Taking Shelter From The Equity Storm

Nicholas Vardy

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

Until the market settles, let’s shift our attention away from equities altogether. This week’s Global Bull Market Alert pick focuses on the vast, if little known world of currency trading. For all of the attention focused on the world’s stock markets, total trading volume in the world’s currencies, including derivatives and futures, averages around $2.9 trillion a day. That’s about 10x the size of the combined daily turnover on all of the world’s equity markets.

The best way to play the currency game is through the Powershares DB G10 Currency Harvest Fund (DBV). And here’s why I think the DB Currency Fund — actually an exchange-traded fund (ETF) — will continue both not only to protect our capital, but also to generate steady returns over the course of the remainder of this year.

It’s best to think of the DB G10 Currency Harvest Fund as a low-cost currency hedge fund with a proven technical trading strategy. The DB Currency Fund tracks 10 currencies — U.S. Dollars, Euros, Japanese Yen, Canadian Dollars, Swiss Francs, British Pounds, Australian Dollars, New Zealand Dollars, Norwegian Krone and Swedish Krona. The strategy is straightforward enough: the fund goes long on "buys" — the top three currencies with the highest interest rates and goes short on "sells" — the top three currencies with the lowest interest rates. And it does so on a 2:1 leveraged basis with long currency futures positions. The DB Currency Fund currently is long on the Australian dollar, the New Zealand dollar and the Pound sterling and short on the Japanese yen, the Swiss franc and the Swedish kroner.

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The DB Currency Fund also is a terrific way to profit from the depreciation of the U.S. dollar. The U.S. dollar has fallen to record lows against the Euro this year and hit a new 26-year low against the pound. The trade-weighted dollar index dropped to its lowest level since 1992. With the U.S. economy growing more slowly than many global rivals, interest rates rising fast outside the United States, and anxiety over U.S. credit and mortgage markets, dollar depreciation probably is in the cards for some time to come.

What kind of returns can you expect from this currency play? Back-testing the strategy used by the DB Currency Fund shows that the average annual return over the past 10 years has been 11.48% vs. 8.32% for the S&P 500. Equally importantly, DB Currency Fund’s correlation to the S&P 500 only has been 0.21, with less than half of the volatility. While 11.48% per annum may not sound like much, outperformance with lower volatility spells "free lunch" in finance terms. That doesn’t mean the fund cannot go down. The Funds’ current short position in the Japanese Yen and the unwinding of the carry trade may impact the fund negatively. But overall, this strategy is a "no brainer" for its diversification benefits alone.

So let’s buy the PowerShares DB G10 Currency Harvest (DBV) at market today, and place your initial stop at $25.00. If you want to leverage your bet, I recommend the December $29.00 call options. (DBVLC.X)


To make room for the DB Currency Fund, let’s close our position in National Bank of Greece (NBG) at a slight gain, thanks to a dividend payment. For those of you with a more long-term perspective, hold on to your position in NBG with a 20% trailing stop. The prospects for this emerging giant in the Balkans remain strong.

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