Betting Against the Euro

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.

Your Global Bull Market Alert portfolio already has significant exposure to global emerging markets through many of your holdings — though you were stopped out of Russia’s Mechel (MTL) on Wednesday during intraday trading. Your current “buy” recommendations include the iShares MSCI Chile Investable Market Index (ECH), the iShares MSCI Israel Cap Invest Mkt Index (EIS), the SPDR S&P Emerging Markets Small Cap ETF (EWX), China’s Trina Solar (TSL) and the Market Vectors Brazil Small-Cap ETF (BRF). You may want to add to these positions to take advantage of any potential January rally.

As I noted last week, I will be looking to move out of your emerging market stock market bets over the coming weeks, and to diversify into some commodity and currency plays. We’ve already started doing that with your recent bet on iPath DJ AIG Sugar TR Sub-Idx ETN (SGG). This week’s Global Bull Market Alert pick — a bet against the euro through the UltraShort Euro ProShares (EUO) — continues that process.

After playing the whipping boy of the global financial markets for most of 2009, the U.S. dollar is back, with the U.S Dollar Index gaining about 4.4% since bottoming in November. With the U.S. economy likely to recover more quickly than its global (developed) rivals, there is good reason to think that the Greenback will continue this upward trend.

With the euro making up more than half of the weightings in the basket of currencies that make up the Dollar Index, a bet on the U.S. dollar is also a bet against the euro. And the euro’s future looks anything but bright. With U.S.-style fiscal deficits in Greece, and yet another closure of a bank in Austria with shaky investments in Eastern Europe, the pressure on wealthy economies like Germany to help bail out the "PIIGS” (Portugal, Ireland, Italy, Greece and Spain) on the fringes of Europe is growing.

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Having fallen from $1.51 to a recent low of $1.42, the euro is already on a firm downward trend. Yet, it still remains about 15% overvalued against the U.S dollar on a purchasing power parity basis. That means it could sink to as low as $1.25 just to get back to “even.”

So, buy the UltraShort Euro ProShares (EUO) at market today, and place your stop at $16.70. This is a leveraged bet that seeks to replicate twice the inverse performance of the EUR/USD daily price change. For potentially even greater gains, I recommend the May 2010 $20.00 call options (EUOED).

Portfolio Update

The iShares MSCI BRIC Index ETF (BKF) ended the week higher, after paying out another 2.5-cent dividend. Although BRICs have tended to do well in January because of the January effect, I am keeping this at a HOLD due to my concerns about a potential bubble in China.

Market Vectors Brazil Small-Cap ETF (BRF) jumped 3.23% last week as Brazil continues its relentless march upward. BRF is my top long-term pick for 2010 in the annual AOL stock-picking contest. My choice for 2009 — the iShares MSCI Emerging Markets Index (EEM) — ended the year up 69%. This leveraged bet on Brazil remains a BUY.

The iShares MSCI Chile Investable Market Index (ECH) jumped 1.16%, and hit yet another high of $54.79 on Friday. ECH remains a BUY.

The iShares MSCI Israel Cap Invest Mkt Index (EIS) dropped back slightly. With technology one of my early favorite themes for 2010, Israel remains a BUY.

SPDR S&P Emerging Markets Small Cap ETF (EWX) closed at a near record high on Friday. With January traditionally a strong month for emerging markets, I am moving EWX back to a BUY.

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India’s ICICI Bank (IBN) jumped 1.9% as India recovered. It remains a HOLD.

iPath DJ AIG Sugar TR Sub-Idx ETN (SGG) fell back slightly last week, as sugar’s relentless move upwards abated. That said, sugar prices hit a record high in India this morning as Food and Agriculture Minister Sharad Pawar made it clear that India would continue to face a sugar deficit for another year. SSG is a BUY.

Trina Solar Ltd. (TSL) dropped back slightly last week. This is a tricky, volatile holding. Although I am increasingly concerned about the bubble in Chinese stock prices, because Trina Solar ended the week on an up note, TSL remains a BUY.

Vimpel-Communications (VIP) had a lousy week, with the Russian antitrust service announcing a probe of VimpelCom for “market dominance.” This is probably a red herring, but until things clear up, I am moving VIP to a HOLD.

P.S. With the help of global financial stimulus, a number of global markets have rallied from their lows of 2008, providing investors who were invested in the right markets at the right time with healthy returns. Although the question remains — how do you become one of those investors? For an answer, I encourage you to attend The World MoneyShow in Orlando, February 3-6, 2010, at The Gaylord Palms Hotel and Convention Center, to hear more than 60 leading experts. They will be on hand to provide you with insights and recommendations to help you identify emerging opportunities around the globe. I hope that you will join me there! Visit The World MoneyShow Orlando to register FREE today!

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P.P.S. If you want to keep up with my latest insights on developments in fast-paced global markets, you can now follow me on Twitter on @NickVardy.

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