Doubling Up Your Bet Against Britain

Nicholas Vardy

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

Your currency bets continue to buck the trend, as The Direxion Funds, Dollar Bull 2.5x Fund (DXDBX) has now returned over 20% during the past five weeks. The CurrencyShares British Pound Sterling Trust (FXB) plummeted to record lows and your short position is now up over 16%.

This week’s Global Bull Market Alert pick, a bet against the U.K. stock market through a short position in the iShares MSCI United Kingdom Index (EWU), is yet another way to profit from the collapsing British pound and U.K. stock market. Here’s why I think this will be a profitable bet moving forward.

First, as bad as the economy seems in the United States, the United Kingdom has it even worse. The property bubble was much bigger in the United Kingdom, than in the United States, and property has always played a much bigger role in individual portfolios in the United Kingdom. House prices are already down 14.6% in the past year, the fastest drop since 1952 — and they have a long way to go. U.K. consumers are more indebted than their U.S. cousins. Consumer debt as a percentage of GDP is 180%, versus 140% in the United States. Retail spending has hit a two and a half year low and consumer confidence is at its lowest since 1974. U.K firms have issued more profit warnings than anytime since 2001. The European Union expects the United Kingdom to be the worst-performing major EU economy next year.  

Second, the U.K. stock market has a lot going against it structurally, with both financials and mining accounting for a big chunk of the index. Financial stocks like HSBC, Barclays and the Royal Bank of Scotland account for about one-third of the U.K. stock market. Mining companies like Rio Tinto, BHP Billiton and Anglo American are also big components. As long as these sectors remain weak, so will the U.K. stock market.

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Third, as U.S. dollar investors through EWU, the collapsing British pound sterling will act as a tailwind to your investment. Every time the British pound sterling declines against the U.S. dollar, your position will be boosted in EWU by the same amount.

Finally, here’s a word on the role of EWU in your portfolio. You can expect your short position in EWU to act as a hedge against your leveraged bet on the S&P 500. In other words, when the Ultra S&P500 ProShares (SSO) jumps, you can expect your short position in EWU to drop by just about as much, and vice versa.  

So why am I recommending these two “contradictory” positions in your portfolio? I want you to profit both from market drops (this week’s short position in EWU) and market rallies (a leveraged bet on the S&P 500 through SSO). The objective is to lock in 15-20% gains on each end of these moves. So keep your eyes open for special alerts indicating when you should sell each of these positions.

So sell the iShares MSCI United Kingdom Index (EWU) short at market today, and place your stop at $15.00

Portfolio Update

The Ultra S&P500 ProShares (SSO) has not behaved as expected. The market’s extreme oversold condition should have given rise to a sustained rally in the S&P 500. The put-call ratios are still bullish, but uncertainty is dominating the market. Because of its leveraged characteristics, this is likely to remain your most volatile position in the portfolio. Make sure you stick to your (wide) stops.

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The iShares MSCI Emerging Markets Index (EEM) has held up reasonably well. As a bet on a sustained short-term bounce in highly oversold global markets, this is a position that can easily soar 20% or more within a matter of days. This is also the time of the year that emerging markets traditionally perform strongly, though these are hardly “traditional” times. When markets do finally turn, we’ll be looking to lock in short-term profits.

The Market Vectors Double Short Euro ETN (DRR) ended the week pretty much where it started — which is a massive outperformance compared with an 8% drop in European markets last week. Even after the recent rate cuts, European interest rates are still much higher than in the United States, so I expect this position to continue to do well over the coming months. The position now is up 25.54% since Sept. 29.

The Direxion Funds, Dollar Bull 2.5x Fund (DXDBX) nudged back up near record highs, boosted by the British pound sterling’s record drop. With this position now up a whopping 20.92% since Oct. 6, I expect this position to continue to perform strongly as the U.S. dollar re-establishes itself as the world’s #1 safe haven currency.

Your short position in the CurrencyShares British Pound Sterling Trust (FXB) had a big week as the British pound sterling dropped to the $1.46 level for the first time in six years. Analysts here in the United Kingdom have stopped predicting a floor for the pound. With this position now showing a 16% profit, tighten your stop to $163.

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The CurrencyShares Japanese Yen Trust (FXY) was flat this week, after briefly closing above the $105 level on Wednesday. This position will continue to ease upward as the carry trade unwinds, so expect it to continue to steadily appreciate over the coming weeks.

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