Last night, we found that the supposedly “contained” subprime problem had spread to BNP Paribas, a large French bank. Early this month, Macquarie bank of Australia admitted losses in two funds due to fallouts from the subprime sector. Enquiring minds want to know here: all this “toxic waste” originated in the US, notwithstanding Bear Stearns and several hedge funds that imploded, how come we haven’t yet heard of any US banks taking big losses? Are US banks that much better at risk management, or are they simply less forthcoming?

The other bogeyman today was quant funds that are liquidating positions after an awful July, such as the Global Alpha fund from Goldman Sachs. Apparently the blackbox models were not stress-tested with the volatility we’re seeing now. Details are not that important, suffice it to say that we are in the middle of a pretty serious dislocation in the credit market. I have been approaching this by separating the credit event from what’s happening in the real economy. I believe the market will solve the liquidity issue, although rates on risky loans will certainly rise. For now I’m more concerned with the underlying economy. Buried in today’s headlines were some lackluster retail sales figures for July, which cements the view that a recession in the US is likely by Q1 08.

All said the S&P finished the day sitting perilously above its 200 day moving average which for many people defines the long term trend in the market. It has dipped below the 200 DMA in Apr-May 05, Oct 05 and May-Jul 06, and recovered all three times. I’m currently using it as a secondary indicator. When the S&P dips below the 200 DMA (which occured last Friday), I hedge or close 25% of my domestic equity exposure. Likewise, when and if the S&P moves above the 200 DMA, I’ll remove the hedge/re-establish longs. I don’t do it on the day of the crossover, rather I tend to ease into/out of positions in the week after. The other 75% is controlled by a primary indicator which has not issued a “sell” signal yet.

I’m by no means recommending this approach, but I think it’s important to have a plan so you protect your assets and not scared out of your positions at the worst time.

For the month of June from 6/1/07 to 7/1/07,

1. Net worth is down by 3.83%.
2. Value of my company holdings is down by -12.05%. My asset allocation strategy using the assumption that my company would positively and strongly correlate to the general stock market is obviously breaking down. The losses from two consecutive month in this category are now at almost 25%.
3. Everything else excluding my home and cash is also down by 3.63%, with the PM market taking a heavy toll at the end of the month.
4. If including cash in #3, it’s down by 2.54%.

Well, but this review is already 9 days late (unintentionally). And PM markets had the biggest July rally for quite a long time, returning ~8% in just 9 calendar days. My company stock went up too, and both probably made up most of the losses if not more.

Looking forward, I am preparing my shopping list for more energy (uranium and natural gas) and precious metal stocks (mid to junior, and possibly indexing ETF), in the hope that the correction will materialize. I have sold out all holdings that correlates to the general market this month. Of course, the correction is still nowhere to be seen. If the bull market continues, I will be simply time-averaging back into the market with selected picks. I have been itching to buy several names. Unfortunately, they are running away in price, and I often barely have enough time to watch their prices once a day.

Special note: returns were calculated by subtracting 3.00% APR return of my cash position.

Stock market again took a fall on Friday. The stock market looks to be gradually unstable. Frank Barbera’s fall date for Shanghai’s market is around Jun29. My own date for US stock market currently is first or second week of July. Even though this bull market is getting really old, and also crazy, it has surprised me so many times. I am quite doubtful however that it can last until August 1st.

Here is what I’ve collected from various pundits:
1. Puplava believes the market can go as far as late in the year or even into 2008. Regardless, Puplava is raising LOTS of cash in the managed accounts. In fact, this is the first time I see so much cash in my managed account. But the percentage level of cash I believe is entirely prudent given my own bearish stand.
2. Bill Cara is still pretty bullish on gold & goldminers. Although I can follow Bill’s reasoning, and am hopeful that he is right, I doubt that this stock market can last that long. I think Bill believes the high should be before October. That almost requires a rallying of PM right now or within 3 to 4 weeks. Again, I am not sure. But I won’t be selling out my substantial positions in PM either.
3. Boy Hoye is still conservatively bullish on PM miners. He has been bullish for a while without not much happening. His previous bullish call in Jan was knocked out of place within a week. Regardless, I believe his intermediate and long term bullish forecast for PM is correct.
4. Frank Barbera is bearish. Many ways of falling, but a big fall for sure in his opinion.

I will be raising my cash further, and possibly buying puts in the coming weeks.

Here is my own thoughts on various sectors taking a longer term view:
1. Precious metals: my own belief is that PM/gold sectors may have skipped a heartbeat this time around due to all the central bank selling. It looks to me that it’s more likely that PM will NOT go up too much BEFORE stock market takes a BIG tumble. I believe that PM may have another retest of low along with the stock market falling down hard. But PM would break new high after stock market correction is over and starts to rise again.

2. General stock market: I believe that once the stock market correction is over, one should be long aggressively on foreign stock markets (India, Brazil, China, etc), and aggressively long on energy sectors. The general stock market will rise too but probably will be a less stellar performer. I have stated previously that the secular bear market started in 2000 is over. By that, I mean US stock market will NOT break 2002 low in all likelihood. The Elliot Wave styled depression will not come before year 2032/33 (the peaking height of 51.6 or 309.6 economic cycle, which is a date within the calculated date of singular point from super-exponetial human and economic growth) if at all. It will continue to break new highs going forward with big/small corrections along the way.

3. Energy sector: this should be the best and safest sector to bet on going forward. Whether you believe in a new era of global economic growth or whether you are a peak oil believer, this is the sector to put your bets in. I will be AGGRESSIVELY long in energy sector once the stock market correction has taken place. I positioned myself with about 50+% in precious metals, and 35% in energy coming into 2007. I thought that US housing market will cause a big fall in the general stock market and therefore I want to under-invest in energy since it is more sensitive to the global economic growth. Whether global economic growth will slow due to US housing market implosion is very debatable. But I believed that whether it slows or not, the stock market will be scared into a big fall. That has not happened yet. Instead, markets have broken new highs all over the place. I will probably raise my combined energy/foreign sector holdings to 50% or more.

Basically, I will have 50% in energy and 50% in precious metals, and adjust the two holdings based on my relative bullishness in the two sectors.

I will probably be selling out of energy sector in year 2009/2010 to prepare myself for the next half-PI date in 2011. Those dates correspond to a big wave in negative ARM resettings started in 2004/2005 (by adding 5). The current wave of subprime mortgage is due to 2005/2006 (plus 1 or 2). But that timeframe of 2011 is too far out right now.

By the way, the failure of PI date for predicting the lastest stock market height was not unexpected. Taking the example from last height, it didn’t happen until one year and eight months later. But the bottom date was correct. I believe that will be the pattern given increasingly available fiat money which can boost the long side.

And don’t buy bonds and stay in cash for the long term. It is far better to take a calculated chance in (selected) stocks than a guaranteed loss in bonds (unless you are old enough, and can afford the short-term loss in buying power).

For the month of May from 5/1/07 to 6/1/07,

1. Net worth is up by 0.93%.
2. Value of my company holdings is down by -11.78%. That doesn’t feel too good especially when the stock market is breaking new highs every week if not everyday.
3. Everything else excluding my home and cash is up by 3.86%.
4. If including cash in #3, it’s up by 2.93%.

I’m raising more cash as you can see from “My NetWorth” page. This month is not a good month for precious metals & goldminer stocks at all, except the last 2 to 3 days when XAU/HUI had a significant rally.

With stock market breaking new highs, my large cash position seems to be over-conservative. As I have commented last month about doing a cash-out refinance from my home equity in preparation for a potential coming low, I stopped short of going through the refinance deal. Everytime (for the third time in the last two years) when I am so close of doing an actual refinance, I am right at the low point in bond yield/mortgage rate. I wonder whether I would make a better bond trader than a stock trader.

My asset allocation plan is also not working very well this month (or I should say this year). My company stock really really sucks. It is probably lagging the general market by some 25%. My total net worth would be breaking record high if my company simply tracks the market performance. So far, I’m still about 3.4% below the all time high of my net worth on 2007-04-26.

In any case, I’m not ready yet to ditch my bearish stand on the general stock market. Is that the reason for this stock market not falling yet because this “last bear” has not turned bullish yet? Maybe. We shall see.

By the way, I have put back the daily update of my portfolio composition in “My Networth” page if you’re interested.

Special note: returns were calculated by subtracting 3.00% APR return of my cash position.

Interactive Broker at www.interactivebrokers.com has closed its IPO auction yesterday. Given the recent market craze about exchange and financial companies, IBKR has done its IPO at the right time. The IPO was well over-subscribed from 20 million shares at an initial price range of 24 to 27, raised to 40 million shares with price range of 27 to 31. The final clearing price was $30.01, and I assume that other people like me didn’t get the full allocation, but more close to one third. My bid price was actually quite close to the clearing price, but I wish it’s cheaper. At $30.01, I’m inclined not to add anymore shares.

We shall see whether IBKR will open trading today on Friday. The shares that I got are quite minimal. They won’t matter to my overall portfolio whether it’s up or down (even by a lot).

In any case, my cost was just $20 for domestic wire transfer because that was the only way that I could make to the IPO on time.

For those who bought into the IPO of IBKR, best luck to you (and me too).

For the month of April from 4/1/07 to 5/1/07,

1. Net worth is up by 1.03%.
2. Value of my company holdings is down by -2.68%.
3. Everything else excluding my home and cash is up by 3.51%.
4. If including cash in #3, it’s up by 2.70%.

I’m staying put mostly in most of my positions, except nibbling on the short side here and there.

Last month I commented:

I’m not sure whether a higher high will come first before a lower low than the Feb/March low. Although my belief is that a lower low will materialize later this year, my conviction is wavered by the market strength. My current plan is still going short against financial/housing/general market and possibly adding some tiny long positions in energy or gold. But I will take my loss if the bull market runs away to the upside again.

A higher (marginal) high has materialized in the stock market. I am still watching intently over the markets for a potential low that I believe would come. I’m contemplating on whether to take cash out from my 401K or refinance my mortgage to get cash out ready for the next wave. That would more than double my existing large cash position, and I am not sure whether it would be wise to do that. Furthermore, it could really push my comfort limit in my emotional ability to handle the daily up-and-down for an even bigger portfolio. In contemplating to take cash out, my most serious concern is with the state of $USD which is pretty much at the edge of cliff. I think a gradual depreciation is the most likely outcome, and maybe with a last dead cat bounce above the 81 level. Even though a zero-point zero-fee (nothing out of my pocket) loan is like a no-brainer deal, I really have to put the money to work in order to take the cash out (for 30 years is at 6.125%, and for 15 years is at 5.875%, zero-cost).

By the way, in the last 5 to 6 calendar days, my net worth decreased by 4.51%, and my portfolio decreased by 2.35%. Otherwise, it would have been a terrific April month. Gold (stock) is going downhill and my portfolio has taken quite a big toll since the recent peak.

This month my saving is slightly negative due to thousands of extra taxes that I needed to pay to make up my capital gain from last year.

Special note: returns were calculated by subtracting 3.00% APR return of my cash position.

For the month of March from 3/1/07 to 4/1/07,

1. Net worth is up by 3.28%.
2. Value of my company holdings (stock options, ESPP, etc.) is down by 5.35% partially due to my liquidation.
3. Everything else excluding my home and cash is up by 4.54%.
4. If including cash in #3, it’s up by 3.46%.

My portfolio has not changed much since the end of February. I have liquidated majority of my holdings that correlate to the general stock market. Right now I only hold 0.2% of my net worth in such stocks/funds. I also still hold some short positions in QQQQ and housing stocks which only hedges against less than 7% of my own portfolio. I’ve closed out about half of my hedges, and some unsuccessful shorts.

Here is the current composition of my portfolio:
1. 55% in metals.
2. 35% in energy.
3. 10% in consumer staples, water, and agricultural stocks.

Here is the current composition of my net worth:
1. 62.6% in my portfolio+cash+misc.
2. 20% in my company holdings.
3. 17.4% in home equity.

Last month I commented:

I believe the secular bear market in stocks may have resumed. The unfolding of such secular bear market however does not necessarily mean a fall in the absolute price of the stock market this time around. Rather, the stock market will fall on an inflation-adjusted basis, and also against gold. There is also a chance that Fed stops the downward spiral in time, and create a bigger bubble in everything going forward. The most likely timeframe is in 2008/2009 for next (potentially higher) peak. In fact, the stock market can put in a higher high in 2009, but not necessarily beating the accumulated inflation since 2000. I do expect the stock market to go lower than the low on 3/5/07 this year. I also expect the general stock market to put in less than 3% gain for the entire 2007 year.

After much seesawing in March, this stock market really has some inexplicable strength, except in a few isolated mortgage stocks and financial sectors. Fundamentally speaking, the problems in subprime and Alt-A mortgages will create a huge problem for the market going forward. Yet technically, the market doesn’t seem to go down much at all. How much longer this market can hold up? I’m still waiting for a safer entry to short more. In the meantime, NEW century mortgage has filed bankrupt, and several other mortgage companies keep falling.

I’m not sure whether a higher high will come first before a lower low than the Feb/March low. Although my belief is that a lower low will materialize later this year, my conviction is wavered by the market strength. My current plan is still going short against financial/housing/general market and possibly adding some tiny long positions in energy or gold. But I will take my loss if the bull market runs away to the upside again.

Best luck navigating in the dangerous water.

Special note: returns were calculated by subtracting 3.00% APR return of my cash position.

In response to Rag2Riches & others’ recent questions,

1. You said you liquidated 100% of your stock market holdings, yet you will gain more from long than short positions. Are you referring to your company stock, or are you still holding other stock?
2. What do you mean you were caught unhedged? You mean you don’t have puts or short positions? Because your heavy allocation to PM seems to be a hedge.
3. You have high net worth already, why not go with a more conservative asset allocation rather than shooting for high outperformance with concentrated (risky?) positions?

First of all, from my net worth page (where you can see the daily history since last May) and 3/20/07 post, I have

17.5% in home equity
21% in my company holdings (stock options, shares, etc.)
61% in my owned stocks+cash+etc.

Within that 61% of stocks+cash, I have
26% in cash (which can be calculated from 87832.96 / 333851.28, taken from 07-03-20 date on my net worth page).

Within 61% * (1-26%)=45% for the rest, I have (from 3/20/07 post)
57.5% in metals
34.6% in energy
7.9% in water, agriculture, consumer staples, etc.

Here are some detailed answers to the above question, so that readers know exactly where I stand (in terms of my investment):

1. By “general stock market” holdings, I meant things like SPY, QQQQ, DIA, or any large to small cap mutual funds. I bought some in last summer. I’ve pretty much liquidated 100% of any holdings related to general stock market.

I don’t consider most of my metals+energy stocks as “general stocks” since they usually have less correlation to the general stock market.

But the synchronization theme is still with us since last May. Currently, the correlation of all international markets, energy, and metals is still pretty high. Therefore, I said I would still benefit from my long positions in energy+metals.

I am not considering any effects from my company holdings in the above statement (although I should definitely benefit more).

2. All of my metals & energy positions were unhedged. They went down along with the stock market (and actually by twice the percentile amount). Synchronization still. I didn’t have significant shorts/puts against general stock market nor my positions in metals & energy.

3. My investment would appear to be risky to anyone. But I balance them out through large holding of cash (26% * 61% = 16% of my current net worth) plus my home equity (17.5% of my net worth). All of those are cash or bonds (“paying interests” to myself) which is already some 33.5% of my total net worth. Home equity is obviously subjected to the house valuation, but I would prefer a cheaper housing so that I can upgrade.

In any case, I have about two thirds (1-33.5%) of my net worth in “risky” investments, which supposedly should balance themselves out somewhat. They are

45% of my net worth in mostly energy+metal stocks, and
21% of my net worth in company holdings (high-tech) but the leveraged power of my company holdings is actually much bigger than my 45% unleveraged holdings in energy+metals (less than 2X however).

I think by most measures, I am probably taking less risk than I should be taking, especially given my age.

I’ve gone through some crash analysis of my own net worth, and I can sustain a 100% loss in my company holding (21% of my net worth), or 100% loss in my home equity (17.5% of my net worth), or 50% loss in my own energy+metal stocks (~22.5% of my net worth). All the above events, I will still have 80% of my net worth, assuming they don’t happen simultaneously.

The bet is that energy+metal will negatively correlate to my high-tech company holdings and my home equity. In the case of falling home equity, it will only translate into an improvement of my life standard. So I don’t worry about that. Overall I think I should be in pretty good shape, with my asset allocation plan.

At other times when I’m more bullish in my own investment, I would be utilizing more cash to hold more energy+metal stocks in order to counter-balance the combined total of my high-tech company holdings and home equity which are quite a big sum to hedge in leveraged terms.

Obviously I believe in what I’m investing in energy and metals. But even more importantly than a potential high(??) performance, they also serve as a very good counter-balance against my high-tech company holdings (well, not all the time obviously, but at least that is the plan.)

If I have liquidated my stock options, my asset allocation will most certainly look a lot different. At the minimum, I will increase my general stock market holdings from 0% to some significant percentage. Currently, I’m assuming that my company stock will positively correlate to the general stock market, and I don’t want to increase any more exposure to it. This assumption is an aggressive bet which is counter-balanced by my commodity investments.

You can see how spectacularly my strategy failed from 05/09/06 to 06/13/06 (21.2% loss in 1 month), and 05/09/06 to 7/23/06 (28.4% loss in 2.5 months) timeframe in the history of my net worth, when my commodity stocks + my company stock went down together very hard. The biggest reason for such a big fall was that my company holdings were about 31% of my net worth on 05/09/06, and I almost lost all of that. But I’m willing to take the risk with the leverage afforded to me through my stock options for a couple of more years. In fact, it is with this leverage in my company stock options, such that I’m willing to allocate more to commodity investments. I have made up most of the lost grounds in my net worth through savings and my investments since 05/09/06 even when the value of my company holdings needs to be 50% higher to be on par with 05/09/06.

This is probably the most detailed and up-to-dated account/analysis of my current net worth & my own asset allocation strategy.

My strategy is definitely not for everyone, given my own special situation. If I calculate my metal holdings using a leveraged combined/controlling value of my home, stock options, etc. as 100%, the PM only comes out to be just 15% to 20%. This is more than 5% recommended by “textbooks”, but probably not an out-sized bet.

Stock market is zooming after the Fed meeting. Looks like my expected market fall is going to be delayed. However, I still expect the market to fall later this year.

Since I was caught unhedged this time, if the stock market goes back up, it will be good news for my portfolio. I still have a couple of outstanding short positions that I have not covered. But I don’t worry too much about them. I would gain a lot more from my long positions than losing money in shorts.

In any case, I have liquidated almost 100% of my general stock market holdings, and have built up my cash position to 26% of my liquid portfolio. It is a lot of cash by any standards, but it is my way of keeping my sanity in this volatile market, since my regular income is relatively small compared to my portfolio.

So let this Goldilock story continues. We will see how it will turn out. I guess Robert Kiyosaki is really bad at his timing. I remember a study done related to smart & dumb traders. The most reliable information among all traders is actually from the dumb traders because they ALWAYS do the wrong thing at the market turn. So if you simply do the opposite of the dumb traders, you will statistically gain over time, .

Finally just now, I think my salary is closer (although probably still below) to the my market value. For so many YEARS, it simply felt no good when you are underpaid days in and days out. Until I complained about my technical rank last year, my company had done nothing. I was almost going to make an internal transfer. So besides the big raise, I also got a promotion in non-managerial technical rank, an event that I have been waiting for too long.

To put this raise into perspective, I had a comparison point, an actual recent offer by my company to a new hire who is 3 years less experienced than I am, but had a 6.5% higher salary than mine (before the raise adjustment). Now my salary is somewhat higher than this new hire. If I assume a nominal annual raise of 3.5%, my base salary level is still about 3% less than what it should be for my level of experiences, not counting any credits from my above average performance at my job.

For all the regular blog readers out there, I also wish that you are compensated handsomely or at least fairly.

I have updated my net worth page to reflect my new option/share grants.