Saturday, November 28, 2009

Bought 100 Activision/End of the Carry Trade-Not Likely/Sysco/Euro vs. U.S. Dollar

1. End to the Carry Trade?: Last Friday, I discussed how the U.S. Dollar has become the currency of choice to effectuate the carry trade, whereby funds are borrowed in dollars at abnormally low interest rates, and risk assets are then purchased with those borrowed funds. U.S. Dollar and the Carry Trade/Sold 100 PMK at 9.2/Gold & Inflation Those assets would include stocks, junk bonds, gold or other commodities, or even another currency like the Australian dollar where rates are higher than in the U.S. For assets purchased that are not priced in dollars, the speculator would sell the dollars borrowed to buy another currency.

I read Randall Forsyth's column in where he argues that the Dubai debt problem is some kind of harbinger of the end to the carry trade. I am convinced that the abnormally low rates in the U.S. will work its way into more demand and higher prices for risk assets. The excess liquidity provided by the central banks is not finding a home in the real economy. | U.S. Department of the Treasury Bank Lending Down I would agree that the evidence points to it flowing into the purchase of assets. The carry trade is just one mechanism which facilitates the flow of funds to what Forsyth calls the global risk trade.

It would be premature to call the end to the carry trade based on Dubai debt's woes. The evidence cited by Forsyth for the end game, including Fridays small rise in the U.S. dollar, the one day fall in the market, and a small uptick in the prices of treasury securities, are far from convincing. If I looked at the market action from late last week without knowing anything about the Dubai World news, I would not draw any conclusions from it, other than there was a minor correction in stocks on light volume.

Does the Dubai World news mean anything long term? The excess liquidity has not been drained from the market; there is still little demand for those funds in the real economy; the alternative safe investments are still yielding close to nil; and Dubai has not collapsed. Some of the oil rich Arab states with more at stake may intervene. And, the size of the Dubai problem is relatively small even compared to the bailouts of single firms such as AIG and Citigroup.

If there is to be some unwinding of the carry trade, I would suspect that the origins will have nothing to do with Dubai World, but the simple fact that the riskier assets have appreciated so much in value that now would be an opportune time to unwind that trade by taking the gigantic gains before the herd starts moving the other way. And, while it is hard to imagine now, eventually U.S. interest rates will rise, possibly sooner than the consensus estimate of late next year, thereby making a continuation of using the dollar as a source currency unappealing.

One movement, the strength of the Euro against the dollar, makes no sense to me for the reasons previously discussed in a prior post. I read over the weekend that the experts had models that showed the fair value of the Euro at around 1.31. And, the buyers of that currency acknowledge that it has few friends at the current price and there is no large Euro area current account surplus to support the Euro. Further the buyers believe the European Central Bank will keep its benchmark rate abnormally low at 1% until the end of 2010. But, notwithstanding all of that the same analysts predict a rise in the Euro to the mid $1.50s or as high as $1.60 against the dollar. Apparently, the analysts are recommending more buying of the Euro based on the belief or hunch, or whatever you want to call it, that it will become even more over valued, sort of the buy and sell to the greater fool theory of investing. I currently own 50 shares of the double short ETF for the Euro and have long positions in the Canadian dollar and the Norwegian Krone. (see disclaimer)

I can see why some in Europe would want to use their currency to buy assets in the U.S. priced in dollars at the current exchange rates. I wish that I could buy some European securities using a U.S. dollar to buy €1.5 in Euros. (I just figured out how to type the Euro symbol on my Mac keyboard: shift+Option+ 2). Even Old Geezers can learn stuff, though more slowly and better than the Young Turks.

2. Bought 100 Activision Blizzard at $11.6 Friday (ATVI)(see disclaimer): This is the RB's contribution to the portfolio. Fortunately, the LB woke up long enough late Friday to keep the RB from entering an order to buy 1000. I am not going to allow the RB to explain its rationale, mostly gibberish about a video game Call of Duty. For those who are gamers this stock needs no introduction. It is the result of a 2008 merger between Activision and Vivendi Games. As a result of the merger Vivendi owns about 52% of ATVI.

ATVI has no debt. The recently filed 10-Q shows cash and cash equivalents of 2.360 billion and another 361 million in short term investments or about $2.15 per share. The current consensus estimate for 2010 E.P.S. is 77 cents.ATVI

Some of the major franchise titles include Call of Duty, Guitar Hero, Tony Hawk and World of Warcraft (the largest online role playing game with more than 11 million subscribers). Other titles include X-Men, Jame Bond, StarCraft, Diablo, Spider-Man & Transformers. (see pages 37-38 of Annual Report:

Activision reported recently that its new edition of Call of Duty reached 550 million in sales during the first five days after its launch: Reuters This is a link to a recent downbeat WSJ article about the videogame industry in the current economy. Still these games provide a lot of entertainment value for the dollar. It took the OG about a month to make it all the way to the end of Call of Duty 2 on the Xbox, after a few thousand violent deaths along the way.

3. Sysco (owned): Barrons has a favorable article on SYY in this week's issue. The author emphasizes the dividend yield, and the possibility that the shares may return to a historic average 20 P/E which would translate into a $40 price. SYY closed Friday at $26.83. SYY: The current dividend yield at that price is about 3.7%. In my last discussion, I emphasized Sysco's history of increasing the dividend, which is an important consideration for me. Item # 4 Sysco Some prior posts on this stock include the following: Sysco & Dupont Mentioned in Barron's Online Buys of CPB LQD SYY XKK

4. Observations on Gold and DXY Year over Year: Some say, with good reason, that gold goes up when the dollar goes down, but it far from a one to one correlation or a constant. Between 9/15/2008 to 3/6/2009, I ran a comparison of DXY, the Dollar Index, and GLD, the ETF for gold bullion. During that period, the dollar gained against the basket of currencies contained in DXY by about 15% and GLD gained about 20%. Between January to early March, both the dollar and gold were rising in price. Since March, however, the price divergence is just huge, no other way to describe it .DXY Index Charts - US Dollar Index Future But the year over year gain in the GLD, approaching 55%, is what causes the divergence, since the DXY has declined just about 6-7%. (a decline in DXY indicates dollar weakness against the basket of foreign currencies which include the Euro, Yen, British Pound, Canadian dollar, Swiss Franc, & Swedish Krona with the Euro having over a 50% weight: U.S. Dollar Index - Wikipedia)

Gold and inflation were discussed in Item # 3 from yesterday's post: U.S. Dollar and the Carry Trade/Sold 100 PMK at 9.2/Gold & Inflation

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