There are numerous stories circulating in the press about the collapse of emerging currencies and four of the five portfolios we track show the effects of this volatility.
The turmoil began when the Icelandic kroner came under pressure due to its high government debt. Concern over other currencies has followed.
Despite this fact, the Asian Portfolio has continued to rise from the +75.19% October 21, 2006 to March 5, 2006 position to a 76.45% gain as of March 14, 2006.
The other portfolios have dropped.
The Emerging Market portfolio is down from 61% to 43.04%.
The Dollar Long Portfolio dropped from + 11.60% to 4.97%
The Dollar Hedge Portfolio dropped from + 9.93% to 3.44%
The Dollar Short Portfolio dropped from +7.22% to -0.97%
This unsettled marketplace first of all reminds us why we do not leverage more than we can afford to lose. What the markets give they can quickly take away. Secondly this sudden movement stresses the importance of diversification in your currency portfolio. Third these portfolios are weathering this storm due to the fact that they are conservative in their leverage. The loans only represent two times the investment rather than the maximum possible four times the investment.
Investors who have leveraged more than double in just in one or two of the wrong currencies may have been clobbered.
In these models we track, four of the five portfolios still have respectable performance despite these market jitters.
The small loss in the US Dollar Short Portfolio shows that the herd instinct is intact in the market. Investors who were speculating have rushed back to the US dollar.
I am not recommending any changes in the portfolio at this time, but if I were to makes changes it would be away from the dollar and into more emerging currencies.. This is exactly opposite the trend, but fundamentals suggest the dollar will suffer parity loss sometime ahead. Massive movements in the opposite direction of fundamental realities simply enhances profit potential for those who remain logical.
There are two reasons why no shifts are being made at this time.
First, trading reduces profits as trading costs increase.
Second, the herd is usually wrong and most turmoil is short term.
When our first MultiCurrency Portfolios were published in the early 19990s we recommended borrowing Japanese yen when it was valued at 111 yen per dollar. The yen then appreciated all the way to 79 yen per dollar. Some investors panicked but those who held on were well rewarded when the yen collapsed to 146 yen per dollar. Today the yen is back in the 11 range. Over the long term, (15 years) all this volatility produced very little change in the yen parity. Wise investors who held onto their low cost yen loans profited from positive carry year in and year out.
Every investor must choose what the MultiCurrency Sandwich means to their portfolio. This can be a highly speculative tool, a diversification, or a play on the positive carry.
Our goal here is to learn by observing these portfolios as plays on the positive carry. This is an educational experience so use what we see here to learn, but be sure to consult with your financial advisor about your actual portfolio to make sure that you are adapting your sandwich based on your actual investment plans.