Currency Trade: Long USD, Short Euro

This is not a new trade (short EUR/USD), in fact both this trade and the long yen trade (against almost any currency) have done very well the last few months. However, European economies are actually in worse shape than the US and their financial systems more troubled, though for somewhat different reasons. Europe is now dealing with a deep banking crisis and Asia faces a plunge in exports, the financial contagion will be more deeply felt outside the United States than within.

"In contrast with the United States, Europe's banking systems is fraught with many portions that are not very healthy. Italian, Swedish, and Austrian banks are far too exposed to Central Europe, which is now in a credit crisis. German banks' corporate ties have left them with poor assets far greater in value than anything American subprime practices created. In addition, Spanish and Irish banks face much deeper subprime problems relative to their economic size than American banks. And the list goes on and on. So while the United States has a liquidity crisis that can be addressed "relatively" easily, Europe faces a banking debacle that has been uncovered by the liquidity crisis -- and dealing with that banking debacle is likely to take more than a year. "

With these ongoing problems in Europe, the ECB will be forced to continue to cut rates more dramatically than previously thought and increase liquidity injections. All this points to a stronger USD vs. the Euro. In addition, further market weakness will lead to a continued flight to safety, which means a strong USD. Look for possible EUR/USD parity within 12 months or less.

Sell Energy, buy Housing! Reverse Bob Doll Strategy

Bob Doll is CEO of BlackRock, one of the largest money managers in the US. I worked for Merrill Lynch in 2006 & 2007 and BlackRock is/was half owned by Merill. Bob Doll would send weekly market outlooks and he was consistently more bullish than any of Merrill's lead analysts or economists. Almost every interview I have seen with him has been overly bullish. I don't claim to know Doll's investment record, but I don't recall BlackRock having a whole lot of great mutual funds.

For those reasons, I am jokingly suggesting a reverse Bob Doll long-short strategy. Today, on Bloomberg Doll suggested that energy stocks are cheap and housing stocks are still in trouble. Our reverse strategy will be to do the exact opposite. We will sell the energy ETF (XLE) and buy the Dow Jones Housing Index (IYR).

Please don't actually put on this trade unless you have your own reasons to do so. I hate to bet against some of the most respected investors, even if they are wrong more than half the time.

Long-Short Strategies: Wells Fargo & JPMorgan

Looking for a long-short trade to put on to get some uncorellated returns and limit your market exposure? Here is the rationale.

Wells Fargo (WFC) is by far the strongest major US bank. It sells more products to each of its customers than other banks and has grown organically as well as through acquisitions. More importantly, it just acquired Wachovia which operates in markets Wells is already familiar with (unlike JP Morgan's purchase of Wamu). Wells has suffered no 11 figure write-downs like many of its peers.

JP Morgan (JPM) is also a strong US bank. However, JPMorgan will conceivably face more problems integrating Wamu than Wachovia, particularly with respect to California where JPMorgan has almost no experience. JPMorgan will remain a leader, but may find Wells Fargo is new leader.

Here is the real reason for the trade:
WFC Price (11.13 11.20am EST): 27.28
JPM Price (11.13 11:20 am EST: 35.04

Wells Fargo Market Cap: approx $91.5b (11/13)
JPMorgan Market Cap: approx $130b (11/13)

Wells P/E = 13.5
JP Morgan P/E= 16.1

Wells yield = 4.7%
JP Morgan yield =4.2%

Which one of these stocks is cheaper?
I think Wells is the better bank, but even if you believe they are even, JPMorgan looks to be about 10-15% overvalued relative to Wells. I don't know what the financial sector will do the next few months, but I'd put maybe 5% of a portfolio in this mostly market-neutral trade that could pay off 10 % or more in the next couple months. Will check back in a bit to see how this trade does.


Update: Since recommending the trade WFC is down to $20.91 from $27.28, JPM is down to $20.33 from $35.04. Wells the long part of our trade is down 23%, but JPM, the short portion of the trade is down 42.1% for a 19% gain on our market neutral financial trade.