. So far, here's my thoughts:

  • 60% Long-Term Portfolio
  • 15% Contrarian Drawdown Bets
  • 20% S&P Market Timing
  • 5% Currencies
That means funding becomes pretty easy. 75% (60 + 15) goes into my Phillip account, while 25% (20+5) goes into my CMC account.

Within my Phillip account, Since the numbers are quite clean, it's a 80% allocation to equal weights of the asset constituents, while 20% used for discretionary value bets. However, now while the portfolio is still young and "lumpy" due to the smaller account size, contrarian bets mights run up quite a bit more, bet definitely expect more funding towards the balance 80% of the account.

In the event that there isn't any compelling buys in the market, the 20% for contrarian bets can be used to overweight asset classes that offer strong fundamentals as well as momentum, if not, they can just be held as cash in the account, while waiting out opportunities.

The CMC account is a lot more tricky. However, since the S&P Market timing strategy should be quite straight forward and does not trade frequently, I think it will be quite easy to find out what is the accurate allocation for it. The total value of the account, minus away the reserve capital for the market timing strategy, will then be used for funding my currencies strategy. With just a 5% allocation, it is small. In fact, it's tiny. But I think this 5% will be enough to keep me on my toes and to not meddle with the rest of my allocations. It will not be enough that if it blows up, I'm screwed, but the strategy itself ought to offer something which isn't correlated to the general market condition.

With that said, maybe instead of just updating my portfolio of unit trusts monthly, I ought to have a massive overview of these 4 strategies that I'm pursuing, as well as their individual performances, eh? Hmmm.... I shall ponder a bit more, maybe ask Asspie what she thinks!

Saturday, December 14, 2013

Week 50 / 2013 Update

Here's the update for the week of 9 Dec to 13 Dec.

The major changes are as follows:
  • Asia ex Japan is looking to turn bearish within the next few weeks
  • DM equities are starting to lose momentum
  • Non-traditional bonds are looking worse
  • Commodities are above it's 50 SMA

The major changes are as follows:
  • General equities seem to be in a correction mode
  • Real estate can be rightly classified as entering a bear market
  • Non-traditional bonds are not going anywhere
  • Commodities are still stuck themselves
  • Traditional bonds looks to be getting worse as well
So, after looking at the the moving averages and drawdowns, what do all of these tell me?
  • Sleep with an eye open watching equities, this correction continue over the coming weeks and trigger cash positions
  • Real estate has started it's slippery slope, and it's going to be major fall out if the rest of the equities follow suit
  • Economic sensitive bonds may not fare well if there is fall out, but they seem to have stalled, most likely waiting for more information about tapering
  • Commodities look set to finally rally, but I predict a final push lower for miners
  • Traditional bonds are all waving red flags now. Considering I picked them up after the huge May correction, I'm not too worried about holding on to them throughout whatever may come.
I'll be away on reservist the whole of next week, so definitely no updates from me. I just hope that the correction in the S&P doesn't happen while I'm away next week, and everything points to sell. I might be looking to sell off DWS soon if equities continue to deteriorate. Things are pointing me quite heavily towards a cash tilt!

Sunday, December 8, 2013

Week 49 / 2013 Update

So, hopefully I can make this a mainstay in my investment journey. Once a week, update the moving averages of my portfolio funds to see the momentum and check on drawdowns in asset classes to look for a bottom.

First up, the moving averages.

The changes are as follows:
  • Asia ex Japan is bumbling up and down it's 50 and 200 SMA's.
  • Real estates securities are now pretty much down in the dumps
Next, the drawdowns of the funds that I follow. I have included funds that don't have a long history into the previous bear market (so no data from the start of '07), so I have included their portfolio benchmarks to serve as proxies. Surely it is not a perfect fit, since some fund managers may mitigate risk better or worse than their benchmark, but it's a good ballpark figure to work with. Note for corp bonds, I took a 50/50 weighted portfolio of CORP and CIU, since there isn't really a good proxy for it as it currently stands.

The most noticeable are:
  • Gold & Gen is almost at 90% of it last drawdown
  • EM Bonds are almost almost 90% drawndown from it's last major correction in '08
So, what do these tell me?
  • Real estate is not doing well, and it has a lot more room to fall, especially if it happens in conjuction with both taper and a stock market crash
  • Asia ex Japan is consolidating, but not much to worry about as long as it is range bound. Still collecting dividends on this, so it should be all right
  • Bonds are overall still not looking good in terms of momentum
  • Gold has more room to fall, and I suspect that it might be even deeper, considering the heights that it fell down from. However, that being said, it looks very attractive at these valuations, with the risks of portfolio loses seem to be capped at 20%
  • For EM bonds, we have got to see how taper affects bonds as an asset class
With that said, I'm still holding on my horses. I have mentioned that I think that gold will bottom out end of the month or in Jan to about a rough 1145-1180 range. Maybe the S&P will hit 1850 then. After that, I'm looking for at least a bare minimum of a correction, if not, even possibly a crash. Those levels will make me a lot more comfortable pulling the trigger and setting my plans in motion.

That being said, the data coming out of economy in the US is holding up surprisingly well, despite fundamentals. I wouldn't let up most of my sensitive positions unless I can really feel a dangerous cloud looming, which I don't see in the near term future.

Friday, December 6, 2013

An Amazing Metrics Website!

Remember how I was just talking about drawdowns and being contrarian? I found a website that has a massive amount of tables, charts and analysis, including drawdowns as well!

Drawdown Directory

Trend Level: Long term OB / OS indicator
Elastic Level: Short term OB / OS indicator

12 month CAGR

Moving Averages Directory
Multiple MA crossover

S&P vs Gold: do you see what I see?

Perhaps the most interesting chart of all for me is the last one, which is the S&P vs Gold.

I think this comes in line pretty much what what my expectations for gold is, which is it is going to seriously start to pick up and outperform when the equity market hits the pits, which is then the perfect time to liquidate gold holdings, and run to the other side of the boat.

I am very much in love with the trend levels also, it gives you a really good picture of what might be the next loved / hated asset classes.

Building a Trading Model with the 10 Year CAPE?

I was reading a Blackrock post today about market valuations, and I link hopped all around the world today, mainly because of the mention about CAPE, or the Shiller P/E ratio.

With that in mind, I wanted to find a website that updates or publishes indices or at least countries with the CAPE data. The best I could find was a weekly market valuation data with the simple P/E ratio on FundSupermart. The next best I could find was Market Cap / GDP, which I personally don't find too attractive due to the lack of usage or research on it.

Finally I got linked back to good ol' Meb Faber here. And that got me to read his research paper that can be downloaded here, which then linked me to an awesome paper about dividend equities "The High Dividend Yield Advantage". I strongly recommend reading that to know why I have a strong preference for dividends.

And all this is so coincidental, because Meb Faber just updated with a post, updating on the returns from the CAPE countries he listed about a year ago. The results, as in his paper, shows the CAPE is a fairly accurate indicator.

Although I'm not keen on directly investing into specific countries, I would love to be able to check what are the CAPE figures for the MSCI World, EM and Asia ex Japan. These would help me decide on a fundamental basis if I want to OW or UW the respective funds. Sadly, I don't know where I can find such information, and I am not keen on doing my own research, and then melding it into a strategy.

I am really trying to simplify my processes these days, and try to stand a bit further back and make less rash decisions.


So I've been thinking. I've been thinking a lot.

On my gambling CFD front, I'm horrible. I just make too many mistakes. Sure, it's fun and all, but when I think that I've actually just lost a ton of real money, kinds of kicks me in the balls.

Because of all these tuition fees that I'm coughing up into the system, I think I can safely say that I have been learning a lot though. I just haven't been practicing it, which I should.

I trade too much, trade unfamiliar pairs, listen to questionable advice, rarely ever book profits and I always try to go against the flow.

Personally, I think that deep down I'm a contrarian guy, rather than a momentum guy. So, I've been thinking how I can use this trait to help me with my long term investing.

Using the moving averages signals, if the signals are already showing buy, do I put more into the position? If the signals are saying cash, do I remove everything from those positions?

Well, I was thinking about, and I don't feel comfortable adding lots of extra capital into already overdue buy signals. If the buy signals were generated a while ago, that means I'm a while faster to taking the bets off the table.

So, I've decided to do something a lot more contrarian, which is to invest using drawdowns.

Historically, if drawdowns are 40%, if my fund drops more than 40%, I'll be looking at any moment to hop on and pile in the money there. Basically, asset classes have difference performances and volatility and a lot of other things. There are different. However, they each have a unique characteristic, which is how much are their drawdowns.

I have written about drawdown investing before, a few months ago, and I did show some charts for some asset classes. I think it was in my investment building write-up. Anyway, how does drawdowns help you invest?

Well, take for example, the US Aggregate bonds. It's a standard bond index used by US investors, and based on historical drawdowns, it has never been drawndown more than 3.8%, until this year. This year's drawdown pushed it to the limits and almost doubled that drawdown percent to 6.8%. Currently, the index is still 5.8% down. What are the odds that over the next 15 years the drawdown in this bond index will exceed 6.8% again? Personally, I think never.

How about gold miners? Their last mega drawdown like this lasted for over 2 years from 1996 to 1998, and the drawdown was 72.58%. The current drawdown starts from 2011 and it's 64.94% now. Can it go down lower? Yes, I think so, but not appreciably much lower.

So, here's the table where I got my information from. It took me quite a while to run around and collect the information.

Along with the weekly updates of moving averages, I think I will I will also be including this drawdown comparison table.

The reason why I find this compelling is that I can start on a long position and accumulate it with the safety in mind that there is a cap to the amount of drawdown that I can possible have now.

Look at UOB Gold & Gen. It's current drawdown is 89% of it's biggest historical drawdown. If I decide to invest into the fund now, I have quite a high margin of safety knowing that beyond a drawdown of 11%, this fund has never ever loss that much before. Who's to say that the biggest drawdown is the cap to how low a fund can go? However, knowing that the fund, if it follows history, will not really plunge more than that.

Given this information, I feel a lot more convinced not to add into positions that have buy signals, unless they were fairly recent. I also will have more conviction to not be itchy and add to those momentum asset classes, and instead be closely monitoring the unloved asset classes, waiting for a nice price level to enter which really minimizes downside risks.

That being said, I've my eyes particularly keen on gold miners. I'm hoping to hear more news about taper talk and what not, and then EM and US bonds will start looking like a fantastic place to add in additional capital.

Argh, with all these ideas floating around, I do think that they can add alpha instead of just having a buy-and-hold strategy. Now what I have to do is to stop thinking so much about other strategies, and instead figure out how my asset allocation is going to work!

Tuesday, December 3, 2013

A Rate Tart

Taking a page out of the Monevator's blog, his recent post titled "Confessions of a Rate Tart", which has coincidentally inspired this post.

Basically, he has 26 bank accounts, and he moves his money around to wherever offers the best rate for his cash.

The phrase that really struck me the most is this "So everyone wants a piece of the pie, but you just give them the same old slice and keep it moving through the system".

Now that I think about it, it really makes a lot of sense to me. Banks are just vying for your crap cash and give you pathetic rates on it, and lend it out for way higher premiums. If you're the sucker here, why not at least try to sucker the most amount of money out of the system?

Let me give you a slice of what the real interest rates on savings accounts are right now. I'll be looking for the rates for accounts of $10,000 SGD.

HSBC 0.01%
DBS 0.05%
DBS 0.05%
SCB 0.10%
OCBC 0.20%
Maybank 0.43%
RHB 0.48%
CIMB 0.50%

(*just a reminder, but 2013 YTD core inflation is 1.6%, so yeah...)

OCBC does have a promo that you can get 1.18%, but you cannot make any withdrawals the whole year. So... it's a 1.18% fixed deposit, not a savings account. But, that said, no lock-in period.

Anyway, as you can see, I've shopped around and I've been looking at rates. It makes me feel like I'm a pretty girl, and all the boys are lining up to get a piece of this. And after looking at all them boys, I decided that the one that has the best to offer, is CIMB. I never knew it until I googled it, but it stands for Commerce International Merchant Bankers Berhad.

So what's at CIMB?

First, they have a savings account, it's called the CIMB StarSaver (Savings) Account. It's different from the current account in only 2 ways. You can't overdraw it, and the minimum deposit is only $1k, instead of $5k. That's it. The base interest rate is 0.5%. The sweetener is that if you regularly deposit money into the account, the interest becomes 0.8%.

Second, they have a fixed deposit scheme, which isn't really a fixed deposit scheme. There's a 5 year fixed deposit scheme, which allows you to withdraw every 6 months, but only with the interest that has been accrued for that time period. The same for a 1 year fixed deposit, but with the option to withdraw every month. Bloody hell, in what way is that a fixed deposit? I'm not complaining, but it just seems crazy to me. Here are my accurate calculations of the effective interest rates based on withdrawal period.

So, as you can see, regardless of whatever time frame, the minimum per annum effective interest is 0.55%, and goes up all the way to 1.57% if you hold the fixed deposit for the full 5 years. If your holding period is definitely more than 3 years, then the 5 year step-up plan is better, since the 3 year withdrawal rate is the same as reinvesting the 1 year amount as it expires over 3 years. However, just the fact that you can get risk-free 1% gives me the chills, in a good way.

Anyway, a Malaysian bank. Why a Malaysian bank?

Well, even though it is a Malaysian bank, it is still covered by the Deposit Insurance Scheme. That means, up to $50,000 SGD in insured if the bank flops out.

Next, as a Malaysian bank, they have a need for Singapore dollars because that is not their main currency. So, I figured that it is cheaper for them to con Singaporeans to give them Singapore dollars, slap on a marginally better interest rates than the local banks, and use the SGD for their own purposes. This saves them financing costs, spreads and risk that they will have to take if they are constantly converting in and out of Malaysian Ringgit. This is also the reason why I think that local banks gives such shitty interest on bank deposits.

So, here I am, fighting the system. I'm being a rate tart, and I don't think I have anything to be ashamed about. I'm just looking out for number 1, and whoever fits the bill, is getting my business.

I am planning on opening up just a simple savings account with the minimum deposit, so that the fixed deposit money can be transferred in and out. I am highly suspecting that the money will perpetually be in fixed deposits though, especially since that there is no penalty for early withdrawl. In fact, the interest rate earned on early withdrawals is even more than the base rate of the account.

However, if I do get a confirmation that local interbank transfers carry no charges, I would actually be quite happy to regularly save and transfer most of my excess cash into this account, either working in a fixed deposit, or just sitting pretty and getting 0.8% risk-free.

I shall see what CIMB says when they contact me.

Greed is... Gold?

My favourite financial site, ZH, has reported that gold is closing in on the marginal cash cost of gold, with CAPEX excluded.

Now, let's pause for a moment and think about this. The current spot on gold is now 1220 USD/oz. The estimated marginal cost of gold is about $1250-1350 which includes CAPEX of a $100 or $200.

Gold at the current spot price costs more than the most expensive mine currently in existence. What does that mean? It doesn't take a math genius to know, the mine will stop production because it is no longer profitable to mine the gold anymore.

Back on 18th April, they had a post showing the gold cost curve estimated for Dec 2012 for a variety of mines, pictured below.

The main thing to see here is that the bars represent the cost of mining gold, and the thick horizontal blue line was the spot rate, of $1400, which would have already knocked some mines out of production since now we're at $1220, which is better represented by the thinner blue line. However, since the start of 2013, gold mines have been cutting down on costs, so the costs should have dropped, but not drastically.

Now, see this graph by Kimble:

The fib extension is met by 2 support lines at roughly the spot price yesterday, which was $1235. I think that this is the current marginal cost of mined gold.

Now, see this graph from TheDailyGold.com:

And where does the support line comes in? The low $1100s! Which I think is the marginal cash cost

So, here is my hypothesis. After looking at the combined analysis from different independent sources above, I think that the current marginal cost of gold of the last producing mine is now at $1235. If this support is breached on a weekly level, it does expose the $1125 cash cost, which excludes CAPEX. This means that you're pretty much buying gold without any of the fixed costs price tag on it, which makes it, very very attractively valued.

Of course, that doesn't mean that the prices of gold can't push lower. But with every lower push, more and more mines will be getting kicked out of production, reducing the supply of mined gold. If supply drops, prices increases. If gold prices hit $1000, a third of the mines would be out of business. At $880, the last line of defense, less than half the mines will still be functioning.

My best bet and prediction is that the price of gold is going to continue to drift lower, not going lower than $1145, definitely not closing below $1155. This price target should be hit either in the last week of December, or by the end of the first week of January. I can't call the bottom with any accuracy, but I would guess between $1180-1155. After this is hit, I honestly expect a spectacular rally over the next year or two.

This is my call, and I am going to show my commitment to it by purchasing gold miners at that price target. I have held the notion that gold (and therefore, gold stocks) are grossly oversold and unloved. After watching this video, I am quite certain that if price drops lower and hits my target, the downside risks are greatly muted. At my price target, I will be dipping my toes into the water, because who knows how long gold will remain range bound before it finally takes over. If I can see that the trend is reversing, I will slowly scale in.

Monday, December 2, 2013

Testing Weekly Update Update

All right, so here it is, this is my updated weekly moving average chart.

So, the 50 SMA and price action will act as leading indicator for me.

The 200 SMA and price action will determine 50% of my asset class allocation. If it's above, buy and hold. If it is below, sell and wait.

The 50/200 SMA Golden Cross will be my second trigger, which the other 50% of my asset class allocation will be based on. Same rules as the 200 SMA price trigger, just a different independent method.

Lastly, the slope of the 200 SMA will be my guide in the tell me what the longer term trend is saying. If it has a high gradient, I might give my triggers more breadth before execution. If the gradient is very flat, then I will respect the triggers very closely.

Now, let me move on to explain why I have expanded my asset classes, shown below:

So, as you can see, I have 4 main groups of equities. US and EAFE equities are quite weird, because it is split between 2 global equity dividend funds. However, I find that both these funds are dissimilar enough from each other, while having a nice geographical spread amongst the world's developed economies. USA is under 40% for both of these funds, which I like, because I think people give the US markets way too much credit, and I don't particularly see fantastic returns for the market in the near future.

Asia ex Japan and EM equities also engage in dividend strategies. The reason for this is, I've written a few posts before. I'd just like to point out that I have an 8% allocation in each of these 4 geographical equity groups, accounting for 24% of my allocation.

After that, I have real estate in the form of REITs. I have also written about why I see REITs as a form of real estate before. I have decided to split up the weightage of this asset class, and give 4% to a global REITs fund, and 4% to the local REITs industry. Honestly, save for a few select cities in the world, I find that property prices in Singapore very much stable, and the REITs market being grossly undervalued compared to global counterparts.

Following that, I have the credit sensitive bonds. Global HY bonds comes in 2 flavours as well, mainly because of the geographical split within the funds. The Legg Mason fund is quite heavily US weighted, while the Templeton fund has no holdings in the US at all. Although the Legg Mason fund seems to be outperforming the Templeton fund now, the Templeton fund has lower interest rate risk, and I believe it will hold up much better than the Legg Mason fund, since it is less closely tied to the US economy.

Global Corporate bonds has been switched out from Schroder to JPM mainly due to the lower subsequent rebalancing amount. The 2 funds are actually very similar. However, I feel more comfortable with the added flexibility of a smaller top-up sum required. These bonds although investment grade, will likely still be affected by economic cycles. More research has to be done before I decide if I will time this asset class like the rest. EM bonds are wildly volatile, and regardless of what the macro factors say, I will simply just be following the technical moving average rules that I have set for myself above.

Finally, we have commodities, which are 8% in a basket, and 4% in gold miners. Although these 2 asset classes seem to be the most hated now, it is very strange to me that I find both of these as the 2 most attractive classes to me. For both these asset classes, I have a strong belief that the downside risk are largely muted, with very highly upsides. In fact, these 2 asset classes maybe make me break my rules and over allocate in them, because that is just how much of a conviction I have for them.

The last 3 funds, US bonds, Foreign bonds and TIPS, they are all relatively stable asset classes. Not much volatility, so not much benefit of timing the market. For these 3 asset classes, I will either be diligently topping them up to the correct portfolio weight, or I might actually time the entries to make it more favourable, though like I said, the differences should be quite muted.

All in all, I find that this exercise has helped me reevaluate a lot of my processes, improved it, and will help me in the future. I am quite adamant now on NOT adding anymore asset classes or funds at all into my portfolio. I personally feel that what I currently have is a pretty robust mix of asset classes, with clear defined rules. If I follow these rules, I will actually be quite happy to be able to clock in yearly returns of 6% with the utmost minimum in total portfolio drawdown. However, given the fact that seemingly a large portion of the portfolio may be sitting in cash waiting for a signal, this might actually be a drag to true overall portfolio returns.

I am currently toying with the idea not to hold so much dry powder in cash. Specifically, not to fund all the asset classes with available cash to take advantage of the market. Instead of having up to 13 cash pools, I think cash pools will be only up to the current top 8 asset classes, since on average, only 70% of the asset classes should be signalling an invested position. This will reduce the amount of redundant cash just sitting idle in the portfolio, thus optimizing returns. However, until I can figure out a proper, mathematical and systematic way to do so, it does no actual harm to my overall returns on all my assets to hold cash, since I do not have any other productive forms of investment.

The only other investment that I have now is still in the works, which is to follow the S&P market signals on a leverage of 2. I am now building up a significant cash fund, adding into the fund monthly, waiting for the next signal to be given. Once the signal is given, I will be putting all the money in the fund into this and continue building another cash position to be deployed with the signal changes.

So, currently I have 2 investment strategies, though I am thinking of a third. The first will of course be my hedge fund, which is going on a diversified, equal weighted mix of asset classes timed with moving averages. The second is my levered S&P market timing system. Lastly, I am thinking of long-only contrarian funds that have a high chance of producing significant upsides within the next 2-3 years, so that I can liquidate these performing investments, and use them to buy undervalued investments then. Like I have said, I personally find that gold miners and commodities are in a extremely promising position now.

All right, enough with the rambling. To cheer myself up, here is the Nov update from the Capital Spectator with the performance reviews of his major asset classes. After seeing that his GMI-EW has only performed 3.3% YTD, I don't feel too bad about how my current portolio is doing, which is about down less than 2%. Actually, when I only had 2 funds, I was down a massive 4% then. I think this just shows how effective diversification is in reducing portfolio volatility. Now, just gonna get them returns!

Testing Weekly Update

Taking a page from Mr. Doug Short, who does something similar monthly (lastest end Nov update here) regarding the Ivy Portfolio by Mebane Faber, here is my weekly updates moving averages chart.

Meb Faber also actually has a page where he has made it fantastically easy to see where the 5 asset classes are in relation to their moving average.

Sidenote: I just got a copy of his book, The Ivy Portfolio, after seeing so much about it and with DShort promoting it. I will do a review soon!

This is just the rough table that I am thinking of updating every week. Hopefully I can dabble into the remaining funds, so that the format will not change. Actually, what's stopping me from tracking funds that I don't own now, but intend to own? Haha, I will include my intended funds next week!

I have sorted the listed to what I think are the most sensitive classes that will benefit the most from market timing. The bottom 3 funds, US Agg Bonds, Global Bonds and Global Inflation Bonds are AAA, A and AAA rated respectively, which means that they are relatively stable in their returns and preserving capital. The GTAA paper by Meb Faber also shows that timing bonds and a very marginal effect on returns and volatility. No doubt it helps, but when transaction costs come in, I question the benefits when compared to the cost and effort put in.

These 3 bond funds will actually just be held throughout a "cash" period. Given that I see that the downside seems to be over (which should not be more than 10% anyway), I intend to use the cash saved up during that holding period and slowly step in quarters as each of the signals turn green in sucession.

However, for the group of funds listed above, I intend to follow buy and sell rules more strictly. In fact, the 50 SMA turning yellow or red is there to alert me to be mindful of that asset classes, and not to go for more than a week without internet.

The main indicator that I shall be following will be a weekly close under the 200 SMA. However, in circumstances which only seem like a whipsaw and no fundamental long term risk or steep correction, I might wait until the 50 SMA crosses below the 200 SMA, which will definitely be my confirmation signal to sell, unless price has already cleared back above the 200 SMA, which I would think would be a very rare scenario.

Finally, the slope of the 200 SMA gives confirmation of the underlying trend bias.

I am still undecided how to use these signals to constantly value average and add in capital to my fund. I am toying with the idea of setting aside "cash" accounts for each of the asset classes, and "cash" account money can only be added into positions when an additional buy signal is generated, for example, if price crossed under the 50 SMA, but has just crossed above the 50 SMA again. The only other option that I can think of is using discretion to decide when is the best time to add to positions. Of course, the drawback to this is opportunity cost of sitting out of a performing asset class.

I am though, quite interested to adopt the (Cash / Invested) binary option that the Ivy Portfolio uses, which DShort tracks. In fact, I think I would like to start segmenting my portfolio now, to show what is invested, and what is "Cash" dry powder that I am holding on to, for that specific asset class.

However, I am thinking of scaling in positions. Perhaps, if the asset class has no positions, price clearing the 50 SMA might warrant a 20% position. If the price continues to clear the 200 SMA, add a 50% position. Once the 50 SMA crosses the 200 SMA, add in 20%. Finally if the 200 SMA turns positive, allocate the remainder of the money sitting in the "Cash" account.

Thinking about it, that would actually mean that I am using 4 different kinds of moving average triggers, which I don't know if that is a good thing.... Anyway, surfed around the net and I found a site from Turnkey Analyst talking about the exact thing I am doing, which is tactical asset allocation, equal weight, based on moving averages here. Linked around here and there and found a great backtest on risk parity, momentum and moving average strategies applied to and benchmarked against an equal weighted asset allocation basket. The conclusion is that diversified, equal weighted, moving average strategy has similar CAGR to a 60/40 or the S&P, but with greatly reduced volatility, and also a much reduced drawdown (15%).

Honestly though, I'm just hoping to find a moving average strategy, either price action or a cross, which has been sort of optimized for different asset classes based on their historical volatility, to reduce whip-saws and have better timing on entries and exits. Well these were the best that I could find, a table comparing the different MA crosses between simple and exponential, and more about the golden 50/200 cross explained. So far, it looks like the 50/200 SMA is the most simple and straightforward crossover method, though just the simple 200 SMA and price action strategy does do well too. Sadly, there is no comparison between a crossover or price action strategy that I can find from the same independent source, so the testing method would be similar, therefore results can be compared.

Actually, after reading all the different research articles and backtests by so many different sites, I think perhaps a simple 2 strategy method might work, which is 50% based on 200 SMA price action, and 50% based on the 50/200 SMA crossover. If both signal green, 100% invested. If both signal red, definitely 100% out of the woods. Hmmm.... I shall ponder this whether it really makes sense or not.

Anyway, this was a huge post on my simple tactical allocation strategy that I'm trying to work out by year-end. I'm actually pretty psyched about it now that I think about it! Look forward to updates, because this is going to be sweet!