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You will make mistakes as an investor…

1. It’s nearly impossible to time the market. Just read my blog and you’ll see.

2. People are prone to buying high and selling low. It’s human nature.

3. If it goes your way, you get happy and get out too early.

4. If it goes against you, you remain in denial and stay in the position.

The best thing you can do is be comfortable with your portfolio allocation. Trying to trade in a long term account will lead to disasterous results and that’s why I don’t do it. Less than a month ago, my long term account had the following breakdown…

14.1% Vanguard Treasury Money Market Fund (VMPXX)
26.0% Vanguard Inflation Protected Securities (VIPSX)
42.1% Merk Hard Currency Fund (MERKX)
17.5% Prudent Bear Fund (BEARX)

Since then, a tiny bit of cash has come into VMPXX, my inflation protected securities got screwed hard because we are in a deflationary credit collapse, and my currency fund got smashed a little more. MERKX and VIPSX are my inflation hedges while VMPXX and BEARX are my deflation plays. Now my allocation is as follows…

17.8% Vanguard Treasury Money Market Fund (VMPXX)
24.5% Vanguard Inflation Protected Securities (VIPSX)
40.3% Merk Hard Currency Fund (MERKX)
21.0% Prudent Bear Fund (BEARX)

7.2% rise in allocation for my deflation plays, 7.2% drop in allocation for my inflation hedges. Total value of long term account is roughly unchanged and in a deflationary environment, that’s a net win. Why not go all in with deflation plays? Because I could be wrong. Why not go all in with inflation hedges? Because I don’t think we will have massive inflation.

I do believe that VIPSX and MERKX will fall much further and that BEARX will continue roaring higher. However, I am not touching anything in my long term account. Why not? Again, because I could be wrong. As long as I am properly hedged, I’m fine. Having my long term account stay relatively flat while people’s 401ks and IRAs are getting smashed means I have nothing to complain about.

The classical hedge is to buy both stocks and bonds but as you know, I hate stocks and it’s a real challenge to diversify without stocks. If you want to diversify with stocks, all you need to do is buy an index fund. If you want to diversify outside of stocks, it is a challenge. Even outside of stocks, there really is no safe place for your money.

1. Leave it in a bank? FDIC insurance is worthless. Trust me on this one.
2. Safe low yielding T-bills. Inflation will eat you alive.
3. Long bonds. Already overbought, and if the foreigners dump our bonds, you don’t want to be here. Also, it wasn’t the 1929 stock market crash that brought on the Great Depression, it was the 1931 bond market crash.
4. Inflation protected securites. Pointless in deflation. Even during times of inflation, it’s stupid because the government will understate inflation.
5. Foreign currencies. We are screwed, the rest of the world is screwed worse. Do you really want to hold this crap?
6. 5 year CDs. No access to money for 5 years. If we get a deflationary collapse, then you will score big, that is, if the FDIC actually backs you up and if you really can survive without that cash in deflationary collapse.
7. Gold. Useless in deflation. If gold shoots the moon, watch the government step in a seize it, instantly making it worthless.
8. Oil futures. Bad in deflation. If oil shoots the moon, an alternative energy source will keep the price of oil in check. An oil spike also results in a recession, instantly screwing over the demand for oil.

This totally sucks man.

Went long.

Bought 2 QQQQ Oct 30 calls for $3.83 each.

I am set to test my power amplifier sometime this week. I had gotten my chip back a month ago, but I couldn’t test it until now because some post-processing had to be done and that didn’t get finished until now.  The stakes are pretty high. This thing needs to work.

1.  The last power amplifier I taped out had its output power fall short by about 6-7 dBm. It was completely out of my control and there was nothing I could have done to design my power amplifier correctly because I did not have a good model of the MEMS device I was integrating the power amplifier with.

2. This work is a part of the design contest.

3. If it is a failure, I’ll have to tape something out again and there’s a tapeout deadline in November, around the same time I go to Austin, and also around the same time I take my qualifying exam. Not good.

I was thinking about going long the market and taking advantage of a short term trading bottom, but I’ve been in the RF lab testing a retarded chip while watching the market go against me too many times. It sucks when your chip sucks. It sucks even more when the market also goes against you. So screw it, no trading.

The market tanked hard over the past week and I wasn’t short, what a shame. However, I know that I cannot chase this on the short side. The market always acts in a way that screws the most people and to trade well, you need to think like a crook. The way most people will be screwed is if we have another monster rally, people pile back into stocks again, and then the bottom falls out. The crash is not now.

Speaking of trading, this post is my first post in more than a week. I’ve managed to stay clear from BOTH trading and blogging for a whole week. I did play Tribes 2 the last two days though.

Link to draft legislation text

Version hosted on my site in case the other one gets pulled

Be aware that this is not the final version of the bill.

On page 81…

SEC. 127. ACCELERATION OF EFFECTIVE DATE.
Section 203 of the Financial Services Regulatory Relief Act of 2006 (12 U.S.C. 461 note) is amended by striking ‘‘October 1, 2011’’ and inserting ‘‘October 1, 2008’’.

What does the Financial Services Regulatory Relief Act of 2006 say?

SEC. 202. INCREASED FLEXIBILITY FOR THE FEDERAL RESERVE BOARD TO ESTABLISH RESERVE REQUIREMENTS.
Section 19(b)(2)(A) of the Federal Reserve Act (12 U.S.C. 461(b)(2)(A)) is amended—
(1) in clause (i), by striking ‘‘the ratio of 3 per centum’’ and inserting ‘‘a ratio of not greater than 3 percent (and which may be zero)’’; and
(2) in clause (ii), by striking ‘‘and not less than 8 per centum,’’ and inserting ‘‘(and which may be zero),’’.
SEC. 203. EFFECTIVE DATE.
The amendments made by this title shall take effect October 1, 2011.

What does Section 19(b)(2)(A) of the Federal Reserve Act say?

2. Reserve requirements.

A. Each depository institution shall maintain reserves against its transaction accounts as the Board may prescribe by regulation solely for the purpose of implementing monetary policy–

i. in the ratio of 3 per centum for that portion of its total transaction accounts of $25,000,000 or less, subject to subparagraph (C); and

ii. in the ratio of 12 per centum, or in such other ratio as the Board may prescribe not greater than 14 per centum and not less than 8 per centum, for that portion of its total transaction accounts in excess of $25,000,000, subject to subparagraph (C).

What the Financial Services Regulatory Relief Act of 2006 does is allow the Federal Reserve to set reserve requirements for banks at 0%. If nothing is done, the Financial Services Regulatory Relief Act of 2006 will go into effect on October 1, 2011. The bailout bill changes the date to October 1, 2008.

In case you have trouble understanding what I just said, THE RESERVE RATIO IS GOING TO BE CHANGED TO 0%! THE BANKS WILL BY LAW NOT BE REQUIRED TO POST RESERVES. THERE IS NO MONEY IN THE BANK!

And do you know what the scary thing is about the Financial Services Regulatory Relief Act of 2006? Guess who voted against it? NO ONE. How did this piece of crap get passed?

This is currently being discussed at tickerforum.org.

Reuters

WASHINGTON (Reuters) - The U.S. House of Representatives on Saturday approved an agreement to end the three-decade ban on U.S. nuclear trade with India and the top U.S. senator was upbeat about passage in the Senate.

The agreement passed the House by a margin of 298-117 and the Democrats who control the Senate hope to bring it to a vote there within days despite the opposition of some in their own party, congressional aides said.

Critics argue the deal undermines efforts to prevent the spread of nuclear weapons and sets a precedent allowing other nations to seek to buy such technology without submitting to the full range of global nonproliferation safeguards.

So let me get this straight. We give India nuclear technology so that we have better oversight with what they are doing with nuclear technology. Am I missing something here?

Who voted for it?

Why not?

Because it looks awful when it moves. RGB pixel psychedelics like crazy.

It also makes McCain look old. There’s a reason why you only see polticians wear solid color ties and it is a very well known fact that wearing a striped tie on TV is a bad idea. I don’t understand how the McCain team could have let this slip by.

Oh btw, where’s McCain’s flag pin?

The market is too volatile and it is impossible to trade. I just can’t trade this. Attempting to trade this market would be worse than gambling. The best course of action is to sit on my hands in 100% cash and do nothing until the risk/reward ratio becomes very favorable. Sure, the economic situation is dire and the market is staring into an abyss. However, there will always be some sort of bullcrap intervention. I would be looking for a short entry around 1240 on the S&P 500, 735 on the Russell 2000, and 1775 on the Nasdaq 100. There has to be one more bounce out of this sucker.

Concerning the bailout, I am adamantly opposed to it. However, from a trading perspective, I would gladly short the market once the bailout is passed because I know that it will not work. But seriously, it is no good to favor a bailout just for a trading opportunity. I’d much rather not see the bailout pass and have the market tank while I am not short, rather than to have this bailout pass and have the whole nation screwed for it. For the sake of this country, I have been e-mailing my congressman and my two senators every night the last few nights telling them to oppose the bailout. I called my congressman’s office today and made it clear to his staff that if he votes for this bailout, there will be severe consequences in November. Thousands of other people have been doing so too. I urge you to do the same. Do not give up on this bailout. You have a voice. Your representatives will listen if you nag them enough. If you threaten that you will do everything in your power to make sure they are not re-elected if they vote for it, they will listen.

Write to your representative

Write to your senators

Give them hell. They love it when you do that.

For more info:

Fed Up USA
Mish’s Global Economic Trend Analysis

What I find very surprising is that it seems that the House Democrats and Senate Democrats are the ones trying to get this thing passed. Sure, they want to modify the plan so that it contains provisions for strong oversight, but the plan is still a waste of taxpayer money at the core. This is no time for some kind of crap bipartisan plan. The legislation is pure trash. Why the heck are the Democrats trying to rubber stamp this horrible Bush/Paulson proposal? It’s ridiculous. It is the House Republicans who are stalling this plan. For once, I actually appreciate what these House Republicans are doing.

UPDATE: Nevermind. I remain thoroughly disgusted with House Republicans. Here’s what they are proposing…

via Bloomberg

Republican lawmakers offered a plan calling for Wall Street firms to purchase insurance on mortgage-backed securities and advocating tax cuts and relaxed regulations.

I have a few comments on this…

1. Insurance? Insurance is an accounting fiction. We already know what happened with credit default swaps. And who is going to do the underwriting? The government? Isn’t this the same as a bailout?
2. Tax cuts? There’s talk that it means a two year suspension of the capital gains tax. What? How is that supposed to help? If I hold stock, then heck yeah I am selling now. Also, if I hold stock at a loss, I am not paying capital gains tax anyway.
3. Relaxed regulations? You’ve got to be kidding me.

I lasted exactly two months without Tribes 2.

I am so bored. I have nothing else to do.

How bout this: between blogging, stocks, and Tribes 2, I can only pick two? So I’m dropping stocks for now.

Not what I wanted, but I’ll take it. I am back in 100% cash.

Sold 1 XLF Oct 30 put for $9.30. Had gotten it for $8.20.

Sold 2 IWM Oct 80 puts for $8.00. Had gotten one for $4.70 and the other for $5.70.

I am going to regret this. I hate taking profits because it is so painful. It’s not a bad haul for something I put on Friday morning, but seriously, it is very emotionally difficult. It’s like dumping your girlfriend after 1-2 days and it has to happen every single week.

Today I hit $800 YTD in commissions on 170 trades.

I think I will take a break from trading for the rest of the month. I usually ban myself from trading because I am sucking. This time I am banning myself from trading because things are going too well. I cannot get overconfident and blow up my account again. I’m 7 for 8 in the last 5 weeks. Really, all it takes is one big mistake to blow up your account. It’s not the little things that kill you. It’s the one time disaster events.

The above trade log has been annotated so you can match up sells with buys. Ignore #0, it’s just pushing and popping money into and out of a PEZ dispenser. #5 is my only loss.

Speaking of one time disasters, I think I will push some money back into the PEZ dispenser. The easiest way to blow up your account is to have extra cash sitting your account and using it to overleverage on options. It is best to keep the candy inside the PEZ dispenser so that there’s a 1 day time lag on the drug if you absolutely need it.

I want to dump all of my puts and go back to 100% cash.

Limit order to sell 2 IWM Oct 80 puts for $9. Will require IWM to be under $71. Closed at $71.95.

Limit order to sell 1 XLF Oct 30 put for $10. Will require XLF to be under $20. Closed at $20.55.

I need both underlying securities to fall a bit to get these orders filled. Based on my chart analysis, I think I might be able to get these fills tomorrow morning. I am hoping for some downward momentum in the morning.

Ever since blowing up my account in July and going from +31% YTD to -2.5% YTD in a week, and sitting out of the market for a month to really think about things, my trading style has drastically changed. I am no longer a stupid bear. After one month of responsible trading, I am now +22.6% YTD. It is very tempting for me to ride my current short positions until I break 31% YTD, but responsible trading is what has worked for me in the last month and I have no choice but to get out of my short positions at a reasonable target.

Right now is the 3rd time this year my account balance has been this high. The last two times I was this high, I had my account blown up. (The first time it got blown up, I went from +27.6% YTD to -14.5% YTD in about six weeks.) I will not be a pig and blow up my account this time. I think what happens to me as a trader is that when I have a string of good trades, I become overconfident, my bets get bigger, and eventually my account gets blown up. I realized that if I can be consistent and keep losses small, I would have so much more money than I do now. I’ve traded responsibly before. February was an amazing month because I wasn’t a pig.

Let’s consider this Markov chain…

Starting state: State 100
50% chance of advancing to state 110
50% chance of declining to state 90

State 90
50% chance of advancing to state 99
50% chance of declining to state 81

State 110
50% chance of advancing to state 121
50% chance of declining to state 99

In each state, there’s a 50% chance of going to 1.1*(Current state) and a 50% chance of going to 0.9*(Current state). After n=infinity number of state transistions, what this Markov chain says is that your trading account balance will go to zero.

Now, if you are a stupid trader like me, this is what the Markov chain actually looks like.

Starting state: State 100
50% chance of advancing to state 120
50% chance of declining to state 80

State 80
50% chance of advancing to state 96
50% chance of declining to state 64

State 120
50% chance of advancing to state 144
50% chance of declining to state 96

In each state, there’s a 50% chance of going to 1.2*(Current state) and a 50% chance of going to 0.8*(Current state). I think for this Markov chain, your account balance goes to zero much faster.

In order to not end up with a Markov chain that approaches zero, you cannot get out of positions as a reaction, that is, AFTER it goes against you. You need to take profits while they exist and not be a pig. You also need to cut losses quickly.