Multi Currency Portfolios Collapse


Multi currency portfolios require more frequent attention than normal due to volatility in the market.

Here is the latest review of the five multi currency portfolio’s were have tracked since November 1, 2006 (seven months 2 weeks).

Portfolios 2007 Mar 27 Apr 30 May 11 June 1 June 9 June 15
Swiss Samba 16.15% 26.60% 32.86% 41.46% 40.40% 44.13%
Emerging Market 12.81% 32.46% 31.13% 40.38% 39.94% 42.72%
Dollar Short 20.12% 30.79% 30.44% 31.84% 32.12% 29.34%
Dollar Neutral 16.58% 25.58% 28.54% 32.26% 32.92% 33.29%
Green 86.86% 135.11% 142.42% 170.33% 163.69% 173.58%

The downwards blip of last week corrected everywhere and emerging markets continue to rise.

Thomas Fischer at Jyske bank wrote:

Hi Gary , Attached is the latest update on our sandwiches. As you can see the turmoil on the equity markets were short lived and our portfolios are steaming ahead. Interest rates however are rising as US treasuries and other long duration bonds are taking big hits but apparently the equity market doesnt care and investors are still buying. I still believe we are heading for more volatility so we could see big movements in the performance but we have already built substantial gains so I expect all our portfolios will show a nice performance after 12 months. The green portfolio is now up 173% so we are becoming environmental capitalists!

There is another important point, the drop in the dollar short portfolio. This suggests some strength in the greenback. My upcoming Tuesday June 19 looks at three reason why the US dollar could strengthen right now. I am sharing this message here early as it has such relevance.

Many readers mistakenly feel that our multi-currency portfolios have something to do with currency trading. This is not the case. Diversified multi currency portfolios are first and foremost a safety investment. In reality most US investors (who live pretty much on imported products) are speculating on the US dollar, if that is the only currency they hold.

This is a blind speculation because they do not see the other currencies they spend. They buy their Toshiba computer with greenbacks rather than yen, their German Mercedes with the buck instead of the euro. The dress in Malaysian and Burmese clothing, eat Danish ham, Swiss cheese, drink Colombian coffee while sitting in furniture manufactured in China . Even if they drive a Chrysler mini van they are probably spending Canadian dollars!

And over the last 38 years, these speculators have been wrong. You can see a chart from the Grandfather’s Economic Report Series by M W Hodges at http://www.garyascott.com/international_investments/354.html

The chart shows how the US dollar has fallen dramatically since 1969.

Yet that chart also shows how there are times even during the downfall when the greenback was strong such as from 1979 to 1985.

This means that there are times to bet on and invest in the US . One reader just sent me this note.

Gary , I wanted to invest in the Danish kroner but can’t convince myself to buy any currency near all-time highs when the USD is near all-time lows. It just feels wrong.

I would love to be in a strong currency and the USD appears to be making a longer-term base. But what do I know? I’m the guy who planted a couple of rows of asparagus upside-down a few years back.

Believe me, I’m kicking myself each hour for moving my foreign money into dollars, something I vowed NEVER to do, but I can’t find anything else that looks better at these levels.

I only expect to be in the USD for a few weeks, but I’ve been wrong before. But if the carry trade gets hit for any reason, I expect Jyske stock to get hit for a while & I’d get back into that. The bottom line is I use my USD trading accounts for writing equity options & my ‘foreign money’ to diversify out of the USD if and when possible. It’s just that I hate selling any currency at a near all-time low & buying any at around all-time highs.

There are three reasons why what this reader wrote makes sense now and why the US dollar could see a strengthening for a while.

#1: The first reason the greenback could strengthen is a rising US dollar interest rates accompanied by lies…(oops I mean statistics) from the Fed on inflation suggest to many investors that the real return on the dollar is better now. This will attract many investors, especially those who do not trek to the grocery store once a week and buy their own food (an exercise I recommend for any currency trader).

#2: There are worries about China ‘s exports running into a huge wall of consumer rejection after the deaths of pets and then killing people in Panama with corrupted toothpaste. A May 24, 2007 article in consumer affairs says: FDA Bans Toothpaste from China . Foreign-Made Toothpaste Found in Many Discount Stores. The Food and Drug Administration said it is blocking all shipments of toothpaste from China after reports of contaminated toothpaste entering Panama .

The toothpaste contained diethylene glycol, the same poison that the Panamanian government mistakenly mixed into cold medicine last year, killing at least 100 people. The poison, falsely labeled as glycerin, also originated in China . However, a ConsumerAffairs.Com investigation reveals the FDA’s action may be too little too late and that importers still may be able to sneak tubes past FDA inspectors.

ConsumerAffairs.Com recently discovered illegal tubes of toothpaste being sold in discount stores in the Washington , D.C. area.

If ruining teeth and mouths were not enough they then began damaging the health of babies world wide.

The BBC wrote an article saying: “ China is the world’s largest exporter of toys. More than 20% of Chinese-made toys and baby clothes are below standard, the country’s consumer watchdog has said. An investigation by the General Administration of Quality Supervision, Inspection and Quarantine found some were even dangerous, Beijing News said. Industrial waste, including dirty carpet fluff, paper and used instant noodle packaging, was found in some toys, the newspaper reported. Some baby clothes contained harmful chemicals, the investigation found. These fluffy toys with bacteria or even viruses in them could cause children to itch if they touch them for a short time, or even cause disease over the long term,” Beijing News said.

The Shanghai daily News recently wrote: Some greedy toy manufacturers in China should stuff pretty dolls for children with infected cotton and industrial waste is outrageous.

This is indeed outrageous and could cause a consumer backlash especially since Chinese industry did something even worse than threaten baby health. They committed the horror of horrors and killed cats and dogs in America .

This captured everyone’s (in the US at least) attention and now Chinese products are suspect.

Last week Merri was at the local drug store after throwing out the only medicine we have in the house, aspirin, after reading that a lot of aspirin is manufactured in China and some of the fillers used are in doubt! She uses it to prolong the life of cut flowers and didn’t even want harmful fillers for that.

How far will these concerns go? How much will it hurt China ?

#3: The two factors above could coincide with weakness in the euro fomented by economic problems in Spain .

A May 16 article in the Daily Telegraph said: Spain ‘s foreign reserves have plummeted to wafer-thin levels, leaving the country exposed to a possible banking crisis if the property market swings from boom to bust – despite membership of the eurozone.

The Banco de Espana’s holdings of foreign currencies and gold have fallen to 13.2bn (9.02bn), equivalent to 12 days of imports.

Over the past two months the Banco de Espania has sold off 80 tonnes of gold, flooding the world market with enough bullion to dampen the usual spring rally. The bank has reduced its holdings of US Treasuries, British gilts, and other investments at a similar rate.

“The current account is completely out of control,” said Alberto Mattelan, an economist at Inverseguros in Madrid . We have the worst deficit in our history and worse than any other country in the western world. It has not yet become a ‘street concern’, but I can assure you that it is of great concern to us economists. This will turn bad over the next 18 months,” he said.

The article went on to point out that though Spain’s economic picture was rosy now, real estate may be inflated and if the real estate market drops badly banks would get in trouble and compound this situation.

A more vital thought comes from an earlier Telegraph article which says; The eurozone has now split into two incompatible camps. Or, in the coded language of the Commission this month: “Persistent differentials in price competitiveness and widening current account imbalances have built up since the inception of monetary union.”

Resurgent Germany will enjoy a current account surplus of 5.3pc of GDP this year, ( Holland , 7.7pc), says the IMF.

Down South, Spain is heading for a deficit of 9.4pc in the blow-off phase of a credit bubble, with equally dire numbers for Greece and Portugal .

France will not sweat out deflation, like the others. It might pick its marbles and walk, doing to the euro what it did to the EU constitution.

And what of Germany , conquering market share at the expense of Club Med in a beggar-thy-neighbour policy? House prices are rebounding after a long slump. Pent-up demand is bursting out. Germany will need higher rates, perhaps much higher.

Berlin gave up the D-Mark under an implicit contract that the euro would never fuel German inflation. This contract will be enforced. If not, German citizens will pull the plug on EMU.

The only question is who will file for divorce first: the Latins or Teutonia. They cannot both share the currency.

My guess (there is not much history to go on though previous attempts at a regional currency like the euro have all failed) is that these concerns are a bit overstated and the euro will hold.

However just the fact that there is a concern over the euro’s disintegration may drive away investors in a time of fear.

If these two factors, a bad downturn in China and drama with the euro coincide this may cause a rush of fear aversion. In their fear investors may stampede into the most familiar currency they know, the greenback simply for lack of anywhere else to go.

The higher US Treasury interest rate would not hurt either.

The yen could be an alternative but is headed in the wrong direction at this time.

A June 13, 2007 Bloomberg article entitled Yen Falls to Lowest Since 2002 as Yields Spur Investment Abroad By Agnes Lovasz and Ron Harui says: The yen fell to the lowest against the dollar since December 2002 and retreated from a one-month high versus the euro on speculation rising global bond yields will prompt Japanese investors to keep buying overseas assets.

The currency dropped as former Federal Reserve Chairman Alan Greenspan predicted a decline in U.S. bonds, pushing 10-year yields to the highest since April 2002. The yen has fallen 5.6 percent against the dollar in the past year as Japanese investors ploughed cash into overseas debt funds and borrowed yen to buy higher-yielding assets in so-called carry trades. There are huge outflows of capital from Japan into foreign assets,” said Marios Maratheftis, a currency strategist at Standard Chartered Plc in London . “The other factor is this broader dollar move because of higher U.S. yields. We see further yen weakness.”

This weaker yen has been great news for the Green Portfolio we track with the help of Jyske Bank. This portfolio invests in just six shares and is up over 163% in the last seven months. This high growth comes in part from the fact that the portfolio is leveraged two times with a Japanese yen. $100,000 was invested and $200,000 in yen was borrowed. That loan would require only $192,839 to pay off seven months later.

Important factors to learn from now include, the dollar interest rate versus other rates and emerging market values see http://www.garyascott.com/international_investments/349.html

There are some nice profits built into these portfolios, especially in the equity markets. However a shift in risk sentiment could cause them to quickly fall. Never forget that leverage from the loans increases profits but also loss!

Until next update, good investing.

Gary

See attached file.

We will update the existing portfolios and introduce the new 2008 portfolios at our September and November 2007 International Business and Investing Made EZ courses. Join us September 14 – 16, 2007 in North Carolina , http://www.garyascott.com/nccourse


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