Spread Betting by Vince Stanzione

For months, I have been writing about why I have been buying the US dollar while other market experts were urging everyone to sell it. So far, I am very pleased with the returns that I’ve made

While we may see a short pause in US dollar strength, my view remains that the smart money will be made in buying the currency for the rest of 2010. One of the easiest ways you can back the dollar is to buy the UUP ETF, which is the Powershares DB US Dollar Index Bullish Fund.

Basically, the ETF tracks the Dollar Index Future, which is the US dollar against a basket of currencies. The basket is made up of euro 57.6 per cent, Japanese yen 13.6 per cent, British pound 11.9 per cent, Canadian dollar 9.1 per cent, Swedish krona 4.2 per cent and Swiss franc 3.6 per cent.

If you think the US dollar will strengthen against the basket then you buy UUP, whereas if you believe it will weaken then you buy the UDN, which goes up as the basket strengthens against the dollar. Both are listed on the NYSE and are easy to buy and sell.

US dollar – the best of a bad bunch
The US dollar remains the world’s reserve currency. While in the long term all paper currencies are going to collapse (history proves that every paper currency has) – since governments cannot resist the urge to print money, and if you have a currency that is not backed by precious metals then it’s not surprising paper money becomes worthless – the main two currencies that I see as remaining overvalued against the dollar are the euro and the Japanese yen. 
Greece’s recent problems have been documented elsewhere, and while a temporary solution may have been found, the fundamental problems with the weaker Eurozone members continue.

I expect to see more problems coming out of the Eurozone in the coming months, together with slow growth, while the US will deliver far better growth than most expect. A fair value for the euro/dollar going into year-end is $1.25, and we could easily fall as low as $1.10.

Japanese yen – a safe haven?
The Japanese yen has somehow managed to build up a safe haven reputation. However, a closer look shows that Japan has its own serious problems and it would welcome a weaker yen. Despite its strong currency, Japan is hardly a picture of health, with its ageing population, 20 years of stagnation and increasing government spending and debt.

I am looking for the US dollar/yen to move back to 100 and then 105 before the year-end. While I am bearish on the yen, I do like the look of Japanese stocks, and a weaker currency will help the large exporting Japanese companies.

As for the pound, I continue to remain short. Having said that, we have already seen a large adjustment, with the pound falling against all major currencies.

While I am still looking for a move to the dollar/pound of 1.40 before the year-end, the pound is starting to look relatively cheap against the euro and the yen, so I would be cautious about opening new pound trades at the current levels, apart from against the US dollar.

Dial into US telcos
One of the worse-performing sectors over the past 52 weeks has been the telecommunication sector, and two large Dow components and one FTSE 100 stock stand out as good value.

While the heyday of telecoms growth is over, these companies still throw off large amounts of cash and pay excellent dividends. 

Dow members AT&T and Verizon are both giving a yield of near 6 per cent. In the UK, Vodafone is paying 5.2 per cent on a p/e of less than nine times. Vodafone owns 45 per cent of Verizon Wireless in the USA, 3.2 per cent of China Mobile and 44 per cent of SFR, as well as operating the Vodafone brand around the world.

I don’t expect any of these stocks to soar, but with well-covered dividends and the potential to play a bit of catch-up, you could see a 10 per cent or more return on all three by the end of the year, with relatively low volatility.

Vince Stanzione has produced a home-study course to teach private investors how to benefit from trading financial spread bets and fixed odds. For more details, visit www.fintrader.net