Brexit, Cybersecurity & March ‘17 skinny

August 24, 2017 04:50 PM

In three issues of Modern Trader, beginning with the December 2016 issue and ending with the April 2017 issue, Paul Cretien detailed the response of six currencies – euro, Swiss franc, Australian dollar, Canadian dollar and Japanese yen – to the pound’s price decline following the Brexit vote. He suggested their central bank would defend export markets by weakening the currencies, which also would strengthen the U.S. dollar.

Predictably, when the other currencies reduced their prices versus the pound, the U.S. Dollar Index was forced higher. Beginning with the December 2016 issue of Modern Trader (available on  Nov. 1) traders acting on Cretien’s analysis in “Taking Advantage of Brexit” (see Modern Trader, December 2016) would have sold the euro, Swiss franc, Australian dollar, Canadian dollar and Japanese yen while buying the U.S. Dollar Index.

One recommendation that accompanied the predicted forex movements was that exchange traded funds (ETF), would be a convenient way to trade the Brexit response. ETFs typically reflect price changes in the underlying currency futures.

To estimate the profit potential based on Cretien’s currency recommendations, you need to view the cumulative percentage price changes in related ETFs starting on Nov. 20, 2016, and extending to the end of the year. Forecasts of currency price changes in November and December 2016 were made in September, approximately two months ahead of the market. This time lag between submitting an article and its publication is normal.

Putting the recommended trades into action, a trader could sell short $5,000 of each of the following ETFs: FXE (euro), FXA (Aussie), FXY (yen), FXF (Swiss franc) and FXC (Canadian dollar). The proceeds from the short sales would be used to buy $25,000 of the U.S. dollar ETF, USDU.

From the original buy and sell trade on Nov. 20, 2016, the ETF prices through Dec. 28, 2016, dropped by the following percentages: FXE, 2.11%; FXA, 2.36%; FXY, 5.28%; FXF, 2.01%; and FXC, 1.09%; while the USDU increased 2.45%. Based on $5,000 for each currency ETF and $25,000 for the U.S. dollar ETF, the relatively cost-free investment returned a total of $1,255. The time span during which a similar profit might have been taken ranged from Dec. 22 through Dec. 28, with the Christmas holiday falling in the middle.

“We took advantage of Brexit” shows that the pound’s competing currencies managed to lower their prices and in so doing, increased the price of the U.S. Dollar Index. Were you able to take advantage of this great Brexit episode by doing just what the world’s central bankers were doing — competing for low price for their currencies?

In the April Spin-Off department Joe Cornell highlighted the recent spin-off of Yum China (YUMC) from the YUM! Brands (YUM) fast food empire. Cornell valued YUMC at $35, a 25% increase from its value at the time, which it reached by early May. YUMC has continued to shine, rallying an additional $7 by early June.

March  2017: DOW 21,406: Our Experts’ 2017 projections
In our March 2017 forecasting issue we reached out to our friends at Eidosearch to provide their quantitative forecast for where the Dow Jones Industrial Average would be on Dec. 31, 20017. As of June 29, the Dow was within 10 points of Eidosearch’s 21,406 projection for the Dow.

Buy Cybersecurity Stocks:

The overall theme of the issue was that with the hacking of the U.S. Presidential election and numerous breaches in security of major banks and retailers, cybersecurity would be the hot sector for 2017. Timothy Summers suggested we would see an increase in state-sponsored cyber attacks in the form of targeted espionage, denial of service and data breaches. He cited analysts’ predictions of a $1 trillion increase in cybersecurity spending during the next five years globally.

Summers highlighted several stocks that could take advantage of the upswing in spending. Among the “safe bets” Summers discussed Symantic (SYMC), which rallied roughly 15% in the first half of 2017 before retreating in June, and Palo Alto Networks (PANW), which dropped more than 20% on a weak Q2 earnings announcement on March 1, but has since recovered most of that ground. He also cited more adventurous stocks including Cyren (CYRN), which has traded in a range for most of 2017, and Imperva (IMPV), which has rallied roughly 15% since Feb. 1.

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