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How I'm Betting Against the Euro

By Dr. Steve Sjuggerud
Friday, February 19, 2010

Two months ago, I recommended betting against the euro... 

It was my top idea. The entire issue of my True Wealth newsletter two months ago was dedicated to that idea. And in last month's issue of True Wealth, I said it was my "top recommendation." 

Here's exactly what I wrote two months ago:
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 three weeks or so, a downtrend has been established – so it's time to make the trade.
My friend, the euro is crashing... 

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. 

And my subscribers have done well... particularly since I recommended a "double-inverse" fund, which is an investment that gains 2% for every 1% fall in the euro. Specifically, we bought shares of the ProShares UltraShort Euro Fund (EUO). Below is a six-month chart. Take a look at how it's done since December... 

And the reality is, the current problems in Europe are not going away. In the Wednesday edition of the excellent 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. 

Gartman points out that the cultural differences between Greece and Germany, for example, or Ireland and the Czech Republic, are simply too vast. Europe is not America... From California to Virginia, Americans have common ground, common culture. That's just not so in Europe. It was only a matter of time before these differences would surface and things would come to a head... That time is arriving now. 

In short, uncertainty will hang over Europe now for a very long time. And investment markets hate uncertainty. So the euro's prospects are dim. 

One thing, though: The world is finally catching on... We're seeing a huge number of traders betting against the euro right now. I expect we'll see a strong bounce in the euro kick many of these traders out of the trade... Many currency traders use extreme leverage, so it won't take a lot for them to have to cover their positions. A bounce up to $1.40 or so in the euro should do it. 

But I have no intention of exiting our trade. A bounce to $1.40 is nothing... it's about a 3% rise – which would mean a loss of 6% on our double-inverse fund (EUO). That's a loss I'm willing to risk. The euro has farther to fall. 

It's still time to bet against it... 

Good investing, 


Market Notes


It took a while, but all three of our "rebound trades" have registered more than 100% gains. 

Just after the terrible market selloff of late 2008, we identified three sectors with tremendous potential to rebound in price... gold stocksemerging market stocks, and infrastructure stocks. These three groups suffered much more than the average stock during the credit panic. Old school traders' wisdom says assets that suffer the most during a selloff rally the hardest when the market recovers. 

Our selections of emerging markets and gold stocks played out according to plan... and doubled in less than a year. Infrastructure stocks – the builders of bridges, tunnels, pipelines, and refineries – however, were slow to get going. Our power plant specialist Shaw Group (SHAW) "only" gained 75% in the next 12 months. But in the past few months, Shaw has staged an upside breakout to register a more than 100% gain since our column. 

Our initial commentary stated: It's a no brainer that Obama & Co will throw hundreds of billions at improving America's infrastructure. It's politically irresistible. You can argue against wars, drug laws, and censorship... but what kind of unpatriotic scum doesn't support new roads, electrical capacity, and bridges? 

As you can see, the market is agreeing with our thesis. Shaw and its fellow infrastructure builders have broken out of a long base of sideways trading action. Easier credit, higher commodity prices, and the aforementioned stimulus money are sending the sector higher. 

In The Daily Crux

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