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Thank you for visiting my web log.  Although this blog is centered around alternative investments, foreign currency exchange & risk managment,  you will not see graphs nor price charts scattered about.  You will not see any news summaries, news articles or other such rehashed fear & confusion.  I have spent an immense amount of time, energy and sleepless nights (i.e. life) studying charts, analyzing price movement, spotting trends, memorizing formulas, determining correlations and pouring over grueling finance books.  What for? For why? Well, to decipher the code, navigate the matrix and predict the future, of course.

That is the past.

This blog reflects process.  And right now, the process is refined, the models are in place and the Mind is set.  God is in the Winds.  And when the Winds gust, the simple truth is that either your sails are up or your sails are down.  Make preparations before the storm.  Here, I will tell you when I hoist the Mainsail, why I lower it, or if I’m just reducing sail to prevent taking on too much risk.

In the sidebar, you will only find links to those resources that I personally use or have personally contributed to.  If the quality or status of the resource has diminished, the link will be promptly removed.

Good sailors know the ocean is unforgiving, relentless and beautiful; they always signal other ships when a storm is coming and when the coast is clear, so that is what I will do for you  …there is enough of God’s blue ocean for everyone to enjoy.

 

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Alternative Investments -Measuring Performance

How to measure performance between accounts.

 

Dealing in Alternative Investments requires a bit of statistical knowledge (the more the better).  So I picked out one component that would benefit someone who handles their investments personally and, at the same time, benefit someone who pays an advisor because it never hurts to ask the right questions.

The following is not investment advice, but one way to assess the advice you were given…

High Frequency Trading or Unconventional Return Periods

When returns are realized at higher frequencies (many times per year), Sharpe Ratios and the corresponding t-statistics can be calculated in a straightforward way.

Assuming there are N return occurrences per year, and the mean (μ) and standard deviation (σ) of the returns are μ and σ, the annualized Sharpe Ratio can be calculated as (μ×N)/(σ×√N) …or (μ/σ)×√N.

The corresponding t-statistic is (μ/σ)×√(N × number of years).

For monthly returns, the annualized Sharpe Ratio and the corresponding t-statistic are (μ/σ)×√12 and (μ/σ)×√(12 × number of years), respectively.  Here, μ and σ are the monthly mean and standard deviation of returns.

Similarly, assuming μ and σ are the daily mean and standard deviation for returns (you traded every day the market was open…please don’t do that:) and there are 252 trading days in a year, the annualized Sharpe Ratio is (μ/σ)×√252 …the corresponding t-stat is (μ/σ)×√(252 × number of years).

The calculators I use to find these metrics are listed in the right-hand column on “my trading desk.” They both have statistical functions.

The Test Statistic

Test Statistics (t-stat,t-statistic) are tricky creatures.  Essentially when evaluating performance, I require a t-stat of 4 or more (the higher the better) before considering a stake.  In the future, I will explain a simple model I use to allocate cash among accounts and strategies according to their t-stat.

Now, here is a simple formula to estimate a t-statistic for unusual return periods:

Test statistic= (μ/σ)×√(N return occurrences × number of years).

Note that “N return occurrences×Number of years” is just the total number of return occurrences resulting from the investment or strategy (either positive or negative).  So, if you closed out 3 trades (at 1%, -2.3% and 3%), that counts as N=3.

Or, if your investment reconciles every 6 weeks, for the past 1.5 years then N=13, (78 weeks / 6).

Remember, it is important to convert your daily/weekly/monthly returns to an annual (yearly) number.  This makes it very easy to compare performance against conventional, low-return investments pushed by financial salesmen.

And since the volatility adjustment is built-in, it is an apples-to-apples comparison.

 

Japanese PMI Composite

Economic Calendar: The Japanese PMI Composite

 

Japanese Purchasing Managers Index

The Markit Japanese Composite Purchasing Managers Index (Composite PMI) is based on original survey data.  These data are collected from a panel of firms that represent, and are based in, the Japanese manufacturing and service sectors.

The major composite index is composed of two minor indices.  It is a weighted average of the Manufacturing Output Index and the Services Business Activity Index.  These are all based on original survey data collected from a representative panel of over 800 Japanese-based firms that serve Japan’s manufacturing and service sectors. The survey data is collected mid-month.  Survey responses reflect change in the current month compared to the previous month.

Old Map (21)

Is The Japanese PMI Composite Important?

Yes!  PMI Data is an important macroeconomic indicator.  Investors need to keep their finger on the pulse of the economy to form expectations of how various types of investments will perform. By tracking economic data such as the PMI numbers, investors will get a better picture of what the economic backdrop is for the various markets.

  • The stock market likes to see healthy economic growth because that translates to higher corporate profits.
  • Governments like to keep markets inflated because a portion of those corporate profits (and inflated assets) are converted into tax revenue.
  • The bond market prefers slow growth and is extremely sensitive to whether the economy is growing too quickly (inflation).

Click this, list of PMI data

Sails Up

Long The Japanese Yen.

↓ CAD/¥

The global macro picture looks squared away: swap dealers are short CAD and long Yen; institutional managers are actively buying Yen contracts.  Bond activity indicates risk-off verifying ¥ long positioning.  Retail positioning is not optimal and BoJ numbers are due out this week so a wide stop.

The charts show good CCI Divergence on the daily and weekly.  Stop is set north of ¥92.  Position size is a full bell.

Update:  10/01, order triggered; 10/18, closed at +2.4% of margin;

 

↓ €/¥

Similar global macro factors with institutional managers  actively closing their euro shorts.  CCI divergence on the weekly; stop-loss is set above the weekly high.  A correlated trade so I will be trailing the stop on this pair if it triggers. Risk taken is a 2/3 bell.

Update: 10/01, order triggered;  10/18, stopped out, -1.94% loss on equity

Trader Error:  this trade was held too long, I was away from my laptop and missed the profit target on the morning of 10/16.

U.S. Industrial Production

What Is The Federal Reserve’s Industrial Production Index?

Always Check The Economic Calendar

The Federal Reserve’s monthly index of industrial production (and the related capacity indexes and capacity utilization rates) covers manufacturing and mining; along with electric & gas utilities.

The industrial sector, along with construction, accounts for most of the variation in GDP over the course of a business cycle. The production index measures real output and is expressed as a percentage of real output in the base year, 2012.

The capacity index, which is an estimate of sustainable potential output, is also expressed as a percentage of the actual output of 2012 (base year). The rate of capacity utilization equals the seasonally adjusted output index expressed as a percentage of the related capacity index.

The index of industrial production is available by market and industry groupings. The major groupings are:

  • final products (consumer goods, business equipment and construction supplies)
  • intermediate products and materials.

Why is U.S. Industrial Production important?

Investors want to keep their finger on the pulse of the economy because it forms expectations on how various types of investments will perform.

  • The stock market likes to see healthy economic growth because that translates to higher corporate profits.
  • The bond market prefers more subdued growth that won’t lead to inflationary pressures.

Tracking economic data like U.S. industrial production gives investors and traders an idea of what to expect in each market.

The Fed’s Index of industrial Production

The index of industrial production gives us an idea of how much factories, mines and utilities are producing. The U.S. is a consumer-based economy.  The manufacturing sector accounts for less than 20 percent of the economy, however most of it is cyclical variation. Consequently, this report has a big influence on market behavior.

Why does such a small ratio of the economy wield so much influence in the eyes of investors? Remember,  variation = volatility.  Volatile markets will either make or break an account.

Every month, we can see whether capital goods, or consumer goods, are growing more rapidly. Are manufacturers still producing construction supplies and materials? This detailed report shows which sectors of the economy are changing.

Now, the capacity utilization rate is a bit different.  It provides an estimate of how much factory capacity is in use. If the utilization rate gets too high (80-85% range), it can lead to inflationary bottlenecks in production.

The Federal Reserve watches this report closely and supposedly …arguably …sets interest rate policy on the basis of whether production constraints are threatening to cause inflationary pressures -when you hear about changes in inflation, think fixed income, think bond market.

Remember, in finance “fixed income” does not mean your grandparent’s monthly government subsidy.

The bond market can be highly sensitive to changes in the capacity utilization rate. However, in this global environment, global capacity constraints may be more significant to fixed income than domestic capacity constraints.

The Meaning of It All

Industrial production and capacity utilization indicate trends in the manufacturing sector, but also whether resource utilization is strained enough to forewarn of inflation.

Also, industrial production is an important measure of current output and helps investors identify turning points in the business cycle –recession expected, get ready to buy equities  …recovery expected, be prepared to sell.

The bond market will rally with slower production and a lower utilization rate as capital flows out of equity and into bonds. Bond demand will fall when production is high and the capacity utilization rate suggests supply bottlenecks.

The production of services has gained prominence in the United States, but the production of manufactured goods remains key to the economic business cycle. A nation’s economic strength is judged by its ability to produce domestically.

Many services are necessities of daily life and would be purchased regardless of the business cycle. However, consumer durable goods and capital equipment are purchased when the economy is expected to strengthen.

When expected demand for manufactured goods decreases, it leads to less production along with declines in employment and income.

The three most significant U.S. sectors are motor vehicles/parts (auto loan bubble?), aerospace and information technology. Volatility in any one of these sectors can affect the U.S. economy.

Industrial production is subject to some monthly variation. The three-month EMA or year over year percent changes provide a clearer picture of the trend.

If you want to learn how to connect the dots without spending thousands of dollars on the CFA exams, It’s all right here in the desk reference I use: Global Macro Trading

If you need a Kindle to read it on:  $15 Off A New Kindle Fire HD  or a $79 Kindle Reader

Homanns Heirs  c1746
Homanns Heirs c1746

Sails Up

↓€/£

Sails are up on this short trade due to global macro and technical confluence.

Global Macro

On the macro side, the COT report shows swap dealers are stretched long the GBP-USD contract and institutional managers are actively taking profit on their euro long positions. Also, the economic calendar lists favorable winds for the big island pound. However, BoE pirate meeting ahead so I will be keeping a weather-eye and trailing stops.

Technicals

The weekly shows good CCI divergence and a pair of tweezer tops on the four-hour chart.  Order triggered on the second pair of tweezer tops.  Lot size is a full bell with a stopper knot set at .9241.

Order triggered at  0.9180

Update:  09/10/2017,  2/3 of trade bulletproofed at 0.9175 & 1/3 of position set to scale-out at 0.9127 –tracking the 4-hour, later trailed to 0.9095.

Update:  09/11/17, closed out 1/3 of position at 0.9095.  Managing remainder of position on the daily chart.

Update:  09/18/17, entire position closed; gain on trade +43% of margin

Antique Maps of the WorldCelestial MapAndres Celariusc 1708
circa 1708

British Retail Sales

How important are British retail sales?

Always check the economic calendar

The British Retail Sales Survey

Retail sales are the total revenue from stores that sell durable and nondurable goods. British retail survey data include all online businesses whose primary function is online retail.  The data also cover internet sales by other British firms, such as supermarkets, department stores and catalog companies.

Headline British retail sales are reported in volume terms but are available in both forms. The data are derived from a monthly survey of 5,000 businesses in Great Britain. The sample represents the whole retail sector and includes the 900 largest retailers and a representative panel of smaller businesses, including internet sales.

Collectively, all of these businesses cover approximately 90 percent of the retail industry –in terms of turnover.

Old Map (35)
The survey data covers 90% of Brit retail

Why are British Retail Sales important?

Consumer spending is a major component of the economy and market players continually monitor spending patterns. The monthly retail sales report contains sales data in both pounds sterling (£) and volume. British retail sales data exclude automobile sales.

The pattern in consumer spending is often the foremost influence on stock and bond markets.

  • For equity, strong economic growth translates to healthy corporate profits and higher stock prices.
  • For fixed income (bonds), the focus is whether economic growth is stretched overboard and leading to inflation –building a case for interest rate hikes and decreasing the expected value of existing bonds.

The ideal economy walks a fine line between strong growth and excessive (inflationary) growth.

The British Retail Sales survey not only gives you a sense of the big picture on the big island, but also the trends among different types of retailers. Perhaps ground tackle sales are showing exceptional weakness but navigation electronics sales are soaring (have you seen those prices lately?!). Trends derived from retail sales data can help you spot specific investment opportunities and preempt expectations.

British Office of National Statistics

 

U.S. Philly Fed Survey

What Is The Philly Fed Survey?

Philly Fed Business Outlook Survey

This business outlook survey is a diffusion index of manufacturing conditions within the Philadelphia Federal Reserve district of the United States.  It is widely followed as an indicator of manufacturing sector trends.  Most important is its correlation with the ISM manufacturing index and the index of industrial production.

Why is this important?  By tracking economic data such as the Philly Fed survey, investors will get a picture of what the economic backdrop is for the various markets.

The Philly Fed survey gives a detailed look at the manufacturing sector’s course and speed. Since manufacturing is a major sector of the economy, this report has an influence on market behavior.  Generally, change in manufacturing activity is positively correlated to change in currency demand.

Lastly, some of the Philly Fed sub-indexes provide insight on commodity prices and other clues on inflation (affecting fixed income). The bond market is highly sensitive to the Philly Fed Survey because it is released early in the month before other important indicators thus forming expectations that traders and investors act upon.

Fair Winds!

Antique Maps of the WorldMap of Europe Willem Blaeu c 1650
circa 1650