This ad is from Justice Litle, who edits the Macro Trader newsletter. I’m more of a micro-trader myself, but I’ve had a lot of questions on this one, and I keep seeing it cycle through my mailbox with that October 7 deadline, so I thought I’d take a look.
Here’s the promise in a quote from Justice Litle:
“Before October 7th, four men will make $53 billion crashing the euro…
“And this 5-letter code* could make YOU $100,000 when they do it.”
Litle goes on to paint a picture that essentially shows a repeat of “Black Wednesday” coming — that’s the day back in 1992 that George Soros famously made a billion dollars in a bear attach on the British Pound, joining with other large speculators to short it so heavily that it crashed.
It did, of course, have reasons to crash, too — the theory here is that when a currency becomes weak, and it starts to look like it’s going to falter, a concerted effort from large short sellers can take it down quickly … with profitable results for you, if you’re willing to sign up for Litle’s $795 subscription. It is, of course, “strictly limited” to 1,000 people, but somehow they manage to have not quite reached that number yet, so they’re still shilling like crazy.
Why limit it to 1,000 people?
“You see, the play I’m going to recommend in “Crash and Earn: How to Score $100,000 as the Euro Gets Sacked” isn’t as anonymous as currency trading.
“Nor is it as vast in scope as a blue chip stock investment, where thousands enter and exit positions on any given day…
“It’s a small, sensitive play — in a market with a lot of eyes on it, 24/7.
“And for savvy traders (like hedge fund managers), there are ways of detecting when a sizable number make the same play in this market at the same time… ”
Litle goes through several other examples involving Soros and some of the other huge macro traders in the investing world, largely hedge fund honchos — “Macro” just means that they’re making bets on big directional shifts in the global economy, not betting on particular companies or even, much of the time, on particular sectors.
His big reasons for speculating that this “attack of the billionaire” will happen by October 7th are …
“REASON #1: CONDITIONS — It’s no state secret that the European economy is faltering on many levels. But few truly realize how bleak the near future looks in Euro-land. According to the International Monetary Fund, the 16 EU-member countries that use the euro as currency (called the Eurozone) will contract by 4.8% in 2009.”
So basically, that’s half again as bad as the US recession. And he goes on to essentially say that the European Central Bank has been just as loose as the Federal Reserve and other banks, they just haven’t been open about it.
“REASON #2: RHETORIC — The European Central Bank is becoming increasingly noteworthy among economists and better analysts for spouting strong rhetoric about the integrity of the euro, but failing to back it up with sound interest-rate and lending policy…
“And now, people outside of banking and policy circles are starting to become skeptical of the ECB’s smoke and mirrors. People like journalists and investors.
“That’s why I’m betting that the upcoming quarterly statement of the ECB — if it’s anywhere near as rhetorically rose-colored as the last few — will raise red flags within the investing community.
“This should trigger individual and institutional short-sellers to begin taking substantial positions against the euro, driving it down. The four global macro billionaires I think are aiming to crash the currency have to get in before this happens, or they’ll leave billions in profits on the table…
“The date of that next ECB quarterly statement: Wednesday, October 7th.”
Reason three is that financial crashes are common in the fall. Won’t bother excerpting from that one, we all know that many of the famous market crashes have come in September and October.
And the final reason …
“REASON #4: PSYCHOLOGY — The last factor that makes it seem inevitable to me that the four billionaires I’m about to introduce you to will crash the euro is simple psychology…
“After Soros’ billion-dollar Black Wednesday success, a number of global macro speculators have been chomping at the bit for a chance to do it themselves — or do it again. “
OK, so this is a looooong argument that basically says you need to be short the euro to get in on the coattails of big macro speculators who are going to bring it down, and to do so before the next announcement from the ECB.
But he’s not advocating Forex trading, or going short the currency yourself — remember, we’ve got a “five letter code” to deal with….
“One 5-letter code is your key to a play that could yield you 100 grand when it happens…
“Only 1,000 people will get this code, and the clock is ticking…”
And a little summation …
“Add it all up and you’ve got a major world currency that’s facing an imminent collapse under its own weight — which, like with the pound on Black Wednesday — is catnip to the global macro tigers I’m predicting will crash it by October 7th.
“The catch is that they must forcibly crash the euro BEFORE it happens on its own.
“Otherwise, short-selling the currency won’t make them nearly as much. And with word starting to get out that little is propping the euro up now but rosy words from the ECB, they’ll have to do it soon.”
So what is it? Well, he goes on to give a few other oblique hints that clarify that this must be an options trade (it’s more visible than currency trading, it’s easier for small investors, a couple thousand people could swing the trade wildly) — and there is, whaddya know, an ETF that represents the Euro, and you can trade options on that ETF.
So here’s my guess: Justice Litle must be recommending buying put options against the CurrencyShares Euro Trust (FXE).
FXE has a fairly wide selection of options contracts available, but after skimming them to look at open interest and volume I’d guess that he must be touting the January 2010 $130 puts. This particular contract has very large open interest compared to others, and it has had very high volume lately, about 1,600 contracts last time I checked. Most contracts in this chain have volume of less than 100 contracts, and open interest of well under 1,000.
And there’s reason to look at these levels, if you just scan the chart of the FXE you’ll notice that it bottomed when the market did, back in November and March, at around $125, so there’s some logic to that level. The option trades for about 50 cents a share now ($50 per contract — a contract represents 100 shares), so if the FXE dipped to its lows at around $125 each contract would be worth about $5, so you’d multiply your money by roughly ten times, which makes sense with the tease that you could get a return of 10-20 times your money.
Of course, it certainly might not happen that way. I’m just trying to figure out what Litle is pointing toward, and it seems unlikely that he’d be so aggressive as to assume a really near-term move and buy something like the October puts that don’t allow him much time to be right. After all, even if you’re convinced that this attack on the Euro will go forward and that it will be successful, you can’t be certain of when exactly it will play out.
Oh, wait — I forgot to tell you the “secret” five-letter code. For this options contract, it’s FNKMZ. That’s the options symbol for that specific contract, the equivalent of the “ticker” for a stock. The ETF itself is essentially a trust run by Rydex that just takes the dollars invested by US traders and buys euros with them — in actuality they put those euros into something that pays a tiny bit of interest, and they use that interest to pay the expenses of the ETF.
There is a growing amount of punditry that predicts the inevitable demise of the European currency — whether because a few of the weaker Euro nations default, or because the ECB fails to contain inflation, or because the Euro zone countries have weaker economies than we’re currently guessing. Milton Friedman very famously predicted that a monetary union would fail after its first recession, and there are a lot of people who think he’ll turn out to be right.
I am far from being wise enough, or even macro enough, to know what the global tides of finance will bring for the euro — and remember, foreign exchange trading, which is what this ETF represents, is all about pairs, so when you’re buying FXE with dollars and Rydex (they manage the CurrencyShares ETFs) uses those dollars to buy euros, you’re betting specifically that the dollar will rise against the euro — so if you’re convinced that both the dollar and the euro will collapse, this might not be your trade … unless you’re certain that the euro will fall first, or harder.
And I could certainly be wrong about Litle’s chosen options contract, too — it seems extremely likely to me that he’s picking a FXE put option, but there are other relatively high-open-interest options out there as well, including the December $128 and the March $125, though neither of those has the big trading volume of the January $130 puts right now.
There are also other ETFs and ETNs that track the Euro, but none of them have the volume of the FXE, or, more importantly, any options trading volume to speak of. If you love this investment thesis but don’t want to trade options, there’s also a short ETF against the Euro, the UltraShort Euro from ProShares (EUO).
Oh, and I haven’t looked through all the data they release, but I don’t know of any reason to expect a quarterly release from the European Central Bank on October 7 — the ECB’s Governing Council (they’re the ones who set monetary policy) meets twice a month, a monetary policy meeting and an “other business” meeting, and they do have a monetary policy meeting scheduled for October 8, with a press conference following that (they don’t issue minutes, but after their first meeting each month they hold a press conference to explain their monetary policy decisions). I suppose it’s possible that this meeting will be the one that makes everyone notice that Jean-Claude Trichet isn’t actually wearing any clothes … I don’t know if there’s a reason why it would be this particular meeting, and not the one on November 5, or December 3, but perhaps Justice Litle really knows a secret, or maybe he’s just hung up on that “bad stuff happens in the autumn” bit (Soros did “break the Bank of England” in September, after all). Of course, there’s less urgency to subscribe to Litle’s newsletter if the news won’t break until December, so it’s just possible that has something to do with his deadline.
What do you think? Will the dollar rise in value against the euro (or, if you prefer the negative, will the Euro fall against the dollar?). I’d love to see that, if only to make a trip to Paris or Tuscany or Barcelona a bit more feasible for Mr. and Mrs. Gumshoe, like the good ‘ol days when a euro only cost about 80 cents in US dollars … but with the unprecedented amount of action from central banks around the world, I can’t personally say with any conviction that I have any idea what will happen to any of the world’s major fiat currencies. If you’ve got an opinion to share, please do so with a comment below. Thanks!
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