Archive for May, 2010

Secrets of the Alpha Traders: What the World’s Top Investors are Buying Today

Download my recent presentation from the Las Vegas Money Show

Secrets of the Alpha Traders-Las Vegas 2010

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Currency Trading: The New Global Investing Game, Part 2

With global financial markets suffering their first major correction since March of 2009, global investors once again are on the hunt for safe-haven assets. While the most risk-averse U.S. investors may park their money in cash through the use of exchange-traded funds (ETFs) or even multi-currency bank accounts, you now can keep your cash in currencies other than the U.S. dollar. This week’s Global Guru examines the investment case for currencies in the world’s developed economies, in addition to the major reserve currencies we discussed last week.
CurrencyShares Australian Dollar Trust (FXA)
The Australian dollar — much like the Canadian currency — is viewed widely as a commodity currency. The equation is pretty simple. When commodities soar, so does the Aussie dollar.
But the Aussie dollar has had a strong run until recently for other reasons, as well. With China buying up Australia’s raw materials to feed its relentless growth, the Australian economy has quickly emerged from its slump. A rebound in consumer confidence, higher housing prices and the manufacturing index all have signaled a strong recovery in Australia’s economy. As a result, Australia’s Central Bank has been raising interest rates, making the Aussie dollar one of the highest-yielding currencies in the world.
But the Aussie dollar has taken a hit in recent weeks. Commodity prices have fallen and fears have grown that the impact of stimulus packages in Asian economies is fading. And a proposed mining profits tax on large Australian companies like Rio Tinto may force business to scale back its activities in the “lucky country.”
CurrencyShares Canadian Dollar Trust (FXC)
For most of your lifetime, the Canadian dollar — “the loonie” — has been a poor cousin to the Greenback, consistently trading below parity. Yet, earlier this month, the value of a Canadian dollar once again almost exceeded that of its U.S. cousin.
Much like the Australian dollar, the Canadian dollar has always exhibited very strong correlations with oil, gold and other raw materials.
But there’s more to the loonie’s strength today than commodity prices. If Canada seemed a bit boring over the past decade, the conservatism of its financial system compared to its neighbor to the south now seems like a virtue. Canada’s per capita debt is less than half that of the United States. Among the major global currencies, the Canadian dollar held up the best during the sharp sell-off in the markets. Given its relatively limited housing bubble and low level of consumer debt, over the next few years, the Canadian dollar may prove to be the surprising, big winner in the global currency game.
CurrencyShares Swiss Franc Trust (FXF)
The Swiss franc, the “Swissie, still conjures up images of safety and security in the minds of global investors”. That’s more image than reality, as the “gnomes of Zurich” carry a lot less weight in the 21st century than when James Bond was catching bad guys in the 1960s while skiing on the Swiss pistes.
More than simply a safe-haven currency, the Swiss franc traditionally has offered investors an indirect way to play interest rates. There always had been a strong correlation between the 10-year bond yield and the Swiss franc. The value of the Swissie often rose and fell with bond yields. Investors in the Swiss franc often offset stock-market losses with gains in the Swiss currency, allowing the currency to act as a hedge against falling stock prices.
That correlation broke down in the most recent sell-off as the Swiss franc has fallen against the U.S. dollar, along with all other major currencies. Possible major losses at highly leveraged investment banks like UBS and Credit Suisse, combined with the fact that the Swiss currency now is no longer fully backed by gold, have impaired the Swiss currency’s safe-haven status.
CurrencyShares Swedish Krona Trust (FXS)
The euro, sterling and the Swiss franc dominate talk of Europe’s currencies. But with the euro getting hammered, the British pound wracked by uncertainty, and the Swissie losing its safe-haven status, the Swedish krona may attract more investor attention in the future.
Unlike most of the European continent, Sweden has refused to outsource its monetary policy to the European Union by adopting the euro. As a result, the Riksbank– the Swedish Central Bank — is not straight-jacketed into the “one-size-fits-all” monetary policy of the eurozone. An additional benefit? While there is a chance that the euro may disappear altogether, the Swedish krona is around for the long term.
Sweden’s economy was affected severely by the Great Recession as Swedish GDP dropped 4.9% in 2009 — the largest annual fall since World War II. But today, the labor market is recovering, and consumer confidence recently rose to its highest level since August 2007. The Riksbank now estimates that the Swedish economy will increase by 2.2% this year and by 3.7% in 2011 — considerably more than in the rest of Europe.
Over the past year, the Swedish krona traded pretty much in line with the euro — until the euro crisis started hitting the headlines. Since then, it’s been as strong a currency as the Swiss franc.
Currency Trading: Applying the Lessons
Few of these currencies look spectacular compared with the U.S. dollar over the past year or so. The U.S dollar has rallied strongly in 2010, thanks to (relatively) strong U.S. growth. And when risk aversion jumps, global investors still rush to the U.S. dollar as a safe haven. But understanding that the “cash” of other countries is a legitimate investing option can give you a huge edge in playing the new global investing game.

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Currency Trading: The New Global Investing Game

With the European Union (EU) announcing a $1 trillion bailout package for the euro last week, global currencies are back in the headlines. With daily turnover exceeding $4 trillion, the volume of currencies traded on world markets is ten times that of stocks. The world’s most famous currency trade — a bet against the British pound in September of 1992 — netted speculator George Soros more than $1 billion.
Thanks to the recent advent of currency exchange-traded funds (ETFs), the formerly mysterious world of currency trading is now as accessible to you as investing in Apple or Walmart. Over the next few weeks, I’ll be exploring the prospects for three different groups of global currencies — reserve currencies, the currencies of other developed markets, as well as those of the BRIC economies — all of which can help you to generate big profits in global financial markets. But realize that 97% of the world’s currency reserves are in the top four currencies: the U.S. dollar, the euro, the British pound sterling and the Japanese yen.
The U.S. Dollar
The U.S. dollar is by far the most widely held reserve currency in the world today, 61.5% versus 28.1% for the euro. That means the United States has the currency deck stacked in its favor — unfairly in the eyes of some. Cassandras have called for the imminent demise of the U.S. dollar for years. In their view, soaring U.S. budget deficits, combined with a creeping European-style social welfare system under the Obama administration, confirm that over the long-term, the U.S. dollar is going to hell in a hand basket.
For all of its problems, the U.S. dollar remains the favorite reserve currency because it has stability, scale and liquidity. And when risk appetite wanes, investors rush to the U.S. dollar. And current economic prospects for the United States are the strongest when compared to Europe, Japan and the United Kingdom. In Q1 of 2010, the U.S. economy expanded at a rate of 3.9%, while Europe stagnated at 0.5% and the United Kingdom barely budged with a growth rate of O.1%. The “least ugly” among the world’s reserve currencies, there’s good reason to think the U.S. dollar will remain strong.
The Euro
For a while, the euro was on a helluva roll. By its seventh birthday in 2006, the value of euro notes circulating worldwide overtook the value of U.S. dollar bills. The model Giselle Bundchen reportedly demanded payment in euro and U.S. rapper Jay Z was flashing euros around in his videos. By September 2007, former Federal Reserve Chairman Alan Greenspan said that the euro could replace the U.S. dollar as the world’s primary reserve currency.
How things have changed. Less than three years and one global financial crisis later, headlines are echoing Milton Friedman and predicting the euro’s demise. Even before Greece revealed the full extent of its fiscal woes, the euro had taken a pounding and dropped from a high of around $1.60 in 2008 to about $1.23 recently. And a bet on the collapse of the euro to fall to parity with the U.S. dollar is the “career-making trade” at the world’s top hedge funds.
The British Pound Sterling
The United Kingdom’s pound sterling was the primary reserve currency for much of the world in the 18th and 19th centuries. But thanks to the increasing dominance of the United States in the world’s economy, the sterling lost its status as the world’s reserve currency over the past 100 years.
More recently, the United Kingdom’s soaring budget deficit and fiscal crisis have put the British pound sterling on the defensive. From the lofty heights of $2.10 to the U.S. dollar in 2007, the sterling fell by a third to around $1.38 in 2009. With the British currency trading around $1.44 to the U.S. dollar, it may retrace that level again in 2010.
That’s not surprising. The U.K. government’s fiscal deficit rivals that of Greece. The U.K. government spent massive amounts to stimulate the economy and bail out banks. Public and private indebtedness is soaring. Government entitlement programs have spiraled out of control. Last year, Standard & Poor’s lowered the United Kingdom’s rating outlook to “negative” from “stable.” The British economy has barely edged out of recession in 2010. Jim Rogers has predicted that the pound will collapse to close to parity with the dollar. Whether you agree or not, it is hard to imagine — its new coalition government notwithstanding — that there is much good news for the pound sterling.
The Japanese Yen
When global investors flee for safety, one of the first places they escape to is the Japanese yen. During the collapse of global financial markets in 2008, the Japanese yen was the greatest safe haven. Every time global stock markets would fall, the Japanese yen would rise.
Given that Japan’s debt problem dwarfs that of Greece, some investors are left scratching their heads. But those who have bet against the yen have had those very same heads handed to them. Bulls argue that after 20 years of virtual stagnation, Japan is due for a comeback; the yen is better positioned today than its European rivals. They seem to have a point. Rising 30% against the U.S. dollar, the yen has quietly become the single best-performing major currency over the past three years.

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“Sell China, Buy America”

With China in a bear market down over 20% in 2010, the euro on the verge of collapse, and the U.S. stock market at the top of global stock performance tables this year, this Money Show Video filmed in February may be more prescient than  I expected.

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The Most Unlikely Asian Tiger

My piece published on Money Show.com

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My Speaking Schedule at the Las Vegas Money Show, May 10-12



5/11/2010, 2:15 PM – 3:00 PM   Workshop Type – WS

The Top Five Global Megatrends That Will Make Your Fortune in 2010

5/11/2010, 6:00 PM – 6:45 PM   Workshop Type – PD

The Top Ten ETFs and Stocks You Should Buy Now

5/12/2010, 3:05 PM – 3:50 PM   Workshop Type – IMS

Secrets of the Alpha Traders: What the World’s Top Investors Are Buying Today

PAID EVENT  – Investment Masters Symposium

5/12/2010, 6:00 PM – 6:45 PM   Workshop Type – WS

The Myth of China’s Miracle

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I will be chatting live on eMoney Show tomorrow 8:00 AM to 8:25 AM (EST)

Register on this link

http://www.moneyshow.com/eshow/Hong_Kong/Virtual_Show_Schedule.asp

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