No surprises at the coin dealer this morning. My son picked the $5 gold eagle (1/10 oz gold coin for non-numismatic readers). He already has a lot of silver and the platinum coin looked too much like his silver coins he plays with all the time. I got the 10 oz silver bar for $417 with no trouble. On rare occasions they don't have any in stock. We stopped at the Borders bookstore on the way home. My wife knew one of the cashiers there and told me that she was facebooking about the store closing last night. All of the employees are losing their jobs, and for some it is their only job. I bought a book about options, "Options Made Easy" second edition by Guy Cohen, and also bought another copy of "The Richest Man In Babylon" by George S. Clason. My original copy is long gone and my audio book cd's are presently lent out. We saw my wife's friend at the checkout and I told her I was sorry about the store closing down. I also mentioned that I had spent thousands of dollars there over the years and will miss the store. She told me she met her ex-husband working there and pointed to her children's pictures on her name badge. I felt like a jackass for asking her if scanning my Borders rewards card would add any savings. She said no. I have been to similar store closings at Circuit City, Blockbuster, and Borders since the 2008 crash and it is a weird feeling, like a funeral and a feast at the same time. The merchandise is haphazardly scattered and the employees are trying not to cry. I think it is okay to go in and make a purchase without feeling bad about it because you are helping the store by doing so. The decisions we make really do matter. If we make responsible decisions and do a good job in the workplace it can save the jobs of the people around us. This is especially true for executives, and based on both personal and anecdotal experience, I suspect that many of them forget this. A job has so much economic value it is astounding. Using a back of the envelope calculation, I value my job at present somewhere above $2 million dollars. I arrive at this number by determining the size of 30 year treasuries I would need to hold to achieve a similar income level. The reality differs slightly because I would probably not have any money in 30 year treasuries right now even if I had $2 million. Regardless, I don't think this is off by an order of magnitude. When I think about the workforce in this way, I am awed. My wife and I are heading to dinner with my business partner and his fiance soon. One topic of conversation this evening will be the new candidate trading system we are looking at. Building on the ideas from earlier in the week, we have arrived at something promising. I hope to take this new strategy live Monday, but only after it has been carefully vetted by both of us.
There is a lot of drama about raising the debt ceiling and the time is quickly running out before at least a partial or transitory default will happen. The nearest month Intrade contract is showing 34% chance of raising the debt ceiling to $15.1T or more before midnight, July 31. This is down from over 50% chance a couple weeks ago, and near the contract lows of around 25%. The similar contract for August 31 shows 66% chance, down from almost 80% a couple weeks ago. I don't bet on Intrade but I do prefer it to polling data for assessing probabilities of political events. As a rule of thumb, the narrower the bid/ask spread on contracts like this, the more credibility I attribute to the odds it implies. In this case the spread is wide I wanted to discuss the implications of a default on the price of silver because I have a lot of silver exposure. Last week I sold $5,500 of AGNC shares and rolled the proceeds into AGQ, so here is an explanation. AGNC is a mortgage reit that exclusively holds agency guaranteed mortgages. I had been accumulating AGNC slowly for months as a play on the wide yield curve. AGNC's business model is to borrow short and lend long, and do it on leverage as a carry trade. There are three main weaknesses to their business model that I watch closely: 1) Rising short term yields force them to shrink their mortgage portfolio 2) The shortfall in mortgage payment income must be serviced by submitting claims to the government agencies that guarantee the mortgage: can they pay it? 3) The value as collateral of agency paper (this is closely tied to the previous point) The first weakness doesn't concern me at this time. The fed has monetary policy as loose as possible and trying to find ways to loosen further. I place a VERY low probability on short rates rising substantially in the near future. The same is not true of long term interest rates, and I am skeptical that there will be a lot of agency mortgages issued at the new higher rates, especially if it is a dramatic rise. In other words, I don't see how any of the mortgage reits can scale their profitability during a blowout of the yield curve to historic steepness. In my view AGNC is a play on a steep yield curve, but not on an unsustainable yield curve that has no resemblance to anything normal, which is what will happen if treasuries start into a spiral of downgrades and missed payments. I should note that I still have something like $4,500 of AGNC. So why did I choose to roll the proceeds into AGQ? Interestingly AGNC is probably the largest dividend yield in the stock market right now, and AGQ is a 2x levered silver etf (derivative) with no yield. I realize that the view I'm about to express is probably not widely held by the market. The common thinking is probably that no increase in the debt ceiling means no increase in the money supply that eventually bids up commodities. While that is certainly a factor, I think there will be a bigger factor in the near future, and it has to do with AGNC risk #3 from above. The dollar used to be redeemable in specie, meaning it was exchangeable for physical precious metals. This hasn't been the case in decades, so it must be something else that explains the dollar's value besides "tradition" That important ingredient is it's collateral value. As the world reserve currency, the dollar is the dominant collateral all over the world and the world's central banks have capitalized themselves with it. Without going into a huge explanation, it is my view that we don't need to experience a debt ceiling increase and further expansions in the money supply to suffer a dollar devaluation. By devaluation I mean that our currency becomes less competitive in the global marketplace for commodities. Without even creating more dollars, they can be worth less than at present simply because people become less willing to hold them as collateral, and this will happen if we miss payments or are downgraded. Just because it is the US government that is the counter-party doesn't mean there is no counter-party risk, but this realization will be a difficult adjustment for most people. Gold and silver make perfect collateral because there is no counter-party risk for the institution that holds it. I want to end this journal entry with an anecdotal story that should illustrate how far things need to correct. A friend of mine has a heavy safe deposit box at a bank, which he adds to regularly. The banker hates taking down his box it is so heavy. One day he said to his banker, "I have a lot of silver in my safety deposit box right here in your bank. Someday I might want to take out a loan. Can we arrange it so that you can make me a loan against this silver, which will remain right here in your vault?" The banker's response: "Sorry, we're not set up for that."
Opportunity cost is what I need to remember. This is execution: doing the most effective thing I can be doing at the moment. Identify the next thing and start into it. For me right now, that is mining intraday price charts for ideas because I have the next few hours to code and backtest if I really like an idea. I will start by choosing a subset of intraday charts based on a theme. Next I choose a lense to view the intraday data. This could be quick programs to make transforms of the data I can load into excel to graph and crunch stats, or it could be looking at intraday charts. It could also be simply writing a system and examining the backtest results. Time to pour a green tea and get to work
Trading bot results today: -1.7% (S&P 500 -0.56%) It hurts to lose more than a percent against the benchmark in one day, but the ride will be rough until we add more trading systems to the bot. Currently there are 5 strategies, which isn't enough. Today I came up with another strategy which should be very uncorrelated to the ones we currently run, but I need to make sure that it can beat transaction costs. I wanted to do a lengthy post tonight about transaction costs but it will have to wait until tomorrow. One last thing to mention tonight: I've added new exercise to my lifestyle routine. A huge Russian man at the gym I used to have a membership would tell me stories of Russian strong men that didn't even weight lift like Americans do. They would hold a cannonball in front of their body and move it in giant arcs, motioning all around their body. He swore this was the only exercise they did to achieve unbelievable strength. He warned me against using the weight machines and fixed planes instead of free weights, but not before I suffered a minor shoulder injury. My injury seemed imbue his words with magic, and probably if he hadn't intervened I might have done serious long term damage. I don't know what made me remember his story about the cannonball this weekend, but I tried it on Sunday with a dumbbell instead of a cannonball and discovered all sorts of muscles I didn't know I had. I had to take a rest day today, but I look forward to trying this exercise again tomorrow morning.
Trading bot results today: -0.68% (S&P 500 change: -0.41%) I'm going to start referring to the routine I posted at the start of this journal as my "lifestyle routine". These are tasks and objectives I've set for myself to complete every day. Writing about my fumbles and inefficiencies helps me keep a self-awareness about my lifestyle and to incrementally improve it. A post on zerohedge a few weeks ago by Dylan Ratigan called What I Read got me thinking that I can be more effective with my morning news reading if I approach it systematically. I used to just check quotes at kitco and yahoo, then head over to zerohedge to read latest news there. When I got through all of that, if I still felt like reading I would start into the comments that people post. While some of the commentary is good, I had jumped to a completely different category of reading, unaware that I had even made a mistake. I think there are 4 major areas of reading in finance: 1) news and data (constantly changing) 2) company prospectus, annual reports, documents, etc (data that does not change constantly) 3) non-fiction books and curriculum material 4) blogs, forums, and opinion articles At times I am guilty of spending way too much time on #1 and #4. I think there is a trap there for traders, we can be hypnotized by #1 and fixated on #4 in response to tedium. Not getting enough sleep makes me vulnerable to these phenomenon, and also a general lack of self awareness that can creep whenever I let my guard down. What I thought to do was make a reading plan for the morning and find a way to 1-click load my morning reading plan in firefox using a plugin. So I read about a lot of firefox plugins and found this one that does what I need: Open Bookmarks In New Tab. I installed the plugin and made a new bookmarks folder called "Financial News". In that folder I bookmarked my morning reading plan, which contains these sites: zerohedge.com kitco.com bloomberg.com ft.com online.wsj.com investors.com economist.com infowars.com I made another folder called Finance Research that has: finance.yahoo.com finance.google.com stockcharts.com With the new plugin, I can browse in the bookmarks to one of these folders and click "Open All In Tabs" and it loads EVERYTHING Looking forward to trying this out tomorrow.
Trading bot results for today: -2.12% (S&P 500: -2.03%) My AM news reading plan worked perfectly this morning, so I will continue with it tomorrow. Over the next week I should have some new ideas to improve it further. I've spent some time this evening refining my newest system trading idea, the same one I've been talking about for a few days. It is really shaping up nicely, but it is a long way from being ready for farming. I have to build some new infrastructure to run it live, and that takes time to do properly. I don't code anything half-assed, no compromises. EUR/AUD had a major breakdown to new lows today, it has got some great momentum. My position is short from 1.3628 a few weeks ago, a discretionary trade. I'd like to hold it down to par I don't know that it will go that far, but the action today confirms one of the reasons for the trade: that market volatility would cause EUR/AUD to go DOWN this year instead of up like in 2008. This is my only significant position that went my way today. A small position in the newest automated system we started running live on Monday, it's first trade, is profitable, but still unrealized gains. One of the reasons the bot has been dragging a little bit lately is that the market appears to be changing gears. Some of our gauges were extremely bullish just a week ago and are now extremely bearish. From my view the market has been schizo for the last month and the bot's performance corroborates that view. One of the strengths of automated trading is that it will continue to adapt despite the psychological difficulty that comes with whipsaws. I don't have to do anything but the easiest thing in the world: turn it on tomorrow. I did like the backtests, didn't I? One last note for today: hat tip to Hubb for coming through with a great red wine solution after hearing about my switch from beer to red wine in the evening, as stated in my "lifestyle routine". *gulp*
A quick update on my lifestyle routine. I've been having the most difficulty with doing jumprope in the morning every day. I've skipped a few days in a row again. One reason is that my son (2 yo) is waking up when my alarm goes off, so he is up with me through my entire morning routine. It is hard to take him outside and watch him while I jumprope because he can't jumprope. I can get around this problem by setting my alarm much earlier so he will want to sleep longer, but this isn't always do-able. Instead, what I want to do is substitute jumping jacks instead of jumprope when my son is with me. It is a very similar exercise that I think my son will try to copy. He can get some exercise too. If he does wander off, I can go get him much easier than if I were jumping rope. I also wanted to mention for the green tea drinkers what green teas I enjoy. Usually I drink 5 different green teas in this order: Tazo "Zen" green tea (lemongrass and spearmint flavored) before lunch Bigelow lemon flavored green tea around lunchtime Bigelow pomegranate flavored green tea after lunch Bigelow peach flavored green tea in late afternoon Bigelow decaf green tea at night The pomegranate green tea seems to go the best with a couple pieces of 72% Ghirardelli dark chocolate. This is my after-lunch dessert. The peach tea is really great at night, but usually I'll have decaf instead. I should probably try to order a case of peach flavored decaf from Bigelow's website if they have such a thing.
Trading bot results for today: -0.33% (S&P 500: -0.32%) My business partner and I have decided to go ahead with deploying a prototype version of the newest automated trading system idea from earlier this week. We have figured out a way to incrementally roll it out to live trading and decided to take that route, since the infrastructure we need to build is complex and we don't need to wait for all of it to get started.
A quick update: I sold my remaining AGNC shares this morning after the bounce. 20% flash crash is too hot in the kitchen for me. Half the proceeds rolled into AGQ. Since it has 2x factor, using half the proceeds from the AGNC sale keeps the same margin footprint for my portfolio (currently no margin except for EUR/AUD short).