Email – #303
Dear Reader,
Today we have quadruple witching day, with options and futures expiring. In addition, being the last expiration in the year, it made it even more volatile. The profitable trade this year has been to short the U.S. dollar and go long internationally, especially commodities and commodity related stocks and countries. In industry jargon, this is what we refer to as the U.S. dollar carry trade. Let me explain further…
Hedge funds, Wall Street, and very sophisticated investors (many using leverage especially through options) borrow U.S. dollars – now that borrowing costs are near zero. They deploy the money in areas of the market where profits and valuations are likely to accelerate. Over the last decade, this kind of trading was accomplished by borrowing Japanese Yen and buying the rest of the world. But the U.S. dollar took over earlier this year, as Japan’s economy underwent some structural transformations, and borrowing in the U.S. became cheaper. Also, the many headwinds facing the U.S. economy did not bode well for the dollar to say the least.
And in the past, you would see a very brief, but violent episode of the Yen carry trade unwinding prior to the Japanese fiscal year ending: March 31. In the U.S. dollar’s case, most banks close their financials on December 31. Hence we were likely to see the unwinding of the U.S. dollar carry trade sometime before December 31. Yesterday, taking advantage of some bad economic headlines in the U.S. and Europe, we saw precisely that. The bulk of these highly leveraged trading positions are most likely liquidated, although nobody can guarantee this. And new positions will be put back on starting January 2nd.
I told you last week that we would be looking to take advantage of the calendar since, we as individual investors, can play over the end of the year. So stay tuned early next week for some additional action. The hit to some of our positions was brisk, and it seems to be over. The fundamentals have not changed, and the investment proposition in each of them remains even more compelling than they were a few days ago, now that the pricing is more favorable. So expect higher prices in each of them, especially as we get a Santa Clause rally, carrying into the new year.
Enjoy and profit,
Horacio Marquez
