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Cagdas Ozgenc's  Instablog

Cagdas Ozgenc
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Bank executive, individual investor.
  • Buy Europe, Short TRY To Hedge 3 comments
    Aug 16, 2013 12:46 PM

    Yet another denied article. These SA editors are plain idiots.

    What a wonderful year...Mouth watering trades one after another.

    My first recommendation was Japanese equities. Up 30%. The trade lost its excitement recently. There may be future upside, but I bailed out to allocate capital to Apple (NASDAQ:AAPL) stocks. I have been buying since it touched 400.

    http://seekingalpha.com/article/1110771-triple-whammy-in-investing-in-japanese-equities

    Second recommendation was to long AUDJPY. That trade made 15%. I hope you were also trading with trailing stops and bailed out before trend reversed.

    http://seekingalpha.com/article/1114641-australia-japan-trade-balance-and-the-aud-jpy-trade

    Finally last week I was trying to alert everybody for the absolute best timing for Apple stock, but was unfortunately not published, I had to post as an instablog.

    http://seekingalpha.com/instablog/4845251-cagdas-ozgenc/2097082-is-europe-dead-is-apple-a-hedgefund

    What now? I have two planned trades for Autumn. First one is to invest in European equities. Specifically in France and Italy. I briefly mentioned about this in the last article above. The European stock markets other than UK and Germany are at extremely depressed levels. For sure there will be some volatility due to FED tapering and other austerity related issues in US during September. Nevertheless the rotation from already peak US equities towards European stock markets has started. European markets are already up 15% since beginning of July. Don't worry you haven't missed anything. There is much more to come. Recent upswing in EURUSD and general weakness in USD confirms that some investors are shifting money out of US. I also investigated emerging markets to figure out where else this money is going. It seems investors are avoiding emerging markets other than South Africa. I personally invest in country indices because I can use tons of leverage on my bets compared to single stocks. If you would like to be selective and avoid the kind of volatility and gambling spirit I have, then I recommend buying the financial sector. Finding the right banks may be problematic. Some of them will go sour. There are a few European financial sector ETFs however. You have to do some Googling and look at the list of holdings to figure out what kind of country exposure you are taking.

    About those emerging markets... Up until the tapering discussions emerging market currencies were doing good. At least they were stable with respect to USD. The reason was that interest rates in US were artificially too low compared to interest rates in emerging markets. After 2009 crash all that liquidity flew to emerging market stock and bond markets to capture higher yields with huge returns up to 250%. Investors were quite comfortable about the FX risk they were taking because emerging market currencies devalued drastically during the 2009 crash as well. USD gained against almost all currencies. Probably after all that devaluation they did not even bother hedging the currency risk. Now the tables have turned. Interest rates are rising in US due to tapering talks. Investors are frontrunning FED by dumping the US government bonds causing an increase in rates even when FED hasn't started tapering. The relative risk/return is probably not justified for some investors anymore. If they start to get higher yield on US bonds, why would they risk going to emerging markets? The money is not going to US bonds yet as investors are dumping them at the moment. This period will be good for European equities as I mentioned above. Once the interest rates go high enough, bond dumping should be countered by bond buying hence should stabilize. I just don't know when.

    All these mechanics will cause a shock on emerging market currencies. Money will leave the emerging markets and the respective currencies will lose value. Among many emerging markets there is one very crucial country: Turkey. Turkey has a large current account deficit, mostly due to energy imports, so far covered by the pumped liquidity by FED, ECB, and other central banks. Moreover the recent social unrest and deteriorating relations between some large business owners and the government are making things worse. Government is also stubborn to raise interest rates to counteract the pressure as part of their Islamic agenda. As Bernanke will open his mouth in September and utter the words "Tape....", USDTRY currency pair will devalue 10% before he finishes his sentence. It has already devalued 10% since the last 3 months. These days I will start allocating capital to USDTRY pair long position as I see some pullbacks (if there will be any). Also let's not forget the classical December effect of position closing of US investors in emerging markets causing further pressure. Hopefully everything resets in January and we start by new ideas.

    Long USDTRY will be an exremely low cost hedge against tapering noise and pullback in equities. As always I put my money where my mouth is. Long European equities and USDTRY!

    Disclosure: I am long AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

    Additional disclosure: Long Italy, France, USDTRY

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Comments (4)
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  • MEKhoury
    , contributor
    Comments (255) | Send Message
     
    Thanks for continuing to write -- whether your work is published or not, I enjoy reading it. Also, fascinating take on Turkey, it will be really interesting to see how it plays out.

     

    Cheers
    19 Aug 2013, 01:26 AM Reply Like
  • Cagdas Ozgenc
    , contributor
    Comments (408) | Send Message
     
    Author’s reply » Fusion IQ has similar strategy for the next 4-5 years:

     

    http://yhoo.it/14fmfVZ

     

    Today also Central Bank of Turkey has rate decision. If they make a surprise with an interest rate hike and ruin my plans then we may have to seek another fragile emerging market currency.
    20 Aug 2013, 04:25 AM Reply Like
  • Cagdas Ozgenc
    , contributor
    Comments (408) | Send Message
     
    Author’s reply » OK. Emerging market currencies are being slaughtered. Indian Rupee is having the toughest time, but Turkish Lira is also good contender for the butcher shop. Central Bank intervention is too weak as expected:

     

    http://on.wsj.com/13RNS3G

     

    Europe is taking a hit at the same time. That's why we are doing this hedge play. Of course we could have delayed the Europe buy, but it is difficult to time everything right. The good thing is once the smoke clears emerging market currencies will not recover those loses while equities rebound. That's the trick behind this play.
    21 Aug 2013, 03:58 PM Reply Like
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