The Global Bull Bets Against the Euro — Again…

Nicholas Vardy

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

Your bet against the British pound sterling through your short position in the CurrencyShares British Pound Sterling Trust (FXB) is your single best performing holding in the Global Bull Market Alert portfolio — up 22% since you entered the position back in September.

This week’s Global Bull Market Alert pick revisits a bet against the single European currency, the euro, through the Market Vectors Double Short Euro ETN (DRR). We were stopped out of the original position during a remarkably sharp rally in December. That was the right thing to do at the time. But recently, the euro has resumed its downward trend, and now is a good time to re-enter this position.

The economist Milton Friedman warned as far back as in 1998 that Europe’s commitment to the euro would be tested by its first serious economic downturn. Well, Europe is in the midst of just such a downturn, and sure enough, some commentators are suggesting that the strains of a “one size fits all” monetary policy is putting the whole idea of Europe’s monetary union in danger.  

Over the past year, the bond market has begun to draw some disturbing distinctions among the members of the European Monetary Union. The gap in yields between the benchmark German bunds — Europe’s equivalent of U.S. Treasuries — and the sovereign debt of Spain, Greece, Ireland, Italy and Portugal has quadrupled since July to the highest level since the single currency’s launch in 1999. The yield on Greek bonds is now 2.3% higher than that on German paper. That makes the spread 10 times higher than it was a year ago. Greece, Portugal and Spain, have already had their credit ratings downgraded and Ireland is on “negative watch.”

Exclusive  Greek Drama Roils Global Stock Markets

Meanwhile, the euro also remains the most overvalued among the world’s major currencies. According to the Economist’s “Big Mac” index, while both the Japanese yen and British pound are now near purchasing power parity levels, the euro is still about 27% overvalued against the U.S. dollar. Only the Swiss and Swedish currencies buy you less.

Finally, the European Central Bank (ECB), despite a strong start, isn’t nearly as aggressive as the Fed in addressing Europe’s economic slowdown. The ECB seems in a similar state of denial to the Bank of Japan in the early 1990s, before its “lost decade,” and European finance ministers last week also rejected proposals to coordinate banking bailouts. As economist David Smith warned in the Times of London over the weekend: “Europe, if it is not careful, could be the next Japan.”

To profit from Europe’s economic malaise, and the euro’s continued weakness against the U.S. dollar, buy the Market Vectors Double Short Euro ETN (DRR), and set your stop at $44.00. This ETN replicates a special Double Short Euro Index. As the index is two-times leveraged, for every 1% weakening of the euro relative to the U.S. dollar, the level of the index will generally increase by 2%, while for every 1% strengthening of the euro relative to the U.S. dollar, the index will generally decrease by 2%. So if the euro declines from its current level of $1.30 to the U.S. dollar to, say, $1.15, you can expect to lock in a gain of twice that with this ETN — that is, about 23%.

Portfolio Update

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The PowerShares DB Commodity Double Short ETN (DEE) hit a record high of $84.49 on Jan. 23, before falling back slightly. It continues to have a key role in the portfolio as a hedge against market downturns.

iShares MSCI Emerging Markets Index (EEM) continues to be locked in a wide trading range. Despite its current weakness, expect emerging markets to bounce strongly during the inevitable market rebound.

Your short position in the CurrencyShares British Pound Sterling Trust (FXB) soared last week as the British currency dropped to a 23-year low against the U.S. dollar. Jim Rogers issued a harsh warning from his new base in Singapore: “Sell any sterling you might have. It’s finished.” He also predicted the pound will fall below its record low of $1.0520 reached in February 1985. Given sterling’s near parity with the euro, this raises the novel possibility that the pound/dollar/euro exchange rate could yield a "triple parity." Tighten your stop to $152.

Your short position in the iShares MSCI United Kingdom Index (EWU) soared last week, as the U.K. market flirted with lows not seen since November. Tighten your stop to $13.50.

The iShares iBoxx $ High Yield Corporate Bd (HYG) fell slightly last week. But this position is holding up well technically, and is set for a strong bounce once markets turn.

Millicom International Cellular S.A. (MICC) continues to be weak, but will reward you greatly when the markets turn. Given its remarkable volatility, it could shoot back to the $50 level within the span of five trading days.

P.S. Markets and investors’ portfolios have taken a beating during the last few months. With a new president, a global economic downturn, U.S. recession, and $700 billion government bailout, investors are left wondering — is the worst behind us or is the other shoe about to drop? What do I do now? Making profitable investment decisions during these unprecedented times can be difficult if you do it alone. Attend the four most important days of the year in 2009, February 4-7, at the Gaylord Palms Resort and learn how the experts are finding profitable opportunities during the market crisis and how to position your portfolio for safety and growth. To register FREE, call 800/970-4355 and mention priority code 012653 or register online!

Exclusive  A Bold Call on a Short-Term Bottom in Emerging Markets

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