Special Situations Investing

Bullish On The Yen Following The Selloff

At this point, I don't know exactly where the yen will trade in the next six months to a year, but the yen will likely be higher. Market volatility seems to finally have picked up, and we are likely headed for emotional extremes in "hot" developing markets such as China, though I doubt China will let its economy falter ahead of the 2008 Beijing Olympic Games. Everyone, even prissy wives at cocktail parties want to talk about the gains to be had in developing markets. Too many people are chasing returns in these markets, and at some point these markets will likely mean revert, in the near future, possibly giving rise to higher market volatility and covering in the Yen. At the same token, the covering in the yen might make the currency become overvalued if there is a disorderly liquidation, at which point we would look to short the yen. Even if there isn't a disorderly liquidation, these huge positions have to be unwound sometime if the Bank of Japan keeps slowly raising rates. Essentially, markets don't move because they want to, they move because they have to. In every trade, there is a winner and a loser. The key is to position yourself properly so that when other traders are taking a spanking and are forced out of their positions, your benefiting from their misery. Amateurs hope, while pros steal, and taking the opposite side of the Yen carry trade captures this approach.