Stock Ideas 
Editors Picks Investing in Foreign Currencies: Think Outside the Fishbowl
Editors Picks Investing in Foreign Currencies: Think Outside the Fishbowl 
Market Watch
|
By Charles Delvalle Dear Reader, The market’s been up, and it’s been down. But the one thing that remains constant is that there are a lot of big investors out there scamming the little guys. Over the past few weeks, many readers have sent in stories and really good resources that can help the little guy figure out what’s going on. |
|
| More... |
Most Popular
Login Form
| Investing in Foreign Currencies: Think Outside the Fishbowl |
| Thursday, 03 January 2008 | ||||||||
|
Welcome to 2008. I wish I could tell you that something remarkable happened when we crossed off the last day of 2007 and took that weathered, old calendar off the fridge. Certainly the kids had a very good time. My middle daughter was finally old enough to sit up with us dodderers as we watched the ball drop on TV. She enjoyed a sip or two of champagne, and enthusiastically waltzed in 2008 with her old dad. (These are moments to treasure: In another 10 minutes, she probably won’t be caught dead within 20 feet of her parents.) Ah well, morning always comes way too early, regardless of what the calendar says, and real life resumes all too quickly. At best, we are all a day or two older, and hopefully some similar increment wiser. After all that noise, U.S. markets closed with 3% gains Time to roll up our sleeves and dig into the mess left behind. At home, that means cleaning up party dishes and digging out lunchboxes and brief cases. At work, that means looking about to see what all the noise and thunder of 2007 has left us with. Let’s begin with a few simple metrics, starting with the view inside our little fishbowl, at 2007’s open, $660.22 could purchase 100 representative shares of the top U.S. companies. One U.S. dollar could be traded for three-quarters of a euro or 119.34 Japanese yen. By the close of the year, those same 100 stock shares could have been sold for $685.65, a whopping gain of 3.54%, rather thin gruel, considering how we were taunted by so many glorious new all-time highs. Overseas investors are losing their shirts here But that’s just the view from within the bowl. A foreign investor, armed with either euros or yen, came away rather bruised. In point of fact, they incurred substantial losses, as the dollar fell 6.6% against the former and 9.33% against the latter. Tot it all up, and overseas investors have watched the value of their investments evaporate all year.
Speaking of Japanese investors, I’m sure that they, in particular, are finding the situation here eerily familiar. As per Yale University’s Robert Shiller, we have already seen U.S. real estate lose some $1 trillion in value. (If the name sounds familiar, that is because Professor Shiller is the co-founder of the widely quoted S&P Case/Shiller house-price index.) And despite very modest improvements in December, he does not see this slide ending anytime soon. Rather, he estimates that these losses will triple over the next few years. This situation has already led to some rather spectacular failures, with several Wall Street houses declaring many billions in losses, making for their first net losses in decades (and in some cases ever!). Others are being quietly being investigated as to why they were personally shorting the very investments they were pitching to clients. Here too we see billions already vanished, with every indication that figure will round up into the trillions in 2008. It will only get worse in 2008 And looking toward 2008, we see this situation coming to a head. The Federal government has run out of tools. The banks have been dependent on huge cash infusions from the Fed just to keep our checks clearing. And now there are proposals circulating in the back rooms of Wall Street and Washington that would force these same banks to retain deadbeats on their books for years to come, rather than allow their properties onto the market at their true value. Anyone who survived the decades-long crisis in Japan recalls our insistence that they would never recover until they did the exact opposite, and very painfully cancel nonperforming loans. I imagine that Japanese investors are less than sanguine regarding this plan. Forget that: They are furious. Thinking outside the bowl could net you 360% gains Both they -- and everyone else outside the fishbowl -- are also furious at the idea of another Fed rate cut. While it might or might not stimulate the market (the last one left traders feeling tepid at best), all these loose dollars being bandied about will continue to destroy the remaining value of any and all dollar-based investments. Unfortunately for us fishes here in the States, that is going to translate into a good bit of fish food when those overseas feeders (who are also a little bit wiser come the new year) begin to withdraw from their U.S. endeavors, including shares, bonds and real estate. Practically speaking, this means that you should be short American shares and long overseas shares. Specifically, I recommend opening 2008 with puts on Bank of America (BAC: NYSE) and JP Morgan (JPM NYSE). Properly selected contracts ought to double their values in short order as these banks continue to pile up losses. Conversely, I recommend calls on Rydex’s CurrencyShares Euro (NYSEArca: FXE). In 2007, the euro gained some 9% over all. Overlapping call contracts here should allow traders to net 18% gains for each of the $13-$20 this fund is slated to pick up in 2008. Should the euro make its outside target, 360% gains would not be out of the question. Adam Source : Market Report This e-mail address is being protected from spam bots, you need JavaScript enabled to view it
|
||||||||
| < Prev | Next > |
|---|