Is betting against the Euro getting a bit crowded? Possibly…but my reason for betting against the Euro is not because I feel it will completely collapse and go to zero. Rather, I am trading based on UNCERTAINTY of the Euro.

Right now Greece is in a world of mess and other countries, such as Spain and Italy, aren’t far behind. What we have is a currency connecting countries with different governments, cultures, languages, and ways of conducting business. Also, none of them really like each other (actually I can’t statistically prove that but my bet is that the Germans don’t really give a hoot as to Ireland’s problems other than the impact on the Euro). Do you see the issue? Plus, there is a mandate when the Euro was formed that no country can have debt levels exceeding 10% (I might be one or two percentage points off) of GDP. Greece is at 12% so, technically, it should be kicked out. A bailout by the European Union would not be approved. Regardless what happens, there is uncertainty and it should continue to increase as other EU member nations continue to struggle.

Please see the below article from today’s Wall Street Journal
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Hedge Funds Euro Bets
Several Hedge Funds Betting Big Against the Euro

Several large hedge funds are placing major bearish bets against the euro. The funds have been meeting at exclusive meetings where the future of the euro has been discussed. Hans Hufschmid, a hedge fund administrator, says “This is an opportunity…to make a lot of money.”

…a small group of all-star hedge-fund managers argued that the euro is likely to fall to “parity”—or equal on an exchange basis—with the dollar, people close to the situation say.

George Soros, head of the $27-billion asset fund manager, warned publicly last weekend that if the European Union doesn’t fix its finances, “the euro may fall apart.”

The currency wagers signal that big financial players spot a rare trading opening driven by broader market gyrations. The euro, which traded at $1.51 in December, now trades around $1.35. With traders using leverage—often borrowing 20 times the size of their bet, accentuating gains and losses—a euro move to $1 could represent a career trade. If investors put up $5 million to make a $100 million trade, a 5% price move in the right direction doubles their initial investment.

It is impossible to calculate the precise effect of the elite traders’ bearish bets, but they have added to the selling pressure on the currency—and thus to the pressure on the European Union to stem the Greek debt crisis.

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Enjoy your weekend!

-Samir

Regardless what the stock market or CNBC or some Wall Street executive says, consumer confidence is an important statistic to understand and follow. What we are seeing in economic numbers, the massive exodus from the jobs market, and resistance to incentives (save for Cash for Clunkers which was too good a deal to pass up) is that the free fall in confidence is real. Moreover, confidence is the key to a sustained recovery. People are not going to open their wallets in a meaningful way, banks aren’t going to lend in a meaningful way, and corporations aren’t going to hire people and invest in capital goods in a meaningful way until there is a wave of confidence. This equation becomes something akin to the old chicken and egg thing where determining what has to happen first is a riddle.

One thing is for sure though, confidence can’t be manufactured by the government…it must come from within. People can be nudged in a certain direction but can’t be done so in a sustained fashion until there is confidence to do so. We aren’t there yet because we are being told the way we became the greatest nation in the world can’t work anymore. The same people that built a nation on raw enthusiasm and rugged individualism are being told we must become a collective and take our marching orders from Washington. This creates uncertainty…not confidence. Government involvement can be that nudge however…just not in a sustainable way.

Through all the schemes, the trillions of taxpayer dollars and government commitments, people don’t have confidence. Ironically, the day after another jobs bill gets the green light in the Senate, we find confidence in the jobs market is all but completely gone. Check out these trends from yesterday’s consumer confidence report from the Conference Board on the state of confidence in February. It all points in the wrong direction. Although the notion that jobs are plentiful is infinitesimal, I have got to believe those that responded in the affirmative must have great throwing arms or families that own businesses.

I was also blown away by the present conditions component. Normally this part of the survey is depressed as people can feel awful or uneasy about the moment but have a ton of hope about the future. We have always been hopeful about the future; it is one thing that has been uniquely American. The spread between present conditions and expectations has narrowed but both are moving in the wrong direction, with the former landing at its lowest point since 1983. The White House must convince Americans that we are not going to tinker with socialism in words and in deeds because while words matter, action speaks louder and can just downright scare the public. While I understand that the banks were driven by unbridled greed, I also comprehend that our leaders bailed them out, thereby enabling the very behavior we are allegedly to abhor.

The present condition component is lower now than it was when the $862.0 billion stimulus plan kicked in, to me it’s the best evidence yet that the program was ill-conceived and horribly inefficient…unless of course you are a government or union worker. The masses have seen many special interest groups paid off for one reason or another and each time with Main Street’s money. It’s so frustrating, so confusing, and feeling more and more helpless.

There has been a lot of housing news this week, and it has all been disappointing. The Case-Shiller Index report yesterday showed that prices in December were flat to slightly down month to month. It was a sign that even though the nationwide tax credit for new homebuyers was extended and expanded, the demand for housing hit a snag. Home prices were down in most regions across the country, except in the hardest hit regions (makes sense), which has been a trend for the past few months. Those regions in particular are likely benefiting from bargain buying.

The latest two data points today show that housing demand has certainly stalled. First, mortgage applications last week declined 8.5% week to week, representing the third week in a row of decreases. The worst part of the release, however, was purchase applications which fell by 3.6% and hit its lowest level since 1997.

This scary piece of information came along with today’s new home sales report which showed an 11% decrease month to month in January and hit a new record low of 309,000 sales annually. It was surprisingly bad, especially considering the consensus was looking for a modest increase as the tax credit extension came back into effect. The new home sales report also showed more falling prices and a bump higher in supply.

Enjoy the rest of your evening and let me if you have any questions or general comments.

-Samir

Ever had a stock promotion come into your mailbox or inbox sounding like it is too good to be true? I am going to tell you why you should run the other way.

According to these promotions, they will often site that some national agency has just made a major announcement such as a massive gold discovery of so many ounces worth so many trillions of dollars.

The thing here is that the tiny company in questions bought these land properties before anyone new of what exactly was underground. So, now that this national agency has made this announcement, this tiny company is all of a sudden sitting on a nice fortune. As a result, the promotion material might say something to the effect: “every share of ABCD company you buy today could jump as much as 1,500% in the next 24 months. Don’t wait – BUY TODAY!”

So, what should you do? I say you should definitely NOT BUY. Why? Generally, in these situations, the person sending this promo has taken a position in the stock and a fee to market it to simply create some hysteria and a jump in the price so they can exit from their positions at a nice profit.

If you were to take a look at the historical prices, you might see that the stock has already jumped 1,500% over the past year, which is when they probably started to mass market the company shares. If that’s the case, the promo worked.

Surprisingly enough this is legal because if you read at the bottom of the promo, you will see that the promoters have disclosed how much they paid for the advertisement, any fees they get from marketing these shares, and how many shares they own.

So, be wary of this type of research/marketing. They try to come across as legit equity research but they are simply marketing at its finest. Really, this is no different that Wall Street firms pushing out bullish research reports to lock in lucrative investment banking relationships or brokers using “buy” recommendations because they get extra commissions when they sell that particular stock.

With that said, I generally ignore most bulge bracket banking research reports because they is almost always an ulterior motive. I prefer independent research where there are no ties to banks or other business relationships.

I want you to be able to distinguish the difference between biased research and independent research. The easiest way to do this is to say to yourself whether the writer has anything to gain if you take his/her advice.

-Samir

Hey fellow TYL’ers, here are some investment ideas for each of you. One thing before I get into the details: be sure you check the twitter feed (right-hand side) on my site from time to time as I post my real-time trades on there. If you have a twitter account, it may be easier to follow me there when it comes to live trades. My twitter account name is yajnikletter.

Buy gold and silver
What more can I say that hasn’t been said before. Government continues to print dollars paving the way for future inflation. This creates uncertainty and nervousness with those holding US treasuries as a reserve. If you spent $1 million per day from the time of the founding of Rome – roughly 2,700 years ago – until today, you would have accumulated about $1 trillion in debt. Now, double that amount. And that’s the size of our annual foreign borrowing obligation, which equates to about 20% of our GDP!

Also, governments around the world are in a long-term trend of debasing their currencies, which will send the price of “real assets” like silver much higher.

With this said, I recommend buying bullion (my preference…no funny money stuff can happen here as can be done with paper assets), ETFs (GLD and SLV…convenient and liquid enough for most investors to have an ownership stake in bullion, also look at GDX which is an ETF of gold mining companies), and mining companies (several to choose from…Barrick Gold, Pan American Silver, AngloGold Ashanti, Silver Standard Resources are a few I have traded).

Invest in uranium
Did you guys read this article? As you know, I have been bullish on uranium and nuclear energy even through the collapse of uranium prices a few years ago. The reason is because the fundamentals never changed and the sell-off was due to hedge funds liquidating their positions in this sector to meet capital calls due to the real estate collapse. Who would have thought a few years ago that we would be building nuclear power plants here int he US. France gets 70%+ of their energy needs from nuclear energy, India and China are building nuclear reactors, Russia is also active in this space, and Canada and Australia hold huge amounts of uranium. It’s the only environmentally friendly alternative to oil that can provide a widespread source of energy. The idea is that nuclear energy will not replace oil…rather, it will lower our dependence on oil. The way to invest in this sector is via uranium mining stocks. Keep in mind they can be volatile because volume across the board is low. I have no doubt that will pick up over time as this form of energy continues to gain popularity. This is an area you buy some shares and don’t look at it for a while. The ones I like are Fronteer Development Group, Laramide Resources, Mega Uranium, and Pinetree Capital to name a few.

Short the Euro
This type of opportunity doesn’t come along very often. It is time to bet against the euro. It is overpriced. The euro is in a horrible situation right now. A mountain of factors is against it. And in just the last 6 weeks or so, a downtrend has been established – so it’s time to make the trade. At the beginning of December, it cost $1.50 to buy one euro. Six weeks ago, it was at $1.45. As I write, it is at $1.36. It doesn’t sound like much, but a 9%-plus drop for a major currency in two months is big. I recommend buying ProShares UltraShort Euro Fund (EUO), which is a leveraged ETF to return 2 times the inverse of the movement in the euro on a daily basis. For example, if the euro falls by 1% in a day, EUO will increase by 2% in a day. Keep in mind there are some risks because these leveraged ETFs don’t move perfectly to that of the underlying asset over the long term…just on a daily basis as it essentially resets itself each day. I plan to hold this for about 2 months or so.

The reality is, the current problems in Europe are not going away. In the Wednesday edition of the Gartman Letter, Dennis Gartman said he is convinced “we are watching the first battles in a long war that shall end with the dissolution of the European Union and the European Monetary Union.” Then on Thursday, he made another great point: Let’s say you run the government in China or India, and you’ve been diversifying your reserves outside of the dollar and into euros. Now the euro is in danger of breaking apart. What would you do? Would you hold your euros and hope? Or begin a hasty exit? The choice is clear: “Sell… and sell what you can,” Gartman says.

The cultural differences between each of the European countries is just too great. Europe is not America as Americans have common ground and common culture. That’s just not the case in Europe. It was just a matter of time before these differences came to the surface and that time is now. So, let’s look to profit from it. As I said, let’s buy EUO. Uncertainty is here and it will be around for a while.

Buy world dominating brands with a history of increasing dividends
Let’s face it…the economy is not stable yet. The minute you remove the government assistance, instability returns. That happened when the $8,000 first time home buyer credit refund expired just to see it extended. Banks are still struggling and when the mountain of commercial real estate debt comes to maturation, watch out! During these times, you want tried and proven companies with dominant global brands and a history of increasing their dividends to weather any potential downturn. You talk to 10 economists and 5 will say we are in a bull market and the stimulus is working. The other 5 will say it’s just a matter of time before the other shoe falls and that the stimulus is simply preventing the inevitable pain from occurring. For what it’s worth, I am in the camp of the latter.

With that said, I like companies such as McDonald’s, Wal-Mart, Verizon, Family Dollar, Exxon, Johnson and Johnson, Proctor and Gamble, and Microsoft. All of these companies are leaders in their respective industries, have pretty good dividend yields, most have a history of increasing their dividends on a regular basis, and are well capitalized (plenty of cash), should still perform well if the economy continues to struggle.

If you wanted to be speculative with some money and willing to hold for at least 3-4 years, you could look at these stocks as I am pretty sure they will still be around 5-10 years from now and in better shape when the economy should be better. I would recommend Citigroup, Bank of America, Ford, and Toyota.

What about real estate? Has the industry reached a bottom?
Like I said above, banks are still struggling in midst of a mountain of commercial real estate debt coming to maturation right at them. I have read reports that quantify the amount to be in the $600 billion to $1 trillion range. The issue is that many of these loans are in the form of interest only structures with massive balloon payments at the end. The reason for this is because, typically, developers want the payments to be low during the development process and then once they exit the asset and capture the revenue, they are able to pay off the balloon payment. The problem is that many of these balloon payments exceed the appraised value of these developments. So, with the tighter underwriting standards in place now, there is no way these loans can be refinanced. The only things that can happen is the government coming to the rescue by printing more dollars (read here: positive for precious metals) and/or the banks “pretend and extend” these loans hoping for the market to rebound. This will only delay the inevitable which is a write down of these assets on the banks’ books and allowing the free market to determine price. So, I am negative on commercial real estate. For the opportunistic investors out there, I think there are some one off good deals out there right now and surely more to come.

Let me know your thoughts. To provide full disclosure, these are all areas I am invested in. Before you invest, I recommend you consult your personal financial advisor.

-Samir

Happy much belated New Year everyone! I hope 2010 has started off well for each of you. I have been traveling nonstop for potential new job opportunities and, as a result, have not been able to write. Now, I am back at it.

With that said, are you guys interested in a system that returns high risk-adjusted returns? In one of my investment letters, I came across some commentary on a young up and coming research analyst, Mebane Faber, and I would like to relay it to you. The details to his system are the following:

• It only takes you two hours a year (10 minutes a month) to implement.
• It’s only had one losing year since it started in 1973 (a tiny 0.59% loss in 2008).
• And it’s outperformed the stock market with much less volatility than stocks.

Mebane has just updated his numbers for 2009. The results over the last decade are what any of us would be willing to pay for. If you had invested $10,000 in his simple system in 2000, you would have gotten back nearly $26,000. Meanwhile, $10,000 invested in the stock market would have shrunk to less than $9,100…you know…the lost decade in stocks.

The focus is not losing money in the down years:
**********S&P 500           Meb’s System
2000            -9.1%                    +13.8%
2001             -11.9%                 +3.2%
2002             -22.1%                +3.4%
2003             +28.7%              +20.5%
2004             +10.9%              +15.1%
2005             +4.9%                 +8.2%
2006             +15.8%               +14.2%
2007             +5.5%                 +9.5%
2008              -37.0%               -0.6%
2009             +26.5%               +14.0%

Just looking at the last decade, you can see how much less volatile this system is than the overall stock market. The stock market’s annual return was about -1% per year. But the actual returns were usually way higher or way lower than that. Compare that to Mebane’s system, where the average annual return was about 10% a year. You can see the annual returns were always within about 10 percentage points of that average.

Here’s how his system works. There are only five holdings and there are two modes: in and out. The five asset classes are: U.S. stocks, foreign stocks, bonds, commodities, and real estate stocks. Your only decision each month is whether you own a fund that tracks that investment, or not. You want to be in when the asset is going up. And you want to be out when the asset is going down. This idea could hardly be any simpler. But, as you can in the above figures, it actually works.

First, you divide your portfolio into five pieces. You dedicate each piece to one of these five asset classes, and you are either in or out of each fund every month. So you might be only 40% invested one month, with the rest in cash (earning interest at the bank…interest?…funny one, right?).

To figure out whether you’re in or out, you just have to do some simple math. You can keep track of it by hand with a pencil and paper. You don’t need a computer or even a calculator. Yahoo Finance would even suffice.

Once a month, get the last 10 monthly closing prices of the five funds. You can get them from a service like Yahoo Finance. Then calculate the 10-month average. If the fund is above its 10-month average, keep 20% of your money in it. If the fund is below its 10-month average, sell the fund and move to cash. Repeat the next month, rebalancing existing positions back to 20% each if they’re buys. Never put more than 20% in a fund. For example, if only three are in buy mode, then you’re 60% invested with 40% in cash.

Remember, with the exception of a tiny loss in 2008, this system has never lost money, and it has delivered double-digit compound annual gains…compound is the key because this system reduces potential volatility. Higher returns with lower volatility (can you hear the angels signing?)! And this is in a portfolio of just five things that you have to manage for minutes a month.

If this seems interesting to you, check out his site at www.theivyportfolio.com. Keep in mind that the potential for making massive gains is heavily suppressed with this system. However, if there is anything I have learned in this depressing economy, SLOW AND STEADY DOES WIN THE RACE!!!

-Samir