As a potentially profitable opportunity presents itself, John will send you an alert with specific trade information as to what should be bought, when to buy it, and at what price. Read more
Global Market Comments
January 3, 2013
SPECIAL FOREIGN CURRENCY ISSUE
Featured Trades:
(LONG TERM DOLLAR TREND),
(FXA), (FXC), (BNZ), (CYB), (FXE)
(THE COMING COLLAPSE OF THE YEN),
(THE BIG MAC INDEX), (MCD
CurrencyShares Australian Dollar Trust
CurrencyShares Canadian Dollar Trust
WisdomTree Dreyfus New Zealand Dollar
WisdomTree Dreyfus Chinese Yuan
CurrencyShares Euro Trust
Any trader will tell you the trend is your friend and the overwhelming direction for the US dollar for the last 220 years has been down.
Our first Treasury Secretary, Alexander Hamilton, found himself constantly embroiled in sex scandals. Take a ten-dollar bill out of your wallet and you?re looking at a world class horndog, a swordsman of the first order. When he wasn?t fighting scandalous accusations in the press and the courts, he spent much of his six years in office orchestrating a rescue of our new currency, the US dollar.
Winning the Revolutionary War bankrupted the young United States, draining it of resources and leaving it with huge debts. Hamilton settled many of these by giving creditors notes exchangeable for then worthless Indian land west of the Appalachians. As soon as the ink was dry on these promissory notes, they traded in the secondary market for as low as 25% of face value, beginning a centuries long government tradition of stiffing its lenders, a practice that continues to this day. My unfortunate ancestors took him up on his offer, the end result being that I am now writing this letter to you from California?and am part Indian.
It all ended in tears for Hamilton, who, misjudging former Vice President Aaron Burr?s intentions in a New Jersey duel, ended up with a bullet in his back that severed his spinal cord. Cheney, eat your heart out.
Since Bloomberg machines weren?t around in 1790, we have to rely on alternative valuation measures for the dollar then, like purchasing power parity, and the value of goods priced in gold. A chart of this data shows an undeniable permanent downtrend, which greatly accelerates after 1933 when FDR banned private ownership of gold and devalued the dollar.
Today, going short the currency of the world?s largest borrower, running the greatest trade and current account deficits in history, with a diminishing long term growth rate is a no brainer. But once it became every hedge fund trader?s free lunch and positions became so lopsided against the buck, a reversal was inevitable. We seem to be solidly in one of those periodic corrections, which began six month ago, and could continue for months or years.
The euro has its own particular problems, with the cost of a generous social safety net sending EC budget deficits careening. Use this strength in the greenback to scale into core long positions in the currencies of countries that are major commodity exporters, boast rising trade and current account surpluses, and possess small consuming populations. I?m talking about the Canadian dollar (FXC), the Australian dollar (FXA), and the New Zealand dollar (BNZ), all of which will eventually hit parity with the greenback. Think of these as emerging markets where they speak English, best played through the local currencies.
For a sleeper, buy the Chinese Yuan ETF (CYB) for your back book. A major revaluation by the Middle Kingdom is just a matter of time.
I?m sure that if Alexander Hamilton were alive today, he would counsel our modern Treasury Secretary, Tim Geithner, to talk the dollar up, but to do everything he could to undermine the buck behind the scenes, thus over time depreciating our national debt down to nothing through a stealth devaluation. Given Geithner?s performance so far, I?d say he studied his history well. Hamilton must be smiling from the grave.
?Oh, how I despise the yen, let me count the ways.? I?m sure Shakespeare would have come up with a line of iambic pentameter similar to this if he were a foreign exchange trader. I firmly believe that a short position in the yen should be at the core of any hedged portfolio for the next decade. To remind you why you hate the Japanese currency, I?ll refresh your memory with this short list:
* With the world?s weakest major economy, Japan is certain to be the last country to raise interest rates.
* This is inciting big hedge funds to borrow yen and sell it to finance longs in every other corner of the financial markets.
* Japan has the world?s worst demographic outlook that assures its problems will only get worse. They?re not making Japanese any more.
* The sovereign debt crisis in Europe is prompting investors to scan the horizon for the next troubled country. With gross debt approaching 200% of GDP, or 100% when you net out inter agency crossholdings, Japan is at the top of the list.
* The Japanese long bond market, with a yield of 0.1.2%, is a disaster waiting to happen.
* You have two willing co-conspirators in this trade, the Ministry of Finance and the Bank of Japan, who will move Mount Fuji if they must to get the yen down and bail out the country?s beleaguered exporters.
When the big turn inevitably comes, we?re going to ?100, then ?120, then ?150. That works out to a price of $40 for the (YCS), which last traded at $16.35. But it might take a few years to get there. The Japanese government has some on my side with this trade, not that this is any great comfort. Four intervention attempts have so been able to weaken the Japanese currency only for a few nanoseconds.
If you think this is extreme, let me remind you that when I first went to Japan in the early seventies, the yen was trading at ?305, and had just been revalued from the Peace Treaty Dodge line rate of ?360. To me the ?84 I see on my screen today is unbelievable. That would then give you a neat 15-year double top.
My former employer, The Economist, once the ever tolerant editor of my flabby, disjointed, and juvenile prose (Thanks Peter and Marjorie), has released its ?Big Mac? index of international currency valuations (click here for the link).
Although initially launched as a joke three decades ago, I have followed it religiously and found it an amazingly accurate predictor of future economic success. The index counts the cost of McDonald?s (MCD) fat and sodium packed premium sandwich around the world, ranging from $7.20 in Norway to $1.78 in Argentina, and comes up with a measure of currency under and over valuation.
What are its conclusions today? The Swiss Franc, the Brazilian Real and the Euro are overvalued, while the Hong Kong Dollar, the Chinese Yuan and the Thai Baht are cheap. I couldn?t agree more with many of these conclusions. It?s as if the august weekly publication was tapping The Diary of the Mad Hedge Fund Trader for ideas. I am no longer the frequent consumer of Big Macs that I once was, as my metabolism has slowed to such an extent that in eating one, you might as well tape it to my ass. Better to use it as an economic forecasting tool, than a speedy lunch.
The Big Mac in Yen is Definitely Not a Buy
?At some point in 2013, knuckles are going to be turning white and we?ll see whatever rabbits Ben Bernanke is going to have to pull out of his hat?, said David Rosenberg of Gluskin, Sheff in Associates
As a potentially profitable opportunity presents itself, John will send you an alert with specific trade information as to what should be bought, when to buy it, and at what price. Read more
As a potentially profitable opportunity presents itself, John will send you an alert with specific trade information as to what should be bought, when to buy it, and at what price. Read more
Global Markets Comments
January 2, 2013
SPECIAL ENERGY ISSUE
Featured Trades: (OXY), (BP), (OIL),
(NATURAL GAS), (UNG),
(NSANY), (BP), (XOM), (PGE)
Occidental Petroleum Corporation
BP PLC
iPath S&P GSCI Crude Oil Total Return Index ETN
United States Natural Gas Fund, LP
Nissan Motor Co. Ltd.
Exxon Mobil Corp.
There are a lot of belles at the ball, but you can't dance with all of them.
While a student at UCLA in the early seventies, I took a World Politics course which required me to pick a country, analyze its economy, and make recommendations for its economic development. I chose Algeria, a country where I had spent the summer of 1968 caravanning among the Bedouins, crawling out of the desert half starved, lice ridden, and half dead. I concluded that the North African country should immediately nationalize the oil industry, and raise prices from $3/barrel to $10. I knew that Los Angeles based Occidental Petroleum (OXY) was interested in exploring for oil there, so I sent my paper to the company for review. They called the next day and invited me to their imposing downtown headquarters, then the tallest building in Los Angeles.
I was ushered into the office of Dr. Armand Hammer, one of the great independent oil moguls of the day, a larger than life figure who owned a spectacular impressionist art collection, and who confidently displayed a priceless Faberge egg on his desk. He said he was impressed with my paper, and then spent two hours grilling me. Why should oil prices go up? Who did I know there? What did I see? What was the state of their infrastructure? Roads? Bridges? Rail lines? Did I see any oil derricks? Did I see any Russians? I told him everything I knew, including the two weeks in an Algiers jail for taking pictures in the wrong places. His parting advice was to never take my eye off the oil industry, as it is the driver of everything else. I have followed that advice ever since.
When I went back to UCLA, I told a CIA friend of mine that I had just spent the afternoon with the eminent doctor (Marsha, call me!). She told me that he had been a close advisor of Vladimir Lenin after the Russian Revolution, had been a double agent for the Soviets ever since, that the FBI had known this all along, and was currently funneling illegal campaign donations to President Richard Nixon. Shocked, I kicked myself for going into an interview so ill prepared, and had missed a golden opportunity to ask some great questions. I never made that mistake again.
Some 40 years later, while trolling the markets for great buying opportunities set up by the BP oil spill, I stumbled across (OXY) once more (click here for their site). (OXY) has a minimal offshore presence, nothing in deep water, and huge operations in the Middle East and South America. It was the first US oil company to go back into Libya when the sanctions were lifted in 2005. (OXY's) substantial California production is expected to leap to 45% to 200,000 barrels a day over the next four years. Its horizontal multistage fracturing technology will enable it to dominate California shale. It has raised its dividend for the eighth year in a row, by 15% to 1.60%. Need I say more?
The clear message that has come out of the BP oil spill is that onshore energy resources are now more valuable than offshore ones. I decided to add it to my model portfolio. Energy is one of a tiny handful of industries I am willing to put my money in these days (technology and commodities are the others), and BP has handed me a rare opportunity to get in as the tightwad that I truly am.
Oh, and I got an A+ on the paper, and the following year Algeria raised the price of oil to $12.
-
A Faberge Egg
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