The past 10 days on Wall Street have been one for the for history books. Four of Wall Street’s top investment banks, Lehman Brothers, Merrill Lynch, Goldman Sachs and Morgan Stanley, all either went bankrupt, were absorbed by larger entities, or turned themselves into highly regulated bank holding companies. The U.S. government announced a plan to buy $700 billion of assets from banks, much in the same way the federally established Resolution Trust Corporation (RTC) did with bad savings & loan assets in the early 1980s. Many market pundits, including the eminent Wall Street historian Peter Bernstein, observed that they could not recall seeing a week characterized by comparable drama.
With volatility in the markets now more than double what it was just a few weeks ago, currency bets are the only safe havens in times such as these. Your latest Global Stock Investor pick, the CurrencyShares Japanese Yen Trust (FXY) rose nicely during the past week as the “carry trade” continues to unwind. Most analysts expect the Japanese yen to appreciate between 5% and 7% against the U.S. dollar during the next two months. Any general weakness in the U.S. dollar as a result of the U.S government’s $700 billion bailout will only strengthen this position.
Your other Asian currency play continues to perform well. The WisdomTree Dreyfus Chinese Yuan Fund (CYB) should hit a new high in today’s trading as the Chinese yuan rose to its highest level against the dollar since its July 2005 revaluation. With the Chinese yuan actively managed by the Chinese government, it offers a rare safe haven in otherwise tumultuous markets.
Both of these currency recommendations, CurrencyShares Japanese Yen Trust (FXY) and WisdomTree Chinese Yuan Fund (CYB), remain BUYs.
Last week’s market turmoil and the uncertainty surrounding the details of the U.S. government’s $700 billion bailout plan did abate the upward progress of the dollar. In a bout of extraordinary volatility, we were stopped out of Market Vectors Double Short Euro ETN (DRR). Once markets digest the implications of the U.S. bailout plan, I expect the U.S. dollar’s rise to continue. The upward trend of the U.S. dollar, the Chinese yuan, and the Japanese yen is one of very few sustainable bullish themes in global markets. You were stopped out of NII Holdings (NIHD), which I had put on a hold last week.
Volatile markets always provide a unique challenge of balancing disciplined, risk control with opportunities provided by Mr. Market’s mood swings. You’ll see in this month’s Global Stock Investor that I’ve set up a “watch list” of stocks. This is something that I had done before during the extreme volatility of August 2007, and it includes the positions we’ll be looking to get back into as the market settles. Our recent positions in the Market Vectors Double Short Euro ETN (DRR), telecom play NII Holdings (NIHD), India’s ICICI Bank Ltd. (IBN) and Millicom International Cellular (MICC) all are on that list. Although all four have closed back up over the prices at which we were stopped out, I want to see a more firmly established uptrend in these picks before we re-enter these positions.
WisdomTree Dreyfus Chinese Yuan Fund (CYB) likely will rise in today’s trading as the Chinese central bank set its daily yuan mid-point against the dollar at 6.8009. This was the first time the Chinese currency broke the 6.81 mark since it was unpegged from the dollar in July 2005. CYB is a BUY.
CurrencyShares Japanese Yen Trust (FXY) had a strong start in your portfolio. The Japanese yen jumped to a two-year high against the euro and a five-year high to New Zealand dollars as investors reduced carry trades. Recall that in “carry trades,” traders borrow low interest-rate currencies such as the Japanese yen to buy higher-yielding currencies such as the New Zealand dollar, and pocket the difference between the two. Investors can borrow the yen at 0.5% and get 7.5% on their New Zealand dollar accounts. With risk aversion increasing, traders are unwinding these trades, pushing the Japanese yen ever upward. FXY is a BUY.
P.S. Surging oil and food prices, as well as deteriorating economic confidence, have stoked inflation fears around the world in recent months, leaving volatile markets and jittery private investors in their wake. In times such as these, it’s good to have this forum to discuss key developments and to hear from the best financial minds in the world. I invite you to join me at the 4th Annual World Money Show London, 14-15 November, at the Queen Elizabeth II Conference Centre. Call 800/970-4355 and mention priority code 009613 or visit The World Money Show London to register FREE today!