Currency

The Dollar is king once again. The Euro dropped over 2%, the Pound over 1%, Canadian Dollar plunged 3.9% this week, and the Australian dollar has fallen for the ninth straight day.

The Crack-Up-Boom (CUB) is over.

I was thinking about covering my FXA short with a 7% profit, as it dropped 2% today. Not bad for a currency holding opened July 1st. However, I need to delever a little. I also don't want to get caught out, not being able to short FXA as I tried and wasn't able to short FXE (Euro) or FXB (Pound). I also see this as a cheaper long term loan. Let me explain what I mean. If I want to leverage my portfolio, I need to borrow something. Instead of borrowing money, which I have to pay for, I can borrow FXA and then sell it for money, which I can use as collateral for another position. I pay a 5.36% dividend to borrow FXA, while I'd be paying 8.5% to borrow on margin. In addition, the rate on the Australian dollar will be coming down, which will cause further falls in their currency. However, speculating in currencies requires one to dance, and if I did not fear no being able to short FXA again in the future, I'd have closed it today.

The Crack-Up-Boom is over. Now what?

1. Look for a short covering opportunity to sell ACI. The smart money's been in this trade for at least a month. (Most likely, they are breaking even because they were too early.) Now that the drop in oil and the rise in CUB currencies is over, the dumb money is piling in. Remember, markets first overreact, and then underreact. This is my #1 rule of trading, which I got from Satyajit Das.

2. Wait for a bounce in commodities which I can short into. The bounce should be at least halfway between this year's high/low.

3. With the CUB commodity bubble now popped, I need to keep thinking about how a deflationary environment will affect financial markets.

As an important development that cannot be ignored, Fannie Mae announced a huge $2.3 billion loss for Q2'08. They also announced that their Alt-A mortgage portfolio has jumped from 1.8% 90-days delinquent on 12/31/2007 to 3.7% by the end of June. Fannie owns or guarantees payments on $190 billion in Alt-A's. That's $7 billion in losses in just on quarter if this was marked to market. Alt-A's are only 60% of their losses. I continue to be very bearish over the next year and a half on housing.