Friday, November 16, 2007

Market Seems to be Holding - Added 2 Weak Dollar Plays

The S&P seems to be holding that 1440 level - we are still very oversold so I lightened up on my UltraShorts going into traditionally a very good week (hopefully the market doesn't change its mind in the last 2.5 hours) Even sticking at 1455 would be a victory at this point. Hopefully we can get a nice rally into 1490 next week... we deserve one after the past few weeks ;)

I mentioned last weekend in my weekly review that there was some VERY crowded trades out there:

There are some extremely crowded trades (meaning a lot of people are *in* them), such as short US dollar, short financials, short retailers, long oil, long gold, etc.... While Big Ben is painted into a corner and must continue to cut rates in my opinion (watch what they do, not what they say) due to our over leveraged financial society, and this will only serve to weaken our dollar further, you'd expect some counter trend rally in these areas soon. When everyone is doing a trade 1 way, usually something snaps and you have a counter rally (however brief). But I still think these trades work for a long time to come because as we continue to cut interest rates, other countries such as Australia are actually raising rates (just last week) to fight inflation so capital will flow to those currencies - the world realizes inflation is real and rising.

So this week those trades reversed very nicely (good timing! pat self on back)
  1. Oil is weaker
  2. The Gold ETF (GLD) is down from $82s to $77s = 6%
  3. The Silver ETF (SLV) is down from mid $150s to $144 = 7%
  4. And the 2 currencies I favor, Australia (FXA) and Canada (FXC) are down quite a bit too, the Canadian peaked last week at $113 and is now $103, and Australian peaked at $94 and now is roughly $89.50
Again, most of my portfolio (90%+) are long term secular trend type positions but I am going to 2 plays today as shelter against a weakening dollar. As I stated last week, "everyone" is doing this trade, but the news so pervasive last week I didn't want any part of it. Now that these trades have reversed a bit, I want to begin positions. While the Fed is jawboning no cut, I believe we have series of cuts and inflation be darned. I think the credit markets are just that bad... so the dollar should take some hits (a thousand cuts).

I actually was going to buy the Australian dollar as a hedge because they are actually raising interest rates, but the Canadian dollar fell so much this week, I bought the Canadian dollar ETF instead (FXC). I bought 175 shares around $103 or a $18K position. Full disclosure - this is my first currency trade ever. :) [that might be marking a top!]

While I do think Canada will be affected by the US slowdown (more than Australia), both are 'strong commodity' countries, and relative to the US have a brighter near term. So it's a simple play on us continuing to bail out the financial system and more cuts to the system.

Instead of buying the gold or silver ETF I bought Silver Wheaton (SLW) which is a company I have traded in the past - very interesting small company, which trades with more volatility than the silver ETF. Earnings are not something I am too interested with; they are profitable but the value of their company simply rises and falls with the value of silver. So its a proxy on silver prices which again, have fallen severely this week. The stock is sitting nicely right above a key support level ($14.70), it's 50 day moving average; and was as high as $18.20s two weeks ago - so it's had a >15% pullback.

I bought 1400 shares right above $15, or $21K for a 1.9% position.

I will be using these 2 similar to hedges with the Ultrashort ETFs. (more active trading in these type of names as they ebb and flow). I do think the long term trend is up for both but a global slowdown could hurt the commodity based economies as well as demand for silver since its used for industrial purposes - those are the risks.... aside from a strong dollar. The next Fed meeting is mid December and while the consensus has been they will be holding rates steady, especially right after the Halloween meeting, I disagree. And if not this meeting, a cut will come next meeting. But I think it will come this meeting, Merry Christmas! :)

Long Canadian Dollar ETF (FXC), Silver Wheaton (SLW) in fund; no person positions

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