A Double-Edged Sword For Equity Investors: Currency Hedging

By James Picerno

Interesting insight by an author, James Picerno.

The US dollar has had a rough ride so far in 2017. The Federal Reserve’s Trade Weighted US Dollar Index that tracks the major currencies has tumbled roughly 8% year to date through last week’s close. The greenback’s slide, however, has delivered a substantial return premium for US investors who own foreign assets in funds sans currency hedging.

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5 Reasons To Fear The Market Fall

By Michael Pento

This powerful and protracted bull market has made Cassandras look foolish for a long time. Those who went on record predicting that massive central bank manipulation of markets would not engender viable economic growth have been proven correct. However, these same individuals failed to fully anticipate the willingness of momentum-trading algorithms to take asset prices very far above the underlying level of economic growth.

Nevertheless, there are five reasons to believe that this fall will finally bring stock market valuations down to earth, and vindicate those who have displayed caution amidst all the frenzy.

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Market insiders selling at the top to retail investors. Is the crash near?

Optimism about U.S. President Donald Trump’s pro-growth economic agenda has lifted U.S. equities to record high territory, with the Dow marking its ninth straight record close on Wednesday.

Overall, U.S. stocks are now up almost 15% since the election, boosted by Trump’s promises of tax reform, infrastructure spending and bank regulation.

The tremendously high valuations has led to some hedge funds to bet that the rally is coming to an end, as enthusiasm over Trump’s policies is overdone and political risk in Europe isn’t priced in.

The level of shorts – a bet that a stock will fall – taken out against the Dow Jones Industrial Average jumped 13% in the 30 days to February 20.

In addition, the first seven weeks of this year have seen insiders selling 5.5-times as many shares as they bought, meaning that insiders are dumping shares at an aggressive pace.

This comes at a time when retail investors are jumping into the market looking to make some quick gains.

Trump has been credited with being a major catalyst behind Wall Street’s impressive rally since election day, with some dubbing it the “Trump Jump”, as investors welcomed his promises of tax reform, infrastructure spending and deregulation.

However, recent gains have led to speculation of a near-term reversal with some fund manager likening the current stock market euphoria to the dotcom bubble, which reached a peak on the last day of 1999 and then burst dramatically.

The question remains, who or what will be the cause of the reversal.

 

Credit to: Investing.com