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My Favorite Speculation in the Coming Dollar Rally

By Tom Dyson, publisher, The Palm Beach Letter
Thursday, November 8, 2007

The music video had everything you'd expect from a hip-hop star...

Semi-clad women danced provocatively... the men wore gaudy jewelry and smoked cigars. The video featured a convertible Rolls-Royce driving slowly along the streets of Manhattan. They even had the brief case stuffed with cash, and the rap star clutching bundles of big denomination bills.

But this video had one major twist that I've never seen before. Even though it shows a famous American artist, and it's set in America, the cash in the video was euros.

The video is for a song called "Blue Magic" by chart-topping rapper Jay-Z. He released it this month.

Is Jay-Z making some kind of statement about the dollar?

Last week, I found more news connecting celebrities with the dollar. A famous supermodel – Gisele Bundchen – refused payment for a modeling contract in U.S. dollars. She demanded payment in euros.

Here's a good rule of thumb about investing: When people who know nothing about an investment start buying it, that's a good time to start selling it. The reason is simple. The unknowledgeable ones are always the last people to buy. Once the amateurs are in, there is no one left to buy. The market can't go any higher.

It's why the technology bubble burst in March 2000, one week after my mother invested her retirement savings in a technology fund. Or why gold dropped through the floor moments after the State of Alaska Retirement System bought two tons of gold bullion in 1980.

Now that models and rap stars are swapping dollars for euros, it makes me think the dollar is about to bounce.

You can use three funds to bet on the dollar:

1. PowerShares DB U.S. Dollar Bullish Fund (UUP)
2. Rydex Strengthening Dollar 2x mutual fund (RYSJX)
3. Rising U.S. Dollar Profund (RDPIX)

You can also buy a "dollar bull" CD from Everbank.

Here's the thing: None of these instruments have enough juice for my taste. They move in small increments, even when the dollar has wild swings. If I'm going to speculate on a dollar bounce, I want to make at least 100% gains if I'm right. That's why I'm making my bet in the stock market.

It's the only way I know to make big gains on a dollar bounce without using futures or options.

It's easy to speculate on currencies in the stock market. Simply find a company that earns revenues in the currency you want to go up and pays expenses in the currency you want to go down.

I'm buying a Canadian natural resource company. Canadian resource stocks are the perfect vehicles for playing the dollar bounce. They sell their commodities for U.S. dollars and pay their costs in Canadian dollars. The trick is to find a Canadian resource stock that's close to bankruptcy. These hobblers have the most leverage to exchange rate movements. Take Ainsworth Lumber, for instance.

Ainsworth runs lumber mills in Canada. It pays wages, rent, power, taxes, royalties, and raw material costs in Canadian dollars, but it sells lumber in the U.S., so revenues arrive in U.S. dollars. Right now, the market for lumber is extremely soft, thanks to the problems in the U.S. housing market. 

According to the literature posted on Ainsworth's website, every cent decline in the U.S.-Canada exchange rate reduces Ainsworth's earnings by $4 million.

Over the last two years, the U.S.-Canada exchange rate has declined from C$1.20 per U.S. dollar to C$0.90. This currency move has trimmed $120 million from Ainsworth's annual earnings.

As a result, Ainsworth's stock has fallen from $35 to $6 over the same period. A slew of other lumber companies have done the same. If the dollar stays where it is, these stocks will probably drift sideways. But if the dollar rallies, I think they could double in fairly short order.

The bounce in the dollar may not be here yet, but when it comes, Canadian lumber is my favorite way to profit from it...

Good investing,


Market Notes


The 2003 invasion of Iraq will go down as one of the greatest "buy" signals for financial assets in the history of mankind.

Around that time, private-equity firms, hedge funds, mortgage originators, investment banks, and credit issuers began swimming in cheap money. The profits that poured into financial centers like New York and London are still trying to find a place to stay.

This boom showed up in a steady bull market in the iShares U.S. Financial Fund (IYF)... an ETF made up of financial titans like Citigroup, JPMorgan, Morgan Stanley, Goldman Sachs, and American Express. These are the companies that benefit when loans are paid back, when businesses expand, and when stocks and bonds are purchased... and these are the companies that suffer when idiotic loans are extended to all takers.

You can place these firms in "suffer" mode right now. These companies in aggregate have taken on too much risk, used too much BS accounting, bought too many garbage loans. They now sport the ugliest chart known to mankind. It will get worse... and more cockroaches will crawl out of this heap before it ends.

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