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
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Evolutionary Finance for the Masses

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

Ponzi Scheme - What is it & How to Avoid It

Aside from the typical business scams we find today, there are also investment scams that one should be aware of. It is important that one can recognize when they may be taken advantage of by someone who claims they are seeking investments for a business, as this is not always the case. Below is the definition of the Ponzi scheme and how to recognize it and best protect yourself and your money.

Definition:

A Ponzi scheme is an illegitimate investment scam that involves paying investors back from their own pocket, or money that is brought in from future investors instead of money brought in from business revenue. In the 1920’s a man by the name of Charles Ponzi was very well known for using the technique successfully and the scam was named after him although he was not the original creator of it.

Charles Ponzi would pay his investors 50% interest on their original investment and use the remainder for his own personal gains and pleasures. Eventually it became illegal as it is not recognized as a legit business because it works on the “rob-Peter-to-pay-Paul” principle.

How To Spot The Ponzi Scheme And Avoid It:

1. Those utilizing the Ponzi scheme will normally ask for a large sum of cash up front and work to convince you that the return will be given in a relatively short period of time.

2. Never get caught up in the rewards and always think about the risk. If the person working to invest your money is telling you there is no risk, this is not true! High dollar investments always come with the risk of losing your money, don’t be mistaken. If it was really that easy everyone would be doing it.

3. Be aware if the offer seems “Hyped” and to good to be true. Make sure the person looking to invest your money can provide you with the information as to what the business is and how it operates.

4. Ask if your investment money is returned from revenue, or other investors. If your return comes back from other investors then it surely is a “rob-Peter-to-pay-Paul” principle and is illegal!

5. In order for your return to be from revenue there must be some kind of product, or service the business offers. You must ask were the business revenue comes from and verify the product, or services are legit and in place.

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