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Date: Mon, 17 Jan 2000 13:58:59 -0800
From: Mervin Yeung <tinyeung@xxxxxxxx>
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Subject: AD, CD
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Hi Jim,
This mail was originally intended for RT Forum. It didn't go through.
It is interesting to find out the more I know, the harder I am hit. In
Oct. 1998, deflationary pressure was rising in the US. I was long
T-Bond. I was making money; then suddenly, out of the blue, T-Bond
collapsed. Now, we know what has happened. Look at the M3 growth rate
in the last quarter in 1998. It was at an annualized rate of 21%! The
Fed was going to cut rates aggressively and planned to flood the
financial market with liquidity. This would cause the stock bubble to
expand enormously. I didn't think that the Fed would be this stupid.
Anyway, that was exactly what happened and I was burned badly. T-bond
feared that the Fed was going to sacrifice the bond market in order to
keep the stock market going.
I was selling short stock market at the same time. When t-bond
collapsed suddenly and violently, I figured it out something was wrong.
I covered my short positions in stock indices and made a nice profit of
it.
Then, using my textbook knowledge, I expected central banks in W.Europe
would hold rates unchanged and the Fed would cut interest rates.
According to textbook theory, I should go long D.Mark & S.Franc and go
short USD because real interest rate differential will benefit European
currencies. I did exactly that and I was waiting the textbook theory to
show me the money. I went long 4 D.Mark contracts and 4 S.Franc
contracts and I was way over-traded; because I trusted the textbook.
That was my worst trade. When the Fed cut interest
rates, D.Mark and S.Franc simply fell apart. USD blasted off when the
Fed cut interest rates. It was incredible. Remember I have turned my
original $10,000 into $40,000 before these stupid trades. Due to these
stupid trades, I was back to my starting point.
>From that point on, I really didn't care about what those stupid
textbooks said.
On June 8, 1999, I went long Jap.Yen because of my fundamental analysis
and technical analysis. Looking back, I was right. But, a few days
after I entered, Bank of Japan stepped in and bought $30 billion USD in
a series of 7 interventions. Thank God it was only $30 billion. I was
burned very badly but I still had something left. If BoJ had bought $30
trillion instead of $30 billion, I would have been dead.
I have not touched Jap.Yen since that unhappy experience. If BoJ had
not intervened the forex market, I would have made US$25,000 per
contract. I was long 3 contracts. (That was overtrading, sure, but I
was too confident on my analysis.) After the interventions were over,
Jap.Yen soared.
In the last days of 1999, yen was making a technical platform and I
expected yen to blast off. But, I also expected BoJ to intervene. So,
I didn't do anything. BoJ intervened the market and yen fell sharply.
Fortunately, I didn't have any positions.
I was selling short t-bond all the way from the last millennium to the
new millennium and I was making money. You know what, Treasury
Department decided to do the FIRST EVER buybacks and used the budget
surplus to buy back t=bonds. Treasury Department planned to buy back
$30 billion USD worth of t-bond. Some of my profit was gone due to this
announcement. "$30 billion" again! "$30 billion" must be a very
unlucky number for me. Why did Treasury Department do this? M3 growth
rate was at an annualized rate of 22% in the last quarter of 1999, this
was even higher than that of 1998. (see above) So, if Treasury
Department hadn't intevened, T-bond would have crashed.
Well, life goes on. After all these years and all these trades, I at
least learn that the market is never free. Manipulations are always
there and if a big trader manipulates the market, he will be thrown into
jail. If, in these cases, governments manipulated the market, well,
.. I am sure that this bubble will burst and a depression will hit
us. Gov't will blame it on the "greedy" traders and "evil"
capitalists. People will believe the government's explanation and we
will have "new dealssssssss". Free market does not cause depression;
governments and central banks do!
Back to the future, I saw a good trade: long Australian dollar and/or
long
Canadian dollar. They are not essential for the bubble, so central
banks won't intervene. Without central banks, my FFEE shall bring me
all the bacons. The expected bull run shall start from now to summer of
2000; so I still can fight my way back. This trade is fundamentally and
technically solid. Technically, a breakout from a huge and converging
triangle has occurred and now it is the pullback. I can enter positions
during this pullback. (i.e. retracement) The risk is quite low and the
potential reward is hugh. Fundamentally, commodity price index has
broken out on the upside. Cotton, grains, oilseeds, crude oil, crude
products, cattle, hogs are all shooting upward. Commodity based
currencies, such as Australian dollar and Canadian, almost always follow
suit. After my calculation of price objective, I think I can make it
big on this one.
I prefer CD to AD because the volume on
AD is too thin. However, looking at price objective, AD has a bigger
potential with a far higher price objective. Fundamentally, Australian
economy relies even more on commodity price than Canadian economy. So,
it makes sense.
Any opinion? Any thought?
Any comment will be appreciated!
The above are for general information only, not for trading purpose.
Mervin
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