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How I Blew It on the Euro

This has been a tough year to trade the currency market. With the euro ETF (NYSEARCA:FXE) within a hair’s breadth of closing above $146, I am close to getting stopped out of my short euro positions for the second time this year.

You may recall that I bought puts on the (FXE) last January when it was trading at $135. Nearly three months later, I was stopped out at $142 as an aggressive jawboning campaign talked the European currency up far beyond its true worth. I got my revenge on May 5 when the “RISK OFF” trade hit with a vengeance and I reestablished my short at $149.

The free fall to $142 that followed clocked a quick 5.14% profit for me, and revenge was sweet. I resold the first rally back to $142.50 AND watched it trade all the way down to $139.50. I didn’t cash in here because I was expecting a bigger break to the downside. It was not to be, and at today’s marks I am looking at a 3.26% loss in the position.

I was expecting a slowdown in the US economy, not for it to fall off a cliff, and that’s exactly what we are getting. The last two weeks have not delivered a modest weakening but a dramatic plunge in economic activity. It was not just Friday’s dire May Nonfarm Payroll Report that did it, but a continuing stream of bad news,  even the obscure reports ones that no one ever looks at. It’s as if someone shut the lights out.

When I shopped at Fry’s electronics store two months ago, it was packed, and the checkout line stretched for 20 minutes. I went there yesterday to buy a video game for my kids and the place was empty, the line having completely disappeared. Not good, not good.

Never mind that that European debt crisis will get a lot worse before it gets better, that the European banks would have negative net worth’s if their sovereign debt was marked to market, that crude oil in Europe is $15 more expensive than it is here, and that the EC economy is growing at half the rate of America’s. Today, the markets don’t care. Blame it on the high frequency traders.

What this means for the currency market is that the US economy has flipped from slightly better than Europe’s to slightly worse. This brings a modest yield advantage for the Euro over the dollar that will end later than soon. This generates euro buying and dollar selling and a rising (FXE). My (FXE) puts go up in smoke in this scenario.

This is not the end of the world. Netting out all of my euro trades this year, I am down 1.89%. So my Macro Millionaire model portfolio is up only 30.42% year to date instead of 32.31%. That still puts in in the top 1% of all hedge fund managers. If I continue at the same pace in the second half as I have in the first, I should achieve a total return of around 75% in 2011. Hey, I never promised you a rose garden. The surest indication that a track record is fake is that the strategy never loses money. Just ask Bernie.