The Unintended Consequences Of The Euro Crash

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Includes: ADRU, DBEU, DBEZ, DEZU, DRR, EEA, EPV, ERO, EUFX, EUO, EURL, EZU, FEEU, FEP, FEU, FEUZ, FEZ, FIEE, FIEU, FXE, GSEU, HEDJ, HEZU, HFEZ, HFXE, HGEU, IEUR, IEV, IWM, OTPIX, PPSC, PSQ, PTEU, QID, QLD, QQEW, QQQ, QQQE, QQXT, RFEU, RWM, RYRSX, SBEU, SCAP, SMLL, SPSM, SQQQ, SRTY, TNA, TQQQ, TWM, TZA, ULE, UPV, URR, URTY, UWM, VGK, VTWO
by: The Mad Hedge Fund Trader

Summary

For those of you who heeded my expert advice to buy the ProShares Ultra Short Euro ETF (EUO) last July, well done!

You are up a massive 21.25%!

My browsing of the Galleria in Milan, the strolls through Spanish shopping malls, and my dickering with an assortment of dubious Greek merchants, all paid off big time.

It turns out that everything I predicted for this beleaguered currency came true. The European economy did collapse. Cantankerous governments made the problem worse by squabbling, delaying, and obfuscating, as usual.

The European Central Bank finally threw in the towel, and did everything they could to collapse the value of the Euro and reinvigorate their comatose economies.

They did this by imitating America's wildly successful Quantitative Easing (QE) program.

And now for the good news: The best is yet to come!

Europe is now 18 months into a strategy of aggressive monetary easing which may take as long as five years until it delivers tangible, sustainable results.

That's how long it took for the Federal Reserve's QE to restore satisfactory levels of confidence in the US economy.

The net net is that we have almost certainly only seen the first act of a Euro weakening which may last for years. A short Euro could be the trade that keeps on giving.

The ECB's own target now is obviously parity against the greenback, which you will find predicted in my 2017 Annual Asset Class Review released at the beginning of January.

Once they hit that target, 87 cents to the dollar will become the new goal, and that could be achieved sooner than later.

However, you will not find me short the Euro up the wazoo this minute. I think we have just stumbled into a classic "Buy the Rumor, Sell the News" situation with the Euro.

The next act will involve the ECB sitting on its hands for a year, realizing that their first pass at QE was inadequate, superficial, and flaccid, and that it is time to pull the bazooka out of their pockets once again.

This is a problem when the entire investment world is short the Euro. That paves the way for countless, rip your face off short covering rallies in the months ahead. Any smidgeon or blip of positive European economic data could spark one of these.

Trading the Euro for the past eight months has been like falling off a log. It is about to get dull, mean and brutish. So for the moment, my currency play has morphed into selling short the Japanese Yen, which has its own unique set of problems.

As for the unintended consequences of the Euro crash, the Q4 earnings reports announced so far by corporate America tells the whole story.

Companies with a heavy dependence on foreign (read Euro and Yen) denominated earnings are almost universally coming up short. On this list you can include Caterpillar (NYSE:CAT), Procter & Gamble (NYSE:PG), and Microsoft (NASDAQ:MSFT).

Who are the winners in the strong dollar, weak Euro contest? US companies that see a high proportion of their costs denominated in flagging foreign currencies, but see their incomes arrive totally in the form of robust, virile dollars.

You may not realize it, but you are playing the global currency arbitrage game every time you go shopping. The standout names here are US retailers, which manufacture abroad virtually all of the junk they sell here, especially in low waged China.

The chart for the NASDAQ (NASDAQ:QQQ), where constituent companies have less, but still a substantial foreign currency exposure, appears to be putting in a sideways pennant formation before eventually breaking out to new highs once again.

The small cap Russell 2000 (NYSEARCA:IWM), which is composed of almost entirely domestic, dollar based "Made in America" type companies, is by far the strongest index of the trio, and looks like it is just biding time before it blasts through to new highs.

If you are a follower of my Trade Alert Service, then you already know I have a long position in the IWM which has already chipped in substantially to my 2017 performance.

You see, there is a Method To My Madness.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.