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It's Time to Bet Against the EuroBy
Saturday, January 30, 2010
It's time to bet against the euro...
That's the trade I recommended over a month ago in my True Wealthnewsletter. And the trade is still as good... no, better... than it was when I first recommended it. Here's why I recommended it in the first place... and why NOW is an even better time to make the trade than when I told my paid subscribers about it in mid-December... First, as I'm sure you've already heard, Greece is at risk of falling out of the euro. But we have many other factors telling us the euro will continue to go down... First off, we have the trend... In currencies in particular,once a trend gets going, it's hard to derail it. Last year's trend was a crashing dollar. In 2010, it looks like the trend will be a crashing euro. No matter how you analyze trends, you'd have to say the euro is finally in a downtrend right now... It peaked in late November and is down more than 8% already. That's a huge move for such a short time in a major currency. When I first recommended betting against the euro in mid-December, I wasn't certain we were in a downtrend yet. Now, it's absolutely clear... the euro fell into the $1.30s yesterday for the first time since last summer. Also, importantly, the euro is WAY overvalued relative to the dollar. One of my favorite simple indicators of whether a currency is overpriced or underpriced is the "Big Mac Index" from The Economist magazine... As the chart here shows, whenever a Big Mac in Europe is 50% more expensive than a Big Mac in the States, the euro crashes.  We're not at the 50% overvalued point anymore (which is a real extreme). But the euro is still very expensive... A Big Mac in euros is around 35% more expensive than a U.S. Big Mac. We will also likely have interest rates in favor of the dollar in 2010... If the European Union must save Greece and the other "PIGS" (Portugal, Italy, Greece, and Spain), then interest rates in Europe will stay low. But the U.S. is in recovery, where rates can rise. At the very least, Europe won't have any interest-rate advantage. Other factors in the dollar's favor include a potential reversal of the Big Trade of 2009. In 2009, as risk abated, everything went up and the dollar went down. Now, risk is making a bit of a comeback – the dollar (the safe haven) could go up. Another factor is, with the troubles in Europe, the euro has little chance of competing with the dollar as the world's reserve currency. I could go on... But in short, this type of opportunity doesn't come along often. The euro is in a horrible situation right now. A mountain of factors is against it. It is overpriced. And in the last two months, a firm downtrend has been established. It is time to bet against the euro. Good investing, Steve P.S. I told my True Wealth readers about an incredibly simple way to make an "anti-euro" trade. The euro is in such bad shape, the sky is the limit for this trade. And I expect we'll cash out in 12 months or less. To learn more about True Wealth and how to access my euro research, click here. Market NotesTHE "LONG VIEW" ON GOLD
OK... we timed our late-November "gold is overbought and ready for a decline" forecast pretty well. Gold has fallen from over $1,200 an ounce to below $1,100 an ounce. But before you get too concerned with the decline, consider this...
Gold is "real money" and wealth insurance. But you can't value it the way a stock buyer says, "I'll pay 10 times earnings for this company," or the way a real estate investor says, "I'll pay eight times annual rent for this house." This "hard to value" component makes the metal fluctuate wildly with investor sentiment. Don't be surprised if the next "fluctuation" is toward lower prices. The dollar is rallying from a deeply oversold condition... which likely means lower gold prices. But instead of panicking over your gold, take the long view. Here is a five-year chart of gold. As you can see, gold could fall all the way down to $850 and still remain in the confines of its long-term bull trend. – Brian Hunt |
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