jmkeynes

Massive Opportunity to Short the Dollar

The recent strength in the dollar may be due to a coordinated effort by central banks to hold down commodity prices and prop up the dollar.

Generally, economists believe that a weak currency helps a nation improve its trade deficit. However, earlier this year as the dollar weakened against the euro oil prices shot up and, according to trade data from July, the US trade deficit increased. We were exporting more but the rise in oil prices more than offset the gains in exports!

One way to push down oil imports would be for the US government to tax oil the way the Europeans do now. Look for this to happen regardless of who gets elected, but don't expect either party to admit that higher oil taxes are in the works. Most voters fail to understand why higher oil prices due to new taxes on oil would actually help the US reduce its trade deficit and would, in the long run, help the US economy.
Of course, the government could give the oil tax revenues back by cutting taxes for low income earners and establishing a negative income tax for non-income earners.

In any event, for those of you who aren't interested in tax and trade policy because you just want to make a buck in the stock market, my advice is to hold an internationally diversified stock portfolio with some gold/silver and commodity exposure as well.

Gold and silver have been clobbered recently, so you could invest maybe five or ten percent of your portfolio by buying ETFs such as GLD and/or SLV. You could also invest maybe five or ten percent of your portfolio in commodities and oil by buying ETFs such as DBC and OIL.

You can gain international stock exposure by buying ETFs such has EEM (or VWO) for emerging markets and EFA for non-US developed countries. Note that EEM and EFA are both down around twenty five percent over the last year. Canada isn't in the EFA so you can get exposure to Canada from the EWC ETF.

You can also buy exposure to the US market by buying ETFs such as SPY for the S&P 500 and IWM for the Russel 2000. US stock values will be hurt initially by a drop in the value of the dollar, but a drop in the US dollar also helps US exporters in the long run.

One final note on ETFs, you can buy/sell options on all of equity ETFs listed above. So, on fairly conservative way to make a little extra money each month is to sell out of the money covered call options on the ETFs you do own. Short term out of the money options usually expire worthless, so you generally pocket the change you make from selling these options (make sure they are out of the money and that they expire in around a month or less). If the market goes up to the strike price, you make a gain and keep the money from selling the option. If the market goes up past the strike price, you still keep the money from selling the option, but you don't get the gain past the strike price. So, unless you expect an explosive move upwards, selling short term, out of the money, covered call options is a pretty safe bet.