The Investment U e-Letter: Issue # 406
Tuesday, January 25, 2005

Short the Euro: The Easiest, Safest Way
By Dr. Steve Sjuggerud, Advisory Panelist, Investment U

It is my belief that the bull market in the euro is near the end of its run, and that the time to profit from a fall in the euro is here.I am practically alone in this belief. But this is where I want to be It’s a curious fact of Wall Street that when everyone finally believes an investment can only go up, it is often near its peak.

And when everyone has written off an investment completely, it may be time to consider it. The case of the dollar and the euro is a great example of this

NOBODY WANTED THE EURO IN 2000… And that was the time to buy it

The euro bottomed in mid-2000, and stayed there until 2002. I wanted to look back at what the “experts” were saying in mid-2000. I didn’t have to look far. I found what I was looking for in my first article – the June 5, 2000 issue of Barron’s:

“It’s been a big failure,” laments Criton Zoakos, chief economist at Leto Research, who sees the euro finishing the year at 70 cents. It’s still down roughly 25% from its level when it was launched January 1, 1999

“Looking forward, however, it’s unlikely the euro will soon find a bottom It’s not hard to understand why the euro is weak and will likely stay that way ‘You have a recipe for a full-blown currency crisis,’ says Jeremy Fand, international economist at Fleet Capital Markets.”

How wrong they were. The euro has strengthened by over 50% since 2002, to near 1.30. As recently as 2002, nobody had a nice thing to say about the euro. The euro had crashed since its introduction, and was now super cheap. Instead of listening to the “experts,” it would have been the perfect time to buy euros.

Now we’re in the equal and opposite position. Nobody has anything nice to say about the U.S. dollar, yet it has already crashed horribly. Now may just be the perfect time to take a position. I think we’re pretty darn close to a top in the euro.

NOBODY WANTS U.S. DOLLARS IN 2004…So it’s time to short the euro and buy dollars

I have a simple model for currencies. I call it my 1-2-3 Currency Model. Not surprisingly, it’s built on three things: value, interest rates and market action/sentiment.

And right now, based on my 1-2-3 model, you wouldn’t want to buy the euro. Let’s take a look

First of all, for value, there is none with the euro. Now that the euro has strengthened by over 50% versus the U.S. dollar, we can’t consider traveling to Europe. It’s too darn expensive. As a simple example, a Big Mac costs 25% more in Europe than in the States right now – the highest premium in the history of the euro.

The technical term for this concept of value is “purchasing power.” And right now, the euro is roughly 15% overvalued by my calculation. And with history as our guide, you generally don’t want to be accumulating euros when it gets this expensive.Value advantage: U.S. dollar.

Second are interest rates. Remember this: Money flows to where it’s treated best. Not so long ago, Alan Greenspan had cut rates to 1% in the States. Money was being treated better in Europe than at home. Hence, money flowed out of dollars and into euros. But now times have changed. Greenspan has hiked rates above European rates now. Interest rate advantage: U.S. dollar.

Lastly is market action/sentiment. There are two pieces to the puzzle here the first is market action. While the euro has started to weaken (from 1.36 in late December to close to 1.30 today), it would be difficult to claim that a downtrend is in place. I’ll call this one neutral. But the second piece – sentiment – is negative. Nobody wants a dollar now. Market action/sentiment advantage: U.S. dollar.

SO IT’S TIME TO SHORT THE EURO…

One of the nice things about having more than 60,000 subscribers is that financial firms are willing to create products that meet the needs of my readers. I’ve met with Frank Trotter, the CEO of EverBank, on a few occasions, asking him to create unique financial products that meet our needs. Hopefully you’ll see some innovative, limited-downside, unlimited-upside products in 2005. For now

Frank has created a nifty product where we can profit from the fall in the euro AND earn some interest. Frank is calling it the Dollar Bull CD, where you basically make a percent for every percent fall in the euro, plus you get paid a small amount of interest.

So if the euro falls by 10% in the next year, you might make 10%, plus 1% interest. Something like that. I think we could do even better than that

Readers of my newsletter did extremely well on our “dollar bear” CDs with Everbank – I’m talking about our commodity currency CDs. We made about 32% on these CDs. 32% in CDs! Those CDs were a classic Investment U play: big gains with very little risk.

Now it’s time to go the other way, with a Dollar Bull CD.

While 32% might not be possible, it is not impossible to imagine gains in the 15-20% range in the next 12 months – all on a FDIC-insured CD!

I’m currently recommending readers of  Investment U buy the EverBank Dollar Bull CDs. I suggest you do the same.

Good investing,

Steve