Multi Currency Portfolio 2008 Drops


Multi Currency Portfolios we track have begun rising straight up in 2006 and 2007. Not so in 2008.

Here is the one month performance of the six portfolios that Jyske Bank created with our direction and that we are tracking for educational purposes beginning November 1, 2007.

Portfolios 2008  Nov 16 Nov. 27
Infrastructure  -16.46% – 35.98%
Emerging Market -13.33% – 29.01%
Danish Health -13.32% – 49.54%
Green  – 10.86% – 38.82%
$ Short Non Leveraged – 5.26% – 9.66%
Blue Chip – 2.78% – 10.58%

Thomas Fischer wrote: Hi Gary,Attached is the latest up-date. The portfolios have been hit hard by the market turmoil and the increased risk aversion which has strengthen the carry currencies. The Danish health has dropped 50% increasing the leverage to 4.2.  Under normal circumstances (live action) we should either reduce the positions or request further funding. The “best” performing fund is the non leveraged fund. Again we learn something which we all tend to forget in the good times “there is no such thing as a free lunch. Thomas”

Here is my reply to Thomas.  “As crazy as this sounds I am happy for this drop now because it will help readers learn that markets do not always just go up.  We have had two similar drops in the last two years but they were masked by the phenomenal prior upwards performance.  All the reversals did in 2006 and 2007 was slightly diminish, for a short time, really great performance. At best the crashes of 2006 ad 2007 made great performance look slightly less good…for only awhile.

 

Then each time the markets rebounded before any damage was done to the statistics and investors forgot and perhaps ignored our warnings.

 

This time because the correction is taking place right from the get go, readers can see the loss potential better.  If we had one more year, like the last two, readers would stop believing in the down side and ignore the risk. This visible, sudden identifiable loss is more meaningful as an educational tool.”

 

My warnings on August 17, 2007 said: “Such historical measures are so inexact that we cannot predict just from them what will happen in the short term. The numbers are close enough that we could be entering the fourth sub cycle down (similar to 1976 to 1978). If so expect a sustained drop in markets for two to three years.”

See http://www.garyascott.com/2007/08/17/1818.html

 

Our September 21, 2007, message said:  “equity markets dropped again violently last month. Now these markets have recovered again. Yet this may be a last gasp party. This drop of interest rates at a time when inflation is beginning to soar could lead to a rapidly falling US dollar. We can see from the chart here that the dollar has done almost nothing but drop for 40 years (that chart is below). Yet much more dollar dropping could be in store.”

http://www.garyascott.com/2007/09/21/1811.html

The October 14, 2007 message stated: “Periods of high performance are followed by times of low returns. We never know for sure when an upwards cycle will stall. Fundamentals look good for a bright 2008 in emerging and equity markets, but this can change quickly so to give our readers a better perspective, this year we are reducing leverage and adding a sixth portfolio with no leverage to study”. http://www.garyascott.com/2007/10/15/1840.html

October 15, 2007 we wrote: “Okay it’s time to turn the burner down. “http://www.garyascott.com/2007/10/14/1839.html

We offered a “leverage dwindling” warning on Oct. 26 where I explained to readers that I had eliminated even my modest leverage and wrote: “There is a final reason I liquidated my leverage now…to lead by example. Too many readers are thinking that the dollar short or dollar neutral Portfolios are only up 38% or 48% for the year. When one thinks that way they could be headed for trouble, so I hope investors will follow my lead and take greater care with their leverage.” http://www.garyascott.com/2007/10/26/1852.html

The November 8, 2007 Black Friday interim message warned about all the points above and more. http://www.garyascott.com/2007/11/08/1870.html

So this drop does not surprise us nor should it. Nor should the expanded loss due to leverage hurt us.  Nor should any of this matter at all.

If markets had not dropped we should be in the same position as if they had risen…because we know that we cannot understand the timing of markets.  What know is equity markets are efficient in the long run they are not effective short term due to human behavior. 

The only way to win in investment markets is to continually look for good value and prepare our own portfolios to fit our economic circumstances…so drops like this do not wipe us out.

With this in mind we’ll keep examining each portfolio to learn why they may or may not offer good value.

In update #3 (Nov.21) we looked at the infrastructure portfolio.

In this update, let’s look at the Danish Health Portfolio, since it has been worst hit.  Before we look at the individual portfolio though let’s take one more look at the benefits of value.

Update #3 said:  “Here is the lesson on value. During this market panic four of the six investments in the infra structure portfolio dropped.  Two did not. They rose…a lot!  Both were European shares listed in good value countries.  The lesson is that the best protection we can get in times of turmoil are investments in good value.”

 

The shares that rose in the infra structure portfolio (and are both still in strong positive territory) are French and German shares.

 

Now let’s look back at Keppler Asset Management’s latest major market valuations. http://www.garyascott.com/2007/11/19/1880.html

 

The good value (buy recommendations) are Belgium , France , Germany , Italy , the Netherlands , Spain and the United Kingdom at equal weights. NEUTRALLY RATED MARKETS include Australia , Norway , Sweden .

 

SELL CANDIDATES (Low Value) are Austria , Canada , Denmark , Hong Kong , Japan , Singapore , Switzerland , U.S.A.

 

This is not to say that there are not good value shares in Denmark and no bad value shares in France and Germany .  Yet these valuations suggest that shares listed on the Danish market are statistically more likely to drop and less likely to rise than shares in Germany or France . 

 

During this period of correction this thought holds up in these examples. The French and German shares in the infra structure portfolio are both up.  Five of the six shares in the all Danish share, Danish Health Portfolio, are down.  

 

Let’s look at the Danish Health Portfolio in more detail

 

Danish Health Portfolio

 

Currency Investment  Invested Value Now
DKK  Genmab 50,000.00 42,826.35
DKK  NeuroSearch 50,000.00 39,158.02
DKK  Coloplast A/S B Aktie 50,000.00 46,588.64
DKK  Novo Nordisk B 50,000.00 52,809.64
DKK  Alk-Abello B Aktie 50,000.00 32,317.68
DKK  William Demant Holding 50,000.00 48,303.57  
Total     300,000.00 262,003.91  
Loan CHF    4.375% 200,000.00 211,551.25
Current Net Value     $50,452.67

 

This portfolio shows the classic whipsaw motion that takes place when many members of the thundering herd unwinds leveraged positions all at the same time. The are all dumping the same shares they all hold and all buying the same currencies they have borrowed.  The price of the shares held fall.  The value (and hence payoff) of the currency borrowed rises.

 

Here we see that five of the six shares in the portfolio are down and the loan payoff is up over 5% in a month!

 

As Thomas mentioned if this were a real portfolio the bank would already have been in touch asking for more money or insisting that the portfolio be unwound and the loss taken.  Strike three…the high risk investor is out!

 

$100,000 invested would be worth $50,452.67, a sudden and dramatic loss.

 

Until next message may all your global investments be in good value.

 

Gary

See attached file.

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