- Written by Sara Nunnally, Editor, Insiders Strategy Group
- Hits: 640
Love it or hate it, the dollar has gained strength. Here's how you play it.
Let's face it... The euro has been a huge pain in the butt recently. Not only have European debt fears hit U.S. markets, the euro has sent gold and oil into a bit of a tailspin.
For anyone who has been watching both the U.S. economy and the EU, it's frustrating to see how much strength is being pumped into the dollar.
I just read an article by Rex Nutting from MarketWatch.com that said our debt situation is actually better than we think. He goes on to make the case that private-sector debt has been slashed as companies are paying off huge amounts of debt.
Total domestic debt (as a percentage of GDP) has declined for the past 12 quarters.
He said that our total debt load is increasing at the slowest rate since we started keeping records in the 1950s.
From the article:
As the political rhetoric about the federal deficit has heated up, we've lost sight of the progress that's been made in bringing total debt back under control. The U.S. is actually doing much better than you'd think if you just listened to the conventional fears about how we're rushing headlong into a debt Armageddon.
Kind of makes things all nice and rosy, doesn't it?
And when you combine this kind of analysis with the debt crisis in Europe, you've got a lot of folks believing in the strength of the U.S. dollar.
I can't argue against them right now. Take a look at the PowerShares DB U.S. Dollar Index Bullish ETF (UUP:NYSE) for the past three months.
But it's not necessarily from our economic growth, or the falling private-sector debt.
Much of that private debt was wiped out because the government stepped in with its hundreds of billions in bailout money. And that bailout money was newly printed by the Federal Reserve.
Again from the article:
In fact, since the recession ended in June 2009, total U.S. debt has risen at the slowest pace since they began keeping records in the early 1950s. While Washington has taken on a lot of debt since then, the private sector has paid off, written off or dumped on the government almost as much.
That in and of itself should tell you that the strength in the dollar is only relative to how far the euro has fallen.
But here's the thing... We can be right and wrong at the same time. I can tell you all I want that the strength in the dollar is fake, but that won't stop the dollar from rising.
Now check this chart out.
This is the UUP versus the CurrencyShares Euro Trust ETF (FXE:NYSE) over the past two years. That thick red line is a level of support that the euro broke through back in mid-May. Recent action shows the euro climbing back up to that support level.
You might have seen news that Spain was able to completely fund its bond program. That's responsible for this little pop in the euro.
I don't think it will last. The euro will find a lot of resistance over the next couple of days. That weakness will send the dollar higher.
There are two simple ways to play this coming move...
You can make a bullish bet by buying some call options on the UUP. There's a whole lot of volume on the July and September contracts for strike prices right around the current price of UUP.
Or you can make a bearish bet by buying some put options on the FXE.
The key to either of these opportunities is waiting. We definitely need to see some clear resistance right at that red line. For the FXE, that's just about at $126.50... about $2.50 from where the FXE was trading on Friday.
The next level of support for the FXE should come at $120... That's a significant drop for the euro, but it's within historical range.
With more trouble from the EU sure to come, and the probable exit of Greece from the eurozone, the FXE is in hot water, and put options could be very profitable.
Chart of the Day: What to Do With All the Data
By Adam English, Associate Editor, Inside Investing Daily
Big data is big business. Whether it is used to market products to customers or to determine which ads to display next to search results, companies that keep tabs on what you like have transformed what we see and how we see it.
Even though it has already hugely transformed online content and the world of marketing, big data is still in its infancy. It is going to get a lot bigger within the next couple of years.
Around 15,000 new jobs are expected to be created over the next six years as companies work to take full advantage of new analytical tools. The potential applications are mind-blowing.
Just take a look at one of the new companies that has been created in the past several years. Paradigm4 is a small startup that is creating the tools for real-time insurance analytics.
One of its clients is an insurance firm that would like to offer auto coverage on the fly. You would only buy insurance when you take your car out of the garage.
Marilyn Matz, the CEO of Paradigm4, stated, "In your car right now, when you plunk in an address, and it comes back and says: There are three routes. Now imagine that for each route, it would tell you the insurance you would pay for that route at that time of day."
Financial and pharmaceutical companies are working with the company as well to develop the systems they need to quickly get better information out of the reams of data they store.
Many of these new companies, including Paradigm4, are not publicly traded yet. If and when one of them develops a strong software system, there is no doubt they'll be acquired or go public.
Our editors have close eye on big-data developments. With how things are looking, there will be plenty of opportunities for investors within the next couple of years.