November 2011 Month-End Trading Report

Dear Investor,

We hope that this message finds you all well as we enter into the final month of the year! And wow.. what a year it has been! One of the craziest and toughest that we can ever recall, from markets in general, to the economy, to crashing brokers, to crises, you name it. We wouldn’t say it’s been just weathering storms this year. It has been more like trying to navigate your way through quick sand, exploding volcanoes, crazy earthquakes, tsunamis, and typhoons, when you are used to just leisurely walks in the park with the odd uphill climb. We would like to discuss a little about our trading moving forward in this update, and also our new brokerage. This is quite important and more details will be found below in this correspondence so we hope you all take the time to read through it.

This past November is best described as a good month, but with a surprise slap in the face at the end. Our average would have been much higher than it is, if it were not for the last day of the damn month (Nov 30^th) where we witnessed a planned and coordinated central bank action to boost liquidity. This was the doing of the Fed, ECB, and the Central banks in Canada, Japan, England and Switzerland etc... This essentially caused us a huge hit triggering many SL’s on most of our systems in a matter of minutes, and up to a -6% loss on both MFX and PFX, which were both wrapping the month up nicely in double digits prior to this. It was a very frustrating way to end an otherwise good month.  We are still positive on our average so cannot complain too much. This has been the story of our lives this year. Our final numbers for the month of November are as follows…

SYSTEM	OFM
Precision FX	6.01%
McLaren FX	5.21%
Vega FX	-7.57%
November Average	1.22%

* Account Discrepancies – Once again, please remember that if your returns for a given month do not match our posted returns take note that our numbers are from the 1st of each calendar month, to the last trading day of the calendar month. If you have invested in the middle of the month, your numbers may not match ours and could vary significantly. In addition to this, if we have open trades at month-end, we calculate our return on the current balance that day at midnight server time, NOT the floating equity. So open trades which have not realized their PnLs yet will be carried into the next month. Please take note that while our returns are calculated from 1^st of each calendar month to the last trading day of the month, our performance fee period (the period in which high water mark performance fees are calculated on), is from NFP to NFP. NFP is the non-farm payroll and is the first Friday of each month.

Our complete Performance Tables will also be updated with the following statistics of interest (broken down by brokerages) on this following page: http://cayoflow.com/performance.html

MARKET NEWS

Well, things are getting messy again. It’s going to be interesting to see how things fair out particularly in 2012. Nov 30th was a huge eye opener for us to show that the current state of affairs is not one particular nation’s problem. “We will all go down together” is the general vibe right now.  Some of the top experts in the industry say that Europe isn’t facing a liquidity crisis. But that the world is facing a structural solvency crisis in which businesses, governments and individuals have all borrowed money — and made promises — that cannot be repaid unless more money is printed (or, more specifically, until more credit is issued). Rather than fill the newsletter for those who are already up to swing, or those who don’t care (hope not to many as this effects everyone whether they “feel” it or not) so here are some of the better highlights from the last few days on what’s happening around the world on this topic ...

1.       Euro doomed from start, says Jacques Delors:
http://www.telegraph.co.uk/finance/financialcrisis/8932647/Euro-doomed-from-start-says-Jacques-Delors.html

2.       Banks Ponder on Scenarious if Countries Drop the Euro: http://online.wsj.com/article/SB10001424052970204826704577074773960813432.html

3.       Time of Reckoning for the Euro Zone:
http://finance.yahoo.com/news/time-reckoning-euro-zone-200335895.html?l=1

4.       Why do Foreign Banks Need Dollars?
http://economix.blogs.nytimes.com/2011/12/01/why-do-foreign-banks-need-dollars/

5.       Germany is the ultimate victim of EMU
http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100013600/germany-is-the-ultimate-victim-of-emu/

MONTH-END TRADING RECAP

There is not much to report on this front, which wasn’t already discussed above. This month 2 of our 3 systems performed remarkably well, with the exception of the last day of the month. Vega has been the system struggling a little more than the others lately. Last month we saw a 15 day stagnant stretch on the EUR/USD pair, which had a huge effect on Vega. This system needs market flow to do well. When there are no defined trends or breakouts its very tough for 2 of the 3 models in it to be profitable. The scalping component will always do well in this scenario. Other than that, the trading went as expected. We had some terrible whiplash spreads from our broker that caused some problems, but since they are passing things through directly to us there is not much we can do there. This month is looking to be off to a good start as well, particularly on the McLaren FX front.

BROKERS

We will update individual clients after our month-end newsletter as to the current state of affairs with our old brokerages. Things are moving along quite well with our own brokerage and we are looking to be live and moving full steam ahead with this in the new year. There has been a tremendous amount of time and effort and money and help poured into this, and we feel we will be securing a very nice part of our future in the FX industry with it.  Our current brokerage (OFM) is filling the gap well for us right now, but our early testing shows we can be much, much, much more profitable with our own setup, as the technology behind it is leaps and bounds ahead of our current one (and most others for that matter). We are essentially piggy backing off of a lot of hard work and a lot of spent dollars, and the fact we will have exclusive access to this on a retail scale, be the only firm with an MT4 platform plugged into it, and the depth of market available is going to give us a huge edge. Some of you have been helping us with the beta testing. Others have been asking many questions. The most common one being, is this broker owned by Cayo? No, it is an entirely different venture altogether. Some of our partners are a major stake holder in the project, but it is separate from what we do here, and we have different partners involved as well. As we get closer to being ready we will explain more. For now we are working our tails off on it, to make it the best it can be, and take our reliance out of the hands of other 3^rd party providers entirely, and build a safe haven for us to trade and grow our funds for a long long time. We have simply been through to much crap to rely on others to clear our trades.

TRADING FORWARD

Current Trading Risk: Some of you have been emailing us asking about our returns and why we are not chasing huge numbers like we were about 2 years ago. This isn’t the first time this has been asked. But we feel we can better address this now, more than ever.  There are really many reasons for this. Much to do about risk, changing markets, and investor mentality. But we believe the whole market, for investment, has changed in the last couple of years, especially this year in particular. Certainly when we were running our early programs all those years prior to now, it was all about the returns! Clients wanted exceptional returns of 100-200+ % a year and they were quite happy to eat an occasional 30% drawdown to achieve this. This was when retail FX was a little different and a little newer to most people as well. Now, with the global credit crunch, and the craziness in the markets, everyone just wants their money back. It has got to be a play-off, with returns versus drawdown.

Previously it was all about shooting the lights out and taking bigger risks, but the vast majority of clients just don’t want the drawdown risk at the moment.  It is more about the steady return with a controlled drawdown. Basically, these days, it’s the risk before the return. If you are the other way around, you are an exception these days. This is not just in FX, but in markets the world over and across all asset classes. With brokers, institutions, banks, govs, and entire countries not managing risk properly we have seen some crazy things happen lately, which we want to avoid altogether.  This includes small scale (like what we have seen with Sparen FX) to large and extremely large scale (like what we have seen with MF Global). So will we be targeting large numbers going forward? Not like in the past, and not with our current systems. If we approach intra-monthly draw downs approaching the 7-10% mark, depending on the system, we will most likely turn off the system for the month. Our profit targets will not be as high as they were in the past either. We are looking to target the 5-10% range. We have potential with the current systems to see 20% ish per month on good months like last month. But not much higher. We want to be clear on this to our clients and prospective clients so as to not provide inaccurate expectations amongst people. We may in the future roll out an aggressive system for those who keep asking for one, but we will wait to see how things transpire in the New Year. We try to optimize our risk for moderate gains, which cater to a wide audience.

Diversification: We have mentioned this quite often in the past, but thought we must bring this up once again, as it is more important than ever lately. Our systems are designed to work together. By this we mean they are meant to cover all types of market conditions. We have never forced this upon our clients. Instead we leave it up to them to do. We explain to them how it works, and for most of them it clicks and sticks instantly. But we still see some who chase after each winning system monthly (or even in shorter intervals). These constant adjustments effect the outcome largely. Our strongest recommendation remains the same. To split your funds across all of our systems equally, allow them to work as one synergistically, and let them ride for 3 months before making any adjustments. This has proven to be the most time tested, safest, and most profitable way of utilizing these strategies to make money in the markets. They have been tweaked and modified and have come a long way to where they are today. So even though they are separate, it is best to think of them as a basket of essentially the same synergistic product. We see the mitigation of risk all time between systems. i.e., one strategy is short euro dollar, and the other is long. This is essentially a hedge between systems. So if you lost on one, the other should help to offset it. Keeping net balances across the systems more level. This happens in single systems as well, but to a larger part across the separate systems.

New Strategy: We have been working behind the scenes to bring a 4^th strategy into the mix that is entirely different than our current ones and adds further diversification. This is near complete, with just a longer live testing period going on.  Once we are ready to go live with it, it will officially be one of the most simple and effecting strategies we have, and, that we have ever used to date. Sometimes simple is good ;-). The system trades the G7 pairs, and places about 40 trades per day following a very simple and effective form or pattern trading, which is proving to be very nice to us, on both back test and live forward test. We will keep all our clients posted on the progress and launch date for those interested in participating.

SUMMARY

We are glad to be in touch on these subjects with our clients as we feel the direction of the markets is changing day by day and month by month. It is a difficult market to navigate these days. We need to expect rough patches in the market, and not panic when they strike and believe in our strategies (which we do more than ever).

We know from our live and back-test process and the simulated results that we’ve got a good basket of strategies. Our tests and research and modifications are all done for a reason. They allow us to benchmark our live performance. So as long as the models are performing well within their KPIs and within our benchmark parameters there is no reason to change anything. This was our problem throughout much of this year, as soon as we seen a model not working for a week or a month, we went to tweak it, which of course ran the risk misfire the following month. This was an obvious reaction to what we saw this year. But we have matured quite a bit in our trading because of it, and continue to do so. We only make adjustments quarterly now when warranted.

We have been through a lot with many of you this year. It has not been a year without some very tough issues. But we will continue learning and pushing forward (we are a stubborn bunch). This brokerage we are working on is a very new and exciting venture for us which are quite excited to share with you. But we are still traders at heart and will always be doing what we do on the market front. It will just be done in a safer and more profitable environment now which is only going to make things better.

Holiday Trading: We typically play this by ear and quite often go full steam til about mid-month, and then cherry pick trades throughout the holiday, firing back up full steam in the near year. Whether we do the cherry picking and to what degree will largely depend on how things are shaping up. Historically speaking the week between xmas and new years has been THE most profitable week of the year for scalping, but terrible for other strategies. So if you see few or no trades taking place on any strategies at anytime this year, it will be normal, and should resume as usually in the new year. So we will get a plan together for this month, and stick to it, and touch base with you next year!

We would like to wish you and your friends and family a warm holiday season this year despite all the things that have made 2011 a outlandish year for the masses. We hope you have time to enjoy some of the finer things in life with those who are close to you.

Warm Regards,

The CayoFlow Team