Short the Yen

Architect of the Fiscal Cliff Doomsday Machine

Another week goes by without a resolution to the fiscal cliff crisis, but to adapt a line from Dr. Strangelove, investors have learned to stop worrying and love the cliff.

Statements from the White House and the House of Representatives have stopped moving the market, and investors have gotten back to their usual routine of fretting over economic news releases.  This morning, U.S. non-farm payrolls came in above expectations at 146,000 jobs, and the unemployment rate dipped to 7.7 percent.

In the convoluted logic of the markets, this can be either good or bad.  It’s clearly good that the job market is improving, but not necessarily good for the stock market if it means that the Fed might put the brakes on its quantitative easing.  But for now, I wouldn’t worry too much about that.  We’ll still at least a year away from a change in policy by the Fed.

In recent weeks, I’ve  recommended that investors get more aggressive with exposure to emerging markets (see “China is a Buy”) and in technology (see “Ride the Bull Move in Tech”).  Apple’s (Nasdaq: $AAPL) recent sell off has dragged the tech sector down a little, but I still believe that more aggressive, cyclical sectors are the place to be right now (and so does Warren Buffett, for that matter).

But today, I want to discuss trading opportunities on the short side.  I wrote recently that Japan is a dead man walking, and the yen looks particularly weak to me right now.  Over the next several years, I see the yen going the way of a banana republic currency (as in paying for a cup of coffee with a 10 trillion yen bill), but even in the short term I see decent downside potential.  The yen has already been sinking for three primary reasons:

  1. It was grossly overvalued to begin with
  2. Its value as a “safe haven,” which was always ludicrous in my mind, is diminished with Europe stabilizing
  3. Investors worry that the new Japanese government will unleash unprecedented quantitative easing in an attempt to restart inflation and lower the value of the yen.

The trend is already in place, but I believe it has a lot longer to run.

Action to take: Buy the ProShares UltraShort Yen (NYSE: $YCS).  This is a leveraged fund, and I expect of 30-50% over the next 12-18 months to be a real possibility.  But in the event I’m wrong and Japan’s day of reckoning is postponed, use a 15% trailing stop.

Disclosures: Sizemore Capital has no position in any security mentioned. This article first appeared on TraderPlanet.

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