Saturday, December 12, 2009

Don't panic, it's alright, it's only a paper loss

I've been following iPredict and opened a small account a few months back: $100. It's pocket money really, but I just wanted to give it a go after observing it for a while.

My $100 was quickly turned into $148. I then gambled a little by putting most of it on one prediction: the OCR to be increased any time before 1 July 2010. But what I did was short sold it - I'm betting against the prediction.

So I was very interested in Thursdsay's OCR announcement because I knew the market would move on that. My basis for initially predicting against the 1 July increase was numerous statements by Dr Bollard that the OCR would not move from 2.5% until "the latter half of 2010", and also the fact that I think that both the world economy and ours are a lot more fragile than most think. I simply can't see any reason to apply any brakes in the next 12 months.

What I initially had to do for my prediction was to figure out the OCR date announcements in 2010 to see what "the latter half of 2010 meant". The OCR dates for 2010 are 28 January, 11 March, 29 April, 10 June and 29 July.

Dr Bollard's "latter half of 2010' meant, to me, that the first movement increse would not occur until at least 29 July, hence I sold the stock. My average price in was 72c. If it went to zero I would pick up a nice little gain.

But at Thursday's announcement, Dr Bollard said this:
If the economy continues to recover, conditions may support beginning to remove monetary stimulus around the middle of 2010. Recent tightening in financial conditions, driven by a higher exchange rate, increased long-term interest rates and a wider gap between the OCR and bank funding costs, reduces the need for more immediate action.
The statement in bold had immediate impact on my iPredict stock: it moved North at a rapid rate. My gain is now a loss. The stock is now at 83c.

Here's where you can help. Do I need to cover my position by buying back my borrowed stock? I'm not too concerned about the $ loss as it's rats and mice stuff. But what I am interested in is proving that I am right and the predictors are wrong. Dr Bollard has not been entirely on the button in the past and most economists have also been far too bullish IMHO. My short selling of the stock really means one thing based on Thursday's announcement: will Dr Bollard raise the OCR at his 10 June announcement? In my opinion, his use of the words may and around the middle are still very vague and it's not certain he will. But 83% of the population with this stock on iPredict think I'm wrong. What I think is also important is that Bollard said inflation is running at about 2% for the 12 months so is well within the band.

I'd appreciate your views.


ZenTiger said...

My views are that the voodoo they practice can turn on a dime. Or a few sen.

So any prediction beyond three months that Bollard will make is capable of surprising even himself.

Anonymous said...

Hold. Although some economic indicators are improving, all it would take is for one major indicator to be worse than expected, and Bollard will revert back to his original position. He has left plenty of wiggle room. For example, household spending may be weak this quarter, at least going by all the christmas discounting. I agree with your comments that the international situation could through up some negative surprises (to Bollard).
I'm not sure I would ever take a position on this on ipredict though, I wouldn't want to be relying on Bollard's judgement....

sagenz said...

It depends on whether you think your original view holds despite the new information. Personally I find it difficult to believe that the Reserve Bank are capable of holding rates at a low for that long. Their inflation fear will kick in and they will raise. On the other hand, that is the herd feeling so at minimum hold and if you are feeling bold average your price by doubling down :)

gomango said...

I think you are making a mistake (in my opinion) of trading bollards comments rather than trading what the market response and consensus is to his comments.

There is little predictive value in whats currently implied in the market but the risk to you is that your view deviates from the market to such a degree that you lose the equity in your trade. I know its only ipredict but two quotes from Keynes contain all the trading wisdom ever written:

"Successful investing is anticipating the anticipations of others."


"The market can stay irrational longer than you can stay solvent."

There is nothing else you ever need to know.

Trading is different to investing - if you are trading you don't really care what the payoff is in july , all you care about the path dependency until then.

I spend way too much time on ipredict and have had some spectacular losses (losing $700 out of $2000 on petrol contracts recently), but I'll be selling my long bollard position if there is any good economic news over the next few weeks. Have made 20 cents but the probability of making another 17 is hard to estimate so any good news induced price spike is a chance to sell.

Best trade out there is shorting the fitch downgrade -still trading at 10c, thats a 20% per annum return.

Matt Burgess said...

Hi Gooner, just found this. Thanks for the coverage. Still at 83 cents I see. Good luck!

amber said...

what is so good about iPredict most people go on better websites than that.

amber said...

what is so good about iPredict most people go on better websites than that.