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Published: October 23, 2009
"What's your slam-dunk currency trade right
now?"
I asked my friend Jack that question earlier this week...
Jack's the best guy I know at currency analysis. I've known him
for 16 years. Back in the mid-1990s, we worked 20 feet away from
each other at a firm specializing in international investing.
Jack taught me a lot about currencies and managing my trading
(cutting your losses and such).
This week, I drove down to tiny Palm City, Florida, where Jack's
Black Swan Trading group is based. We spent a few hours catching
up.
Jack explained his favorite trade right now... and he explained
an easy way for an individual investor to take advantage of
it...
In short, Jack thinks the Japanese yen today is like a ticking
time bomb. It's ready to explode... We just don't know when. As
of this month, the time may be right.
You see, right now, the Japanese yen is extremely overpriced.
It's just off a huge high versus the dollar. The only time it's
been higher against the dollar was in early 1995.
Since that's the only similar high in the yen's history, let's
take a closer look at what happened next...
In 1995, the Japanese yen was comically overvalued. Everyone
knew it. But just like the last six months, the yen kept going
higher. Then the bottom fell out.
The yen lost
-20% of its value in three months
and a total of over -40% of its
value in three years. That's an
astonishing fall in the value of a
developed country's currency.
Back then, if you'd bet against the
yen with just a little leverage, you
could have made a whole lot of money
-- easily triple-digit gains... even
more depending on how you traded it.
Jack told me we're seeing a similar
setup today in the yen... and the
potential is there for similar
gains.
You see, the Japanese can't raise
interest rates, since the economy is
in the tank. And the Japanese
government is issuing more debt to
make up for its shortfall in tax
revenues. So in essence, it's
creating more money out of thin air.
Look, when a currency pays no
interest, and its government is
writing I.O.U.s, then the value of a
currency should fall. Nobody wants
something that pays no interest and
is increasing in supply.
But for the last six months, the
Japanese yen has done the opposite
of what it "should" have done. It's
gone up... until this month. Jack
believes after its huge rise from
April, the yen may finally be
changing its trend.
In the past, it was tough for
individual investors to bet against
the yen, particularly in retirement
accounts. You couldn't trade futures
or options, and you couldn't go
short. But now, there's a way to bet
against the yen AND get a bit of
leverage AND do it all in your
retirement account. It's through the
ProShares UltraShort Japanese Yen
Fund (NYSE: YCS).
Here's a chart of YCS over the last
six months. You can see as the yen
has strengthened, these shares have
crashed... down from $25 to $20 in
the last six months.
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But the fund is already up from $20 to $21 this month as the
yen has weakened. (It's a "double inverse" fund, meaning for
every -1% move down in the yen, this fund should move up +2%.)
A move back to April's level of $25 would be a +25% gain from
YCS' lows around $20 -- and even then, the Japanese yen would
still be near its all-time highs versus the dollar. My point is,
even after that gain, there's still much more room to run.
If you know my writing, you know I look for three things in a
trade: 1) cheap, 2) ignored or hated, and 3) an uptrend. In the
yen's case, we have all three.
Time to follow my friend Jack's advice (the best currency
analyst I know), and bet against the yen. The double-inverse
Japanese yen fund is the smartest way to play it. Thanks, Jack!
-- Dr. Steve Sjuggerud
Editor
Daily Wealth Editor's Note: This
article originally appeared in
Daily Wealth. |
