The Carry Trade - What is it? How to Play it?

There’s been a lot of press lately about the Carry Trade, and like all catchy trends in the investing world, by the time it’s a routine fixture on CNBC and blogs, the smart money’s been made and retail investors are left holding the bag when the bubble bursts (anyone recall housing 2007, oil 2008?). Conversely, the trend is your friend and given the continued decline of the US dollar of late, we may very well see this trend continue for months. In a flat or downward stock market following a 60% move from the bottom, the carry trade may be a nice place to earn a double digit gain in the meantime.

What is the Carry Trade Exactly?

Essentially, because the US has a near 0% interest rate and other economies have higher interest rates or are even raising them due to the relative strength and confidence in their economies (like Australia), currency ETFs such as FXA (Aussie Dollar) are on fire. This year, you would have even done better in FXA than the S&P500, even given the recent rally.

YTD Return FXA +28% vs. S&P500 +15%

As outlined in this article on Currency ETFs, there are some currencies that are making great gains against the US Dollar and investors could have captured some nice low-correlation gains alongside stock gains in the past few months and this may continue.

With all the talk of the US Dollar being displaces as the reserve currency of choice, we’ve seen gold rally to all-time highs, which is very much a function of the weakening dollar (see why silver-platinum ETFs are even better investments than gold in a weak dollar environment) as opposed to a supply shortage or industrial demand.

Meanwhile silver and platinum benefit from actual real-world industrial utilization and are more leveraged to a weakening dollar even than gold. However, aside from a commodities trade or trying to pit Australia alone vs. the US, another ETF that goes long the highest yielding currencies and short the lowest yielding currencies is DBV - PowerShares DB G10 Currency Harvest. This one is considered a broader play on the carry trade rather than betting on the relative strength of individual currencies. Carry Trade Bubble Risk

To be clear, playing the carry trade this far into the dance is not without risk. Prominent B-School professor and oft-doomsayer Roubini has been warning of the imminent collapse of the mother of all carry trades. The video’s a bit long, so I’ll summarize. He warns that when the carry trade reverses (the bubble bursts) and investors have to cover their short dollar positions, panic will ensue and investors will rush for the exits. In doing so, the dollar will rally to the tune of 25% or more and overseas currencies will crash precipitously. Those that are long foreign currencies and short the US dollar will get crushed. Indirectly, all risky assets will suffer including stocks and bonds like we saw in 2008 into 2009.

This would be akin to what we saw during the global collapse and complete capitulation of the investment world at large in March 2009 where even the weak dollar-gold correlation broke down for the first time in years - and then promptly recovered as we’re seeing now. Therefore, if you’re a contrarian and want to wait it out for this bubble to burst, you’d want to stay out of commodities, stay out of the foreign currency ETFs and just go long the dollar or Treasuries.

Darwin’s Finance
http://www.darwinsfinance.com
Evolutionary Finance for the Masses

Article Source: http://EzineArticles.com/?expert=Dan_Pritch

The Best 3 Ways You Can Be Profiting From Investing

As children we were always told if we wanted to learn something to imitate ones who have done it before. If you were a young boy who wanting to play baseball you watched professional baseball players play the game. If you wanted to be like your parents you watched them so you could learn how to do something. The same thing can be said about investing. By following the strategies of those who have successfully made money from investing, you could possibly earn a lot of money too. In this article I will give 3 ways how you can start profiting from investing by following some key points from one of the greatest investors in the world, Warren Buffet.

Now I have read many books on warren and there is a common them I find. Here is a list of the 3 common tips I find from Warren’s investing strategy:

1. Buy businesses with a competitive advantage. Be interested in companies whose earnings will grow. Companies with a strong brand name are the best choices.

2. Don’t buy businesses you do not understand. Make sure you can get an understanding of how the business operates. Do not follow the crowd buying companies just because some television personality did it. Back in the late 1990s everyone was buying during the dot.com era but not Buffet. He could not predict how the earnings would perform so he stayed away.

3. Think like an owner. Investors sometimes believe the way to make money is by buying a stock on the rise and then sell it. Buy low sell high, is not as easy as it sounds. That is not how Buffet does it. He wants to buy a part-ownership in the business, and considers the companies earnings as his reward.

Following these tips will help you to have winning and profitable trades almost all the time.

You can make money trading stock. Go to my ==> Investment Page. you will see free information to making profitable trades.

Article Source: http://EzineArticles.com/?expert=Chadwick_Farrell