HAG: One Trade

Our primary economic theme continued today as the Fed continued it's hawkish inflation talk ("We thought about raising interest rates .5%") while continuing to act dovish. I think this is the right position, and so do markets. Marvell was sold today and nothing bought. HAG is once again flat.

Completed trade:

MRVL: 1.84%

Adding these trades to our totals:
86 trades
.551% average gain per trade
11.85% total theoretical gain since inception (2/7/06).
NASDAQ composite on 2/7/06: 2244.96
NASDAQ change since 2/7/06: 2.94%

Once again, the "total theoretical gain" assumes 25% of a portfolio was invested in each trading position. Half-sized positions assume only 12.5% was invested, and count as only 1/2 of a "completed trade". Buying power is limited to twice the value of the portfolio.

HAG: Flat!

On Friday, our program finally sold all of its positions, and today the NASDAQ market fell over 2%. Awesome! Our spread over the returns of NASDAQ is now over 15% since inception on February 7. I'm pretty sure that's a new high. Today, the program buys one stock: Marvell Technology.

System Z Month 2 end of week 3: $9,963.83

7 weeks in, System Z is just about flat and Ameritrade is much richer. If System Z were trading more money, our transaction costs would be a much lower percentage, and we would have realized nice gains despite a downward market.

This week, markets rebounded, but System Z did not caputure all the gains it should have. Mostly, this was due to bad luck: Our portfolio is underdiversified because our trading costs are expensive. This past week, a few of our concentrated positions (TIVO and XMSR) had terrible losses.

System Z's low and no-commission returns are once again significantly positive, and the spread between the return of System Z and the return of the NASDAQ has reached a new high.

System Z account value: $9,963.83
commissions paid: $460
maximum commissions should be: $184
which means I overpaid at least: $276
minimum account value corrected for obscene commissions: $10,147.83
account value if no commissions: $10,423.83

System Z actual return since 4/7: -.36%
System Z corrected return since 4/7: 1.48%
System Z no-commission return since 4/7: 4.24%

Nasdaq on 4/7: 2339.02
Nasdaq return since 4/7: 5.50%

Refer to post from 4/19 for explanation of "corrected return". Returns for a larger fund would fall somewhere between the "corrected" return and the "no-commission" return.

HAG: Finally Flat

Market rallied nicely today. One of our three positions--Akamai--was one of the largest percent gainers in the market and had no significant news surrounding it. That's how this program makes money. Plus, some of the XMSR losses were mitigated by it's 10% intraday rally, as mentioned in the previous post. For the first time in weeks, System HAG has no positions.

Completed trades:

XMSR: 7.48%
AKAM: 9.49%
WFR: 4.37%

Adding these trades to our totals:
85 trades
.536% average gain per trade
11.39% total theoretical gain since inception (2/7/06).
NASDAQ composite on 2/7/06: 2244.96
NASDAQ change since 2/7/06: 2.08%

Once again, the "total theoretical gain" assumes 25% of a portfolio was invested in each trading position. Half-sized positions assume only 12.5% was invested, and count as only 1/2 of a "completed trade". Buying power is limited to twice the value of the portfolio.

Is that the phone ringing?

Margin calls!

That's the "joke" I saw posted all over the XM Satellite Radio message boards yesterday. Not that I normally read those things, but yesterday was a special situation. I was long a sizable postition is XMSR (sort of by accident, as I previously mentioned) and I wanted to get a feel for daytrader sentiment.

I mentioned yesterday that I was holding a postion in XMSR overnight reluctantly. The "reluctance" was because I was pretty sure there were too many small investors who had large percentages of their portfolios in this stock. Since the stock had fallen about 70% from the time it was attractive to small investors, and had just fallen another 10%, there were bound to be some investors getting a margin call. It might only be $5000 in an IRA, but that's still $5000 of stock that needs to be sold at the open no matter the opening price. I'll repeat: no matter the opening price! A glaring market inefficiency. If there are margin calls ahead, a stock is almost guaranteed to open much lower.

Open lower it did. A few moments after the open, XMSR was down another 6% from it's previous close. My system HAG position was about 17% in the red. Luckily, once all the margin calls had been settled, the stock was able to rally. And rally it did. XMSR rose about 10% from it's low today to make the reluctant decision to hold XMSR through today a good one. I don't like having to make decisions like that, but there's no clear-cut way for me to correct my mistakes. Do I sell positions immediately? Do I hold? I think I have to leave these rare choices up to my instincts.

Oh, and there's a silver lining to this situation. All that thinking about XMSR led me to buy a few thousand shares this morning. I was hoping there might be a post-margin-call bounce. A very profitable trade. Will TIVO do the same thing tomorrow?

HAG: costly mistake

Uggh. XM satellite radio seriously hurt my returns once again. This time, a mid-day announcement was made by the company that they were scaling down expectations. The stock closed down over 11%. The worst part of this incident is that I should not have bought XMSR in the first place. I read one of the numbers wrong on the spreadsheet that would have disqualified it as a purchase. Unfortunately, mistakes like that are unavoidable because the current state of System HAG requires lots of calculations, by me, in a very limited amount of time. In the long run, I hope the mistakes all cancel each other out, but it's very frustrating when they seem skewed against me.

Today, RHAT (bought 2 days ago) and RFMD (bought today) were sold. XMSR is reluctantly held another day (morning margin calls ahead!). Today, the program buys MEMC and Akamai.

Completed trades:

RHAT: 1.39%
RFMD: 3.77%

Adding these trades to our totals:
82 trades
.478% average gain per trade
9.80% total theoretical gain since inception (2/7/06).
NASDAQ composite on 2/7/06: 2244.96
NASDAQ change since 2/7/06: 3.34%

Once again, the "total theoretical gain" assumes 25% of a portfolio was invested in each trading position. Half-sized positions assume only 12.5% was invested, and count as only 1/2 of a "completed trade". Buying power is limited to twice the value of the portfolio.

HAG: some relief

This was a great day for System HAG. More anxiety yesterday equals greater relief today.

Though markets closed negatively as the broad relief rally completely faded away, all seven stocks that that HAG held had positive returns for the day. Every position was sold except RHAT (bought yesterday). Also, RF Micro Devices and XM Satellite Radio were bought today.

Completed trades:

1/2 sized GG(5 trading days ago): 7.42% (3.71%)
1/2 sized JOYG(6 trading days ago): 8.33% (4.165%)
RIMM (2 days ago): 2.70%
MNST: 1.93%
WFR: 1.68%
BHP: 3.80%

Adding these trades to our totals:
80 trades
.460% average gain per trade
9.20% total theoretical gain since inception (2/7/06).
NASDAQ composite on 2/7/06: 2244.96
NASDAQ change since 2/7/06: 3.87%

Once again, the "total theoretical gain" assumes 25% of a portfolio was invested in each trading position. Half-sized positions assume only 12.5% was invested, and count as only 1/2 of a "completed trade". Buying power is limited to twice the value of the portfolio.

System Z Month 2 Mid-week 3: $9,964.20

System Z had a great day today. Though markets went down again, many oversold positions, which we owned, rebounded nicely.

System Z's low and no-commission returns are once again significantly positive, and the spread between the return of System Z and the return of the NASDAQ has reached a new high.

System Z account value: $9,964.2
commissions paid: $420
commissions should be: $168
which means I overpaid: $252
account value corrected for obscene commissions: $10,132.2
account value if no commissions: $10,384.2

System Z actual return since 4/7: -.36%
System Z corrected return since 4/7: 1.32%
System Z no-commission return since 4/7: 3.84%

Nasdaq on 4/7: 2339.02
Nasdaq return since 4/7: 7.71%

Refer to post from 4/19 for explanation of "corrected return". Returns for a larger fund would fall somewhere between the "corrected" return and the "no-commission" return.

HAG: still trading

Markets continue to fall and HAG continues to trade heavily. The past two weeks have been very atypical.

Today, HAG sold one of its half-sized positions in GG (the one bought 5 trading days ago) and still holds one half-sized position in GG and one in JOYG (bought four and five trading days ago, respectively). Also, the program sells its full-sized position in JNPR, bought Friday, and holds it's position in RIMM, also bought Friday.

Today, the program buys full-sized positions in Monster, MEMC electronic, Red Hat, and BHP.

Completed trades:

1/2 sized GG(5 days ago): 10.91% (5.455%)
JNPR (1 day ago): 2.86%

Adding these trades to our totals:
75 trades
.533% average gain per trade
9.99% total theoretical gain since inception (2/7/06).
NASDAQ composite on 2/7/06: 2244.96
NASDAQ change since 2/7/06: 3.21%

Once again, the "total theoretical gain" assumes 25% of a portfolio was invested in each trading position. Half-sized positions assume only 12.5% was invested, and count as only 1/2 of a "completed trade". Buying power is limited to twice the value of the portfolio.

Let's go to Bubbles! BUY GLD: $65.58

My behavioral algorithm says buy and my behavioral research says buy. This is as good an entry point as any. GLD closed at $65.58 on Friday. Volatility is very high, so there might be a much better entry point than $65 ($60?, $55?) over the next few weeks, but I wouldn't recommend waiting.

Gold has entered a speculative bubble phase that might eventually bring its spot price well over $1000/oz. Perhaps $2000/oz. Seriously. Gold is the investment most likely to follow in the path of Beanie Babies, tulips, baseball cards, and .com ipos. There's a fixed supply and it's easy for anyone to buy it. As long as the volume traded keeps increasing, prices are likely to keep increasing.

Speculative bubbles are a powerful force of complete instability. The scenario works something like this: Future events that smart investors have already priced into the value cause a new wave of buying by less sophisticated investors. Prices rise to $800, a level which smart investors now think is expensive. But this price rise to $800 attracts even more less sophisticated investors who want to get in the riches. Gold seems to be the best game in town. Media coverage builds and announcements of actual inflation in teh economy seem to justify prices. Momentum driven price increases continue, and "smart" investors begin to short gold. Now, the "smartest" investors, realizing the inherent instability of the situation, add fuel to the fire and start buying even more. Everyone is talking about gold. The price shoots past $1000 and the "smart" investors get scared. They cover their short positions as momentum players keep buying and the price of gold doubles quicker than anyone thought possible. Its the best possible investment! A real store of value that people will always want. The currency of the world. Some think it should be worth $5000 an ounce.

That's the speculative blowout. A few months later it turns out those "smart" guys were right. It's not worth more than $800 an ounce.

Bubbles are fun to be invested in. The only safe way to make money is to get in early.

It's not early. But it's not yet late. Enjoy!

System Z Month 2 end Week 2: $9,754.03

This was a terribly volatile week for System Z. The program's big weakness is that it can't differentiate between anxiety in the individual stock and anxiety in the general market. If the program chooses to a buy a stock because it traders are worried about that specific company, and then larger market worries build on top of that anxiety, the positions that System Z enters will most likely be losers. This past week, the market made a rare adjustment from a low-volatility bullish market to a much-higher volatility bearish market.

Despite the worst-case scenario that has unfolded for System Z in its second month, no-commmission returns remain positive despite the NASDAQ market falling 6.24% since inception.

System Z account value: $9,754.03
commissions paid: $385
commissions should be: $154
which means I overpaid: $231
account value corrected for obscene commissions: $9,985.03
account value if no commissions: $10,139.46

System Z actual return since 4/7: -2.46%
System Z corrected return since 4/7: .15%
System Z no-commission return since 4/7: 1.39%

Nasdaq on 4/7: 2339.02
Nasdaq return since 4/7: 6.25%

Refer to post from 4/19 for explanation of "corrected return"

HAG: Relieved

Finally, market anxieties dissipated. Greenspan' s off-the-cuff remark that the housing boom has ended was interpreted as implying that the Fed is aware of a potential slowdown in the economy and won't be quick to raise interest rates. I still expect the Fed to talk like hawks but not act like hawks when it comes to inflation.

Though the Nasdaq only rose a half of a percent, many of the technology stocks that System HAG has accumulated rose significantly as sentiment improved.

Today, HAG sold 12 its 15 half-sized positions. The only ones that remain are GG and JOYG bought 4 days ago, and another allotment of GG bought 3 days ago. These three positions are half-sized and bear significant unrealized losses. Today, the program buys full-sized positions in Juniper and Research in Motion.

Completed trades (all 1/2 sized):

RHAT(4 days ago): 4.15% (2.075%)
RHAT (1 day ago): 3.25% (1.625%)
PAAS: 4.60% (2.3%)
TLAB: 2.56% (1.28%)
NVDA(2 days ago): 2.52% (1.26%)
NVDA(1 day ago): 2.10% (1.05%)
AMTD: 4.45% (2.225%)
EBAY: .64% (.32%)
MNST: .17% (.085%)
WFR: 3.77% (1.885%)
ARRS: 3.54% (1.77%)
TIE: 13.1% (6.55%)

Adding these trades to our totals:
73.5 trades
.579% average gain per trade
10.64% total theoretical gain since inception (2/7/06).
NASDAQ composite on 2/7/06: 2244.96
NASDAQ change since 2/7/06: 2.23%

Once again, the "total theoretical gain" assumes 25% of a portfolio was invested in each trading position. Half-sized positions assume only 12.5% was invested, and count as only 1/2 of a "completed trade". Buying power is limited to twice the value of the portfolio.

HAG: Rock Bottom but still Positive

The late-selloff today is typical of an extremely worried market. Many of the market's fears will come pass over the next few months: we will have both higher interest rates and higher inflation rates. But these fears are still just that. Fears and not facts. The growth in the world's capital and productivity will continue, but might need a short adjustment period.

Today, HAG sold none of its three half-sized positions from two days ago, five of its seven half-sized positions from two days ago, and none of its five half-sized positions from yesterday. So 10 half-sized positions are held over: JOYG, GG, RHAT from 3 days ago; GG and PAAS from 2 days ago, and TLAB, NVDA, AMTD, EBAY, and MNST from yesterday.

The program buys five more half-sized positions today: MEMC Electronic Materials, NVIDIA, Arris, Red Hat, and Titanium Metals.

Completed trades (1/2 sized):

TLAB: 2.27% (1.135%)
NUAN: 1.10% (.55%)
NTAP: .98% (.49%)
MRVL: 1.09% (.545%)
PMCS: 2.57% (1.285%)

Adding these trades to our totals:
67.5 trades
.465% average gain per trade
7.86% total theoretical gain since inception (2/7/06).
NASDAQ composite on 2/7/06: 2244.96
NASDAQ change since 2/7/06: 2.88%

Once again, the "total theoretical gain" assumes 25% of a portfolio was invested in each trading position. Half-sized positions assume only 12.5% was invested, and count as only 1/2 of a "completed trade". Buying power is limited to twice the value of the portfolio.

Second worst month ever

Thus far, May 2006, is shaping up to be the second-worst month for System HAG. In September 2001, losses came in at around -14%. So what has made this month so devastating? Well, it was the way the market's anxieties about inflation have consistently increased day-by-day since the stimulus that set them in motion (the Fed meeting last Wednesday). Slowly building anxieties, combined with options expiration tomorrow (heightened volatility) have led to a worst-case scenario. The foundation of "Psychological Arbitrage" is that market anxieties usually have a rapid onset and a quick relief. Though relief is not always quick, betting that it will be quick is a winning bet to take if you take it every time. Let's see how the long run works out for System HAG.

HAG: lots of paperwork

Broad markets continued their tremendous selloff as inflation anxieties were somewhat realized by CPI data. New anxieties about the effect that inflation will have on the average consumer are still premature. Expect a relief rally tomorrow.

Today, HAG sold four of its seven half-sized positions from two days ago, and one of it's eight half-sized positions from yesterday. So 10 half-sized positions are held over: JOYG, GG, RHAT from 2 days ago; GG, MRVL, NTAP, NUAN, PAAS, TLAB, PMCS from yesterday. The program adds five more half-sized positions. Today it will buy Tellabs, NVIDIA, Ameritrade, Ebay, and Monster.

Completed trades (1/2 sized):

AKAM: 1.32% (.66%)
NUAN: 4.77% (2.385%)
BRCD: 2.34% (1.17%)
MRVL: 3.28% (1.64%)
STX: 1.42% (.71%)

Adding these trades to our totals:
65 trades
.513% average gain per trade
8.33% total theoretical gain since inception (2/7/06).
NASDAQ composite on 2/7/06: 2244.96
NASDAQ change since 2/7/06: 2.19%

Once again, the "total theoretical gain" assumes 25% of a portfolio was invested in each trading position. Half-sized positions assume only 12.5% was invested, and count as only 1/2 of a "completed trade". Buying power is limited to twice the value of the portfolio.

System Z Month 2 Week 2: $9,759.46

On the whole, System Z has performed as expected during this week of market adjustments. As longer-term anxieties become incorporated in prices, the program performs poorly, but the increase in general anxiety levels should lead to future gains.

System Z account value: $9,759.46
commissions paid: $310
commissions should be: $124
which means I overpaid: $186
account value corrected for obscene commissions: $9,945.46
account value if no commissions: $10,069.46

System Z actual return since 4/7: -2.41%
System Z corrected return since 4/7: .55%
System Z no-commission return since 4/7: .69%

Nasdaq on 4/7: 2339.02
Nasdaq return since 4/7: 4.70%

Refer to post from 4/19 for explanation of "corrected return"

HAG: losses continue, more buying

Today, HAG sold its positions in Corning from 3 days ago, and in Amkor, Network Appliance, and JDS Uniphase from two days ago. All these trades realized losses. Also, the program sold one of its half-sized positions that it bought yesterday, Titanium Metal Corp. Seven positions from yesterday remain.

The market continued its adjustment period today, and HAG continued to selectively buy into the greatest pockets of anxiety. Again, because there were so many potential buys, the program will buy 8 half-sized positions. The buys for today are Goldcorp, Marvell, Network Appliance, Nuance, Pan-American Silver, Seagate, Tellabs, and PMC Sierra.

Completed trades:

GLW: 4.39%
AMKR: 6.65%
NTAP: 3.55%
JDSU: 2.40%
TIE (1/2 size): 5.27% (2.64%)

Adding these trades to our totals:
62.5 trades
.578% average gain per trade
9.028% total theoretical gain since inception (2/7/06).
NASDAQ composite on 2/7/06: 2244.96
NASDAQ change since 2/7/06: .70%

Once again, the "total theoretical gain" assumes 25% of a portfolio was invested in each trading position.

HAG: losses and mining stocks

As mentioned in the previous post, HAG is realizing losses as the market is adjusting to inflation anxiety.

Today, HAG sold it's positions in NVIDIA, Broadcom, Tivo, and PMC Sierra. Losing positions in Corning from two days ago, and Amkor, Network Appliances, and JDS Uniphase from yesterday, were held until tomorrow.

For the buys today, there were many technology companies and a few commodity companies which System HAG indicated as a buy. Because there were so many buys, we are going to depart from our usual maximum of 4. Today, we are going to buy 8 different companies, but invest half as much of our "portfolio" in each one.

Especially compelling buys are the mining companies Joy Global, Titanium Metals Corp, and Gold Corp. Though these companies are extremely volatile, over 26 out of 31 of the theoretical System HAG buys since March, 2005, in these companies have been profitable.

The other five buys are all tech companies: Akamai, Nuance, Brocade, Red Hat, and Marvell.

Completed trades:

NVDA: 9.52%
BRCM: .76%
PMCS: 1.19%
TIVO: .39%

Adding these trades to our totals:
58 trades
.87% average gain per trade
12.647% total theoretical gain since inception (2/7/06).
NASDAQ composite on 2/7/06: 2244.96
NASDAQ change since 2/7/6: .29%

Once again, the "total theoretical gain" assumes 25% of a portfolio was invested in each trading position.

A more anxious market

This past week has been a transition period for System HAG as well as the broad markets. As inflation worries have begun to enter financial markets on a permanent basis, System HAG has realized significant losses.

Here is a possible cause: HAG buys stock when anxiety levels are much higher than average, assuming most states of heightened anxiety quickly revert to states of neutral emotion. However, during some transition periods, heightened emotional states do not dissipate quickly. The poor results of HAG this past week have indicated that markets have entered a longer-term period of inflation anxiety. The "neutral" state is a less bullish, more anxious market.

Ultimately, System HAG should benefit from more anxious trading, but the transition to a higher anxiety period has yielded losses.

System Z: beginning of month 2 $9,982.74

The NVIDIA that was bought two days ago suffered a large decline today of over 7% after announcing earnings. This loss, combined with the large market declines over the last two days, have left System Z in the red. Hopefully, this situation is temporary. Volatility ahead.

System Z account value: $9,982.74
commissions paid: $215
commissions should be: $86
which means I overpaid: $129
account value corrected for obscene commissions: $10,111.74
account value if no commissions: $10,197.74

System Z actual return since 4/7: -.17%
System Z corrected return since 4/7: 1.12%
System Z no-commission return since 4/7: 1.98%

Nasdaq on 4/7: 2339.02
Nasdaq return since 4/7: 4.07%

Refer to post from 4/19 for explanation of "corrected return"

HAG: Full Tilt

The anxiety that potential inflation has conjured up in the market continues to grow, and the small pockets of great anxiety that HAG has identified have failed to dissipate. HAG is fully loaded with stocks. In addition to NVIDIA, which was bougt two days ago (and collapsed taday), and Broadcom, Tivo, Corning, and PMC Sierra, which were bought yesterday, System HAG buys Amkor Technology, Network Appliance, and JDS Uniphase.

HAG: buys! Inflation scare...

As I've mentioned over the last few days, I think Bernanke wants to allow as much inflation into our economy while still maintaining a strong stance against inflation. Once again, the reasoning is that an isolated inflationary episode would help stabilize capital flows, while entrenched inflation would be a trememdous hindrance to growth. It' s a fine line to walk, but the only direction to go. The gold market had already told us we were headed in this direction.

Today, equity markets finally realized that an inflationary episode is in store, and there was worry about the impact this inflation will have on our economy. Reasonable fears. A reasonable reason for the NASDAQ to lose more than 2% of it's value. Still, some people must have overreacted, and System HAG found plenty of stocks to buy.

First off, I must mention that the program bought NVIDIA yesterday.

Today, it buys the maximium 4 stocks: Broadcom, Tivo, Corning, and PMC Sierra.

System Z: End of month 1 $10,419.59

System Z rebounded smartly last week to end it's first month with a significant percentage gain. Right now, the program is long a few Etrade options, and it bought NVIDIA today for a quick trade.

System Z account value: $10,419.59
commissions paid: $185
commissions should be: $74
which means I overpaid: $111
account value corrected for obscene commissions: $10,530.59
account value if no commissions: $10,604.59

System Z actual return since 4/7: 4.19%
System Z corrected return since 4/7: 5.30%
System Z no-commission return since 4/7: 6.04%

Nasdaq on 4/7: 2339.02
Nasdaq return since 4/7: .78%

Refer to post from 4/19 for explanation of "corrected return"

Three themes

The three macroeconomic themes that have continually been alluded to on this blog are currently at the forefront of the news. First, the rally in commodities, especially metals, is in high gear. Though I am still extremely bullish on gold, I think that a selloff that will trigger buying by System HAG is probably only a week away.

Second, Cisco announced solid earnings today. I maintain that the next wave telecommunications buildout will be bigger than we can imagine, and that Cisco is the core technology stock to own.

Third, inflation. The Fed meeting that will give us an indication of Bernanke's monetary policy is only a day away. As indicated earlier, I think Bernanke wants to allow as much unexpected inflation as possible while continuing to indicate that he is an inflation hawk. I would guess that his policy statement at this meeting will contain a strong anti-inflation message, while also hinting that rate increases might pause. This hypothesis has been supported by the gold market, which has already inflated.

This inflation is necessary because of the imminent housing market slowdown. The lure of other good investments in the world economy will shift capital away from real estate, which has no ability to outperform other investments going forward. Without an inflationary environment, we run the risk of entering a deflationary environment, which is much more devastating. Luckily, the man in charge is an expert on this subject.

As expected, the ones who will lose out the most are the poor (as necessities become more expensive) and holders of variable-rate loans.

HAG: Back on Track 3 months in

After three months, HAG has made a theoretical return of 15.42%, compared to the gain in the NASDAQ of 4.16%

Getting caught up on the last few days of trading in HAG: The BEA Systems stock that was purchased last Wednesday was sold last Friday. Yesterday, the program purchased Pan American Silver and Ebay, both of which were sold today. The program is currently flat.

BEAS: 1.33%
EBAY: 1.72%
PAAS: 5.49%

Adding these trades to our totals:
54 trades
1.142% average gain per trade
15.420% total theoretical gain since inception (2/7/06).
NASDAQ composite on 2/7/06: 2244.96
NASDAQ change since 2/7/6: 4.16%

Once again, the "total theoretical gain" assumes 25% of a portfolio was invested in each trading position.

Coming eventually:

Charts!
A static web page!
Inflation!

Get rid of those variable rate loans. Bernanke is going to let a little bit of inflation into the system before he begins to aggressively fight it. Right now, higher interest rates can cause more potential problems than a little bit of inflation. The thing is, Bernanke will continue to talk like an inflation hawk, but act like a dove. It's in the economy's best interest. More on why later!

System Z Week 4: $10,260.76; Commentary

System Z is an obvious work in progress. Hopefully, the returns it generates after paying off it's exhorbitant commission costs will lead to larger investments. The commissions on an account over $100,000 will be about 80-90% less, so it's important to separate out the commissions from the returns.

Two weakeness of System Z were exposed this week. The first is that this system simply games the expected relief rally from anxiety. I see an excess of anxiety as a force that will cause average returns to be significantly positive, but I do not know when the release of anxiety will occur. If the rally happens within a day or two, great. If it doesn't, I stop myself out of the position. This process is easy to backtest because it requires no qualitative decision-making.

However, as I saw this week in with the online brokerages, sometimes the relief rally takes an extra day or two to materialize. Although I labeled the potential relief rally as a likely occurence, adhering to the program did not allow me to wait for the rally. I realized significant losses that would have turned into significant gains had I held a day or two longer.

I will look into extending to holding period for "best bet" positions, but I hesitate to add a qualitative layer to the decision-making process. Part of the reason for this blog is to track qualitiative decisions...

In the meantime, I must note that System Z made it's first option trade. A purchase of out-of-the-money Etrade options. I want to selectively purchase long options for companies that have has longer-term optimistic feelings interrupted by shorter-term anxious feelings. The fears of a price war amongst online brokers, in the midst of optimism about accelerating trading growth, fits this paradigm.

The second problem this week was with XM Satellite Radio. This is a stock that's definitely facing a deceleration of speculative activity, and shoul dnot be in the universe of traded stocks. This error also helped me realize what additional stocks i could enter into the universe of traded stocks. System Z will soon find more buys than it did before. More anxiety, more money!

System Z account value: $10,260.76
commissions paid: $165
commissions should be: $66
which means I overpaid: $99
account value corrected for obscene commissions: $10,359.76

System Z actual return since 4/7: 2.61%
System Z corrected return since 4/7: 3.59%
Nasdaq return since 4/7: .15%

Refer to post from 4/19 for explanation of "corrected return"

HAG: less losses

The market rallied broadly today, and System HAG sold it's positions in XM Satellite Radio for only modest losses. No additional buy were made, and BEA Systems was help until tomorrow.

XMSR1: 3.47%
XMSR2: 2.11%

Adding these trades to our totals:
51 trades
1.042% average gain per trade
13.280% total theoretical gain since inception (2/7/06).
NASDAQ composite on 2/7/06: 2244.96
NASDAQ change since 2/7/6: 3.50%

Once again, the "total theoretical gain" assumes 25% of a portfolio was invested in each trading position.

Big Call #1: Inflation

In 1982, Paul Volcker raised the Fed Funds Rate to about 16%, to finally end the inflation of the late 1970's that peaked at around 13.5%. Though the economy was sent into a controversial recession, there is no doubt that this policy decision was for the greater good. Since then, Fed governors have been inflation hawks, and rightfully so. Raising interest rates to stave off inflation has kept the economy from growing too fast, which in turn has helped to sustain measured growth.
Since inflation can be controlled so easily, many people assume that it won't happen again.

Ben Bernanke, the new Fed governor, is a leading scholar on monetary policy and inflation. He knows that there is always a tradeoff between the impact of higher interest rates and the impact of inflation. He knows about liquidity traps, and that deflation harder to control, and potentially more devastating, than inflation.

Big call #1 is that we are entering a period of inflation unlike anything we've seen since the 70's, and that the Fed will allow inlationary pressures to take hold before they are ultimately quenched.

HAG update: More losses!

XM Satellite Radio lost over 5% of it's value today, which has yielded significant unrealized losses. Today, the program buys BEA Systems, sells Google (1.19%), and holds XM radio.

Adding the one completed trade to our totals:
49 trades
1.198% average gain per trade
14.68% total theoretical gain since inception (2/7/06).
NASDAQ composite on 2/7/06: 2244.96
NASDAQ change since 2/7/6: 2.63%

Once again, the "total theoretical gain" assumes 25% of a portfolio was invested in each trading position.

System Z: two steps back $10,161.64

System Z's party has ended. The prices of online brokerages did not see quick turnarounds, and today's walloping of XM Satellite Radio (down over 5%) yielded significant losses. System Z also made it's first option trade.

System Z account value: $10,161.64
commissions paid: $160
commissions should be: $64
which means I overpaid: $96
account value corrected for obscene commissions: $10,257.64

System Z actual return since 4/7: 1.61%
System Z corrected return since 4/7: 2.57%
Nasdaq return since 4/7: 1.27%

Refer to post from 4/19 for explanation of "corrected return"

HAG update: Losses!

Relief rallies in online brokerages did not materialize, and HAG took some losses. The program retains Google and XM radio for tomorrow, and buys more XM radio. Realized trades:

Etrade 1: 3.49%
Etrade 2: 1.00%
Ameritrade: 2.64%
Corning: .62%

Adding these trades to our totals:
48 trades
1.248% average gain per trade
14.98% total theoretical gain since inception (2/7/06).
NASDAQ composite on 2/7/06: 2244.96
NASDAQ change since 2/7/6: 2.85%

Once again, the "total theoretical gain" assumes 25% of a portfolio was invested in each trading position.

HAG: No relief

Anxiety doesn't necessarily dissipate within a day or two, and when this happens, our holdings accrue significant losses. Overall, I expect only that 55% of trades are "winning" trades, and that the average winning trade is a bit bigger than the average losing trade. Today the program holds its positions in Etrade, Ameritrade, and Corning, and purchases Google and XM Satellite Radio.

The losses sustained today were significant, but not yet realized.