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lemoneater (56.84)

An Alternative to ForEx Trading?



April 26, 2011 – Comments (14) | RELATED TICKERS: FOR , E , X

My impression of ForEx trading is that if one doesn't know what one is doing one can be taken out to lunch and eaten as the main course.

I'm not a macro economist, but I'm still concerned about what a weaker USD means to an ordinary investor. I would like some of the diversification benefits of trading in foreign currencies without the need for enormous funds, the high pressure, the time commitment, and the steep learning curve which seems to characterize successful ForEx.

I already invest commodities and metals in an effort to provide for inflation since money does grow in trees and the FED keeps making more :). I also invest in American companies which have a large percentage of their customer base overseas like HNZ and KMB, or in Canada like SE. Some of my foreign companies have their earnings in euros, some in shekels, some in Hong Kong dollars, some in rupees, and some in Japanese yen.

Is investing in ADR's a practical alternative to ForEx trading or am I kidding myself?




14 Comments – Post Your Own

#1) On April 26, 2011 at 2:22 PM, ikkyu2 (98.20) wrote:

I own a few ADRs, one practical benefit is that the companies in question often transact their business in currencies other than dollars.

Currency imbalances even out in the very short run.  Suppose I have a dollar and a ruble and each one buys me a frozen pizza; meanwhile, on the forex market, I am told I can get a dollar for a ruble, or a ruble for a dollar. Now fast forward 1 month, and the dollar still buys a frozen pizza but the ruble buys two frozen pizzas.  The forex market hasn't caught on yet.  I'm going to spend my ruble, buy two frozen pizzas, import them to the US and sell them for 2 dollars.  Now I have 3 dollars.  When I go to the forex market to convert them to rubles, I get 3 rubles.  I convert that into 6 pizzas, import them to the US, and sell them for 6 dollars.

Pretty darn soon, the demand for rubles jacks up the exchange rate and this carry trade stops working.  Trying to profit off the slim margins of inefficiency that the currency exchange markets allow is in my opinion a sucker's game because what you are really doing is making bets on how quickly or slowly the markets will correct away inefficency.  That is something that most people aren't well-informed enough to do.

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#2) On April 26, 2011 at 3:40 PM, ChrisGraley (28.63) wrote:

Can't I just eat the pizzas?

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#3) On April 26, 2011 at 4:14 PM, lemoneater (56.84) wrote:

Thanks, ikkyu2, very helpful explanation. Since I'm abysmal at market timing, I'm very glad that I've decided to avoid ForEx. Now I'm even happier that I have some ADRs.

Speaking of pizza, Chris, I love Papa Johns. I've considered purchasing stock in PZZA if it dips down again to the $20's to defray our weekend splurges.

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#4) On April 26, 2011 at 5:58 PM, chk999 (99.96) wrote:

I own a number of companies that have ADRs. In general this seems like a good way to buy strong companies that are not in the US. Don't buy just for the ADR, but buy a good company at an attractive price and then if you get some currency boost, that is gravy. 

One note: Many of them seem to have small fees and taxes that get collected out of dividends. None of these are lethal, but they are there and if you own them in a tax advantaged account, you can't report them on income tax.  

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#5) On April 26, 2011 at 6:20 PM, Betapeg (< 20) wrote:

Use currency ETFs. Forex is highly leveraged and not for the faint of heart. I have been almost wiped out by a small move only to barely be saved from liquidation by a reversal in my favor. I'm talking less than 1% moves which can wipe you out. Currency ETFs trade like stocks without the huge leverage but because currencies move very little day-to-day, so do these ETFs. But if you want a less risky way of trading currencies, I think that's the best option.

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#6) On April 26, 2011 at 10:01 PM, rd80 (95.80) wrote:

Investing in ADR's is quite a bit different than forex.  Both can be fine investments, but they aren't substitutes for each other.

With an ADR you get both the equity risk/reward and the currency exchange risk/reward.  Holding a foreign currency - either directly or in a ETF - just gives you the currency exchange r/r and, sometimes, a better interest rate than here in the US.

You also probably have some decent currency diversification just with your US equity holdings.  Many US companies do a significant amount of their business overseas.  I think the S&P500 companies as a whole have nearly half their revenue from outside the US.

If you want exposure to companies outside the US, look for quality non-US companies that trade as ADRs, US companies with significant ops outside the US or an international mutual fund or ETF.

If you want to diversify your cash exposure, look into ways to hold other currencies.  Most of what's in this old blog is probably still relevant to ways of holding other currencies, some of the comments added other good info.

I also a poor market timer, but get very nervous when something moves as far and fast as the US $ has fallen.  Other than the planned end of QE2, I don't see anything on the horizon to stop the fall, but it has been a pretty dramatic move and might be ready to reverse for a bit.  Or maybe not.  How's that for a useless opinion?


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#7) On April 27, 2011 at 9:26 AM, lemoneater (56.84) wrote:

This is another instance where I wish I could rec the comments. Thank you!

#5 Betapeg it's good to hear from you. Thanks for the helpful comment. Your experience confirms my impression of ForEx. I will have to check out currency ETFs. I know that recently my brokerage Schwab started advertising certain ETFs.

#6 rd80, Thanks for clarifying the difference between investing in ADRs and in ForEx. From what you and Betapeg both said it sounds like a currency ETF is the closest way to mimic forex risk/reward without being taken to the cleaners.

Perhaps I should forget about currency altogether and buy more Depression glass. Antiques go in and out of demand. Right now that kind of collectible is dirt cheap. :)




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#8) On April 27, 2011 at 12:39 PM, Betapeg (< 20) wrote:

Here is a list of currency ETFs. 

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#9) On April 27, 2011 at 3:27 PM, lemoneater (56.84) wrote:

Thanks, Betapeg! I'll check it out when I have time.

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#10) On April 28, 2011 at 7:35 AM, lemoneater (56.84) wrote:

At the moment I'm most interested in the ETF's FXA and BNZ as parts of the world which I don't think I have many (if any) investments in. I will have to check where my multinationals do business.

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#11) On April 28, 2011 at 1:21 PM, Betapeg (< 20) wrote:

I haven't played with currency ETFs but I do play in the FOREX market and currency futures market. My current trades are...

Long on AUD/JPY = Australian Dollar / Japanese Yen

Short on USD/HUF = US Dollar / Hungarian Forint

I did an interest rate analysis and paired the Australian Dollar and Hungarian Forint, both who have interest rates in the 4-6% range, with the US Dollar and Japanese Yen, who both have interest rates less than 0.25%. I hedged my trades by buying Japanese Yen futures and US dollar futures.

They don't perfectly hedge but I made the total positions as close to each other as possible so they hedge as much as possible. Currently, all these positions together are netting me a $4000 profit. I'm holding for a long while. Only when they start changing interest rates do I unwind. I could make a lot more as my profit is made only from a 2 week movement. If I hold for 1 year, I can only imagine what I'd be making, or losing. But that's what the hedge is for ;-)

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#12) On April 28, 2011 at 4:42 PM, lemoneater (56.84) wrote:

Very interesting, Betapeg. Thanks for the information. I certainly want to take advantage of the better interest rates on the AUD!

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#13) On April 28, 2011 at 6:52 PM, rd80 (95.80) wrote:

lemoneater - many thanks for the article idea.

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#14) On April 29, 2011 at 7:46 AM, lemoneater (56.84) wrote:

Thanks, rd80! I'm honored that my question would suggest an article topic. I know others are wondering how to invest with such a weak dollar.

Have a great weekend!


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