Ray Hendon

Tough Times for ETF and ETN Providers

Any ETF that is registered under The Investment Company Act of 1940 is free from any of the shenanigans that the banking industry and others used to fleece investors. These trusts are rigorously regulated and, as importantly, their monies held and securities purchased must be held by separate companies under highly controlled conditions. All of WisdomTree's currency assets are registered under the provision of this act, and, I believe, so are PowerShares. You might the prospectuses for more details on this provision.

ETNs are a different matter. With these instruments the safety is dependent entirely on the credit worthiness of the ETN provider at the time the fund matures. Personally, I do not like the ETN format. It has so many things wrong about it that I can't bring myself or any of my clients to risk a penny in their trust. Not everyone agrees with me harsh assessment, but I stand by it. Why take a credit risk that is added to the market risks you are already taking?

Best wishes,

Ray

Hard Time for Soft Currencies

bmaclaverty: Interesting possibility--this option is always available--the U.S. has done it for the last sever years. I have not made an explicit study of bouts of competitive devaluations, so I cannot speak with any special knowledge of the subject. Just off the top of my head, if this kind of destructive practice did occur, it would most likely be on a regional basis. S.E. Asia, Latin America, Eastern Europe, etc. If this is the way it would play out, then the controlling forces would be the regional leaders. In Asia it is China, with Japan playing a more silent role. In Latin America, Mexico and Brazil are local leaders, but the U.S. is still the Monroe Doctrine practiticioner and would yield much influence. Eastern Europe is difficult for me to assess. The old Soviet Union members are now, for the most part, looking to Euroland, but some in the furtherest east (Bulgaria, Romania and all the absurdistans that populate western asia) are still under Russian influence to some degree.

It's just a guess, but I think the real leaders of these regions could keep a lid on the kind of destructive practices you fear.

Best wishes,

Ray

Hard Time for Soft Currencies

Thanks for the comments, guys. Chance, good idea about using a symbolic language in a book about currencies. I'll get to work on it, soon. (:~)

Ray

Brazilian Real: Update to the Downside

With respect to the prospects for EWZ I would encourage you to split your views into the short run and the long run. If your horizon is short, say, a year or less, then EWZ is not a strong prospect for gain. A 10% gain for Brazil is not out of the question; their recent gains have far exceeded that amount. But you do need to extend your horizon some to be more certain of coming out ahead.

Equity markets are in a transition stage, especially in the developing world, where there have been huge gains over the last few years. They will pay back some of their gains as the effects of world inflation and slowing Europe and America take their toll. But Brazil is in such a good position to profit from the commodities boom, that they must eventually prosper more than most others. They have so far to go, and for the first time in their history, they have the infrastructure in place to make something out of it.

But they are strictly a longer term play.
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Brazilian Real: Update to the Downside

I still like their equity ETF (EWZ). There is often a disconnect between a currency and equities, and I feel much stronger about the economy of Brazil than I do their currency, at least over the next months. The currency was simply oversubscribed by the carry trade hot money. EWZ has taken its hits lately, as all emerging markets have, but I think this will pass once commodity prices stabilize and they do some test drilling in their new oil fields off shore. But, it's still risky for either investment.

Currencies: Dead Cats and Yapping Dogs

Muddling Investor: You have the right idea to dig into your own research. I am sticking with Mexico and Brazil, but I believe both these currencies may be in for a rough patch ahead. Both countries have slid into trade deficits, and, in my view, Brazil is likely to allow the real to slide vs. the dollar in order to help it correct its deficit. This will probably mean giving up some points of its gain over the last few years. But, I don't think the carry trade investor will lose because the interest rate there is so high.

elwin45: I must say the economic scenario you lay out is beyond my ability to follow. I don't know what world you are being real about, but it isn't the one I live in. Generally, an increased supply of a currency, such as U.S trourist in China spending for motels, food and taxis, will put downward pressure on their currency--not upward. And, in my world, nations holding bad debt denominated in dollars will not increase their purchases of dollars because of it. I actually don't see much relationship between those two items, other than a tendency to dump the debt and recycle the proceeds into other investments--assuming something is left to recycle. Whether the recycled purchases are in dollars or not will depend on the interest spreads and currency spreads at the time. I'll give you credit for original thinking, but I just don't follow it. Good luck.

ikkyu: I always enjoy your perspective, and I appreciate your comments. As far as interest being the only attraction of the carry trade, I think you are speaking of motive, which is highly personal, and I am speaking of a strategy. I tend to be somewhat of a purist when dealing with strategies and theories, and try to stay focused on the driving force behind it. But, you are correct that holding currency pairs involves risks, and they may be substantial, in that there is likely to be some appreciation/depreciat... between them. So no carry trader can ignore the prospects of having a profit or loss from the transaction. In fact, if there is a big interest rate differential between two currencies, that is reason enough to expect there to be some change in their currency relationships. The carry trade is a temporary opportunity that requires an exit strategy to be successful.

As far as JEM and DBV being correlated, that may prove to be true over some time period, but I think that the developed economices and emerging markets do follow a different drummer. So, I don't look for a strong sympathy between them. But, I'll keep an eye on this possibility.

Best wishes,

Ray

Currencies: Dead Cats and Yapping Dogs

surgcare: I consider a currency strong if it is going up or at least holding its own against other majors. I consider it weak if it cannot hold its own, as the dollar did not do for the last sever or so years. I feel the dollar is undervalued now, not because of any great fiscal restraint or wisdom coming from our political learers, but simply on the what you get when you pay for something in America with most any other currency. It has been my experience that currencies almost always overshoot the mark and become under or over valued briefly before a correction set in. I think the dollar is there now. But, of course, I may be well off the mark on this estimation.

As far as Rome, I guess we, and millions of others could discuss the causes of Rome's fall until the end of time. From my limited knowledge of its history, I think Rome was ultimately a moral failure: it never rose above slavery, and it lost the support of the general poplulation over the course of centuries of warfare. In the end, it seems, there was no one left to defend it from more aggressive peoples clammoring to take it.

Thanks for the comments.

droskoph, thanks for the compliment. In reading it again, today, I feel I could have said about the same thing with many fewer words, but I almost always feel that way when its over. I wasn't targeting any one in particular about the Rome comments. It's a popular thing to do.

Best wishes,

Ray

Finding Your Comfort Zone with Currency Investing

Hi, Les,
I am not aware of much research on currency ETFs. They are probably too new to attract much attention from analysts. However, even if they were I would be skeptical of their opinions. I'm equally skeptical of my own. No one can do much of a reliable prediction in this type of market, in my opinion. Things can turn on a dime at the slightest quiver of a wind from any direction.

I have read a book on trading currencies, and I thought it was fairly good. Remember, all we have are opinions, and currency trading (vs. investing) is not necessairly a teachable subject. The book I read is : Getting Started in Currency Trading by Michael Duane Archer. It is probably out of print, but I found a copy at Amazon. Also, there are a couple of authors who contribute to Seeking Alpha. Chen and Lieu (if my spelling is correct) are two you might check on.

I would encourage you to approach this subject with the greatest caution, and consider, instead, currency investing--something like the carry trade. Trading is fast paced and will eat you up fast if you are not exceptionally able to cope with it. Few are!

Good luck.

Ray0

Finding Your Comfort Zone with Currency Investing

I haven't been following CNY, since I detest most ETNs, and your report reaffirms my view on this instrument. I believe CYN is one of the ETNs that doesn't pay dividends, so the interest income, if any (and the Chinese Yuan is the last place I would go to earn interest) you will see only to the extent their forward contracts include any such accumulation. Apparently they are not. The reason for this, I believe, is that China pays less than 1% on their foreign deposits, so that precludes leaving any money there. But, even worse,the yuan is mostly traded through forward contracts which the providers "hope" will include some interest earnings. But, you can't prove that by me--especially with most ETNs.

Also, even Wisdom Tree, whose yuan fund I like more than Van Eck's, only pays dividends on an annual basis--if I recall this correctly. China is not a good place to play the carry trade.

I thank you for your post. Our readers need to know how these differences will affect them and their investments.

Best wishes,

Ray

Finding Your Comfort Zone with Currency Investing

For ETFs the providers list their assets under management on a daily basis. For ETNs they list the indicative value, which is the last price per share times the number of shares outstanding.

Best wishes,

Ray

Currency Counter-Cyclicality

elobrate what?

The Burden of the Carry Trade

Hi, Mark

I don't know your situation, but as a general idea I like the ETFs of Rydex and Wisdom Tree. The specific ones to buy will depend on the strategy you wish to follow. The carry trade options are limited to about five, and a value strategy is even more limited. I have had good success with both the FXM and BZF funds, but I also like Australia (FXA) as a value play and as a carry trade prospect. China (CYB)) is probably the best value play, in my view, but CYB doesn't hold the yuan, it buys forward contracts, and the interest earnings are unattractive.

For strategy funds, I prefer DBV over ICI simply because I prefer the Deutsche Bank Index over the Morgan Stanley Index--but I have no way of knowing which would be better over the years. Right now, DBV has outperformed ICI by a small margin, but both are young funds.

I have also read of strong recommendations on the Swiss Franc (FXF), but I would encourage you to do some research on this currency--it has a long record of good stability and a haven in the storm type of play, but I don't know what to expect of it as a growth prospect.

I am a long term investor, so I don't look for fast turnover. You may be of a different temperment, so I can't give you advice or opinion of much value.

Good luck.

Ray

Strategies for Currency Investors

Thank you all for your generous comments. I'll have another post within a week or so on the details of executing a carry trade strategy. User 86999: I am not a tax expert, so be careful in placing too much credibility in my views on the K-1 issue. As far as I know, K-1s are used by Trusts, and is their way of passing on capital gains to their owners--you. While the Rydex fund (FXM) is a trust, they do not engage in futures transactions--they own mexican pesos outright. So, their exposure to capital gains is small. Those trusts that engage in forward contracts, however, do have a large exposure since they must turn over their contracts on a periodic basic.
ikkyu, thank you for the infor on OANDA. I was not aware of this broker, and what I have found so far is good.

Six Ways to Trade Foreign Currencies

My mistake. The symbol is BZF.

Six Ways to Trade Foreign Currencies

BXF is the trading symbol. It has been actively trading since May 14, 08.