Sizemore Capital Allocation Update: Close Short Position in the Euro

The following is an excerpt from a Sizemore Capital Management internal trade memo:

With negative sentiment on the euro bordering on hysteria, we felt the time was right to take profits and close our short position in the common currency via the Market Vectors Double-Short Euro ETN DRR. All Sizemore Capital portfolios have been sold out of their positions in DRR.


As of Friday, May 14, 2010, the euro had fallen to 18-month lows to $1.2359. The euro was trading over $1.50 as recently as November.

Market conditions have now completely reversed since our initial portfolio move. In August 2009 we initiated the trade, believing that negative sentiment toward the U.S. dollar had reached irrational extremes and that the euro was being unjustifiably rewarded. We correctly pointed out that Europe’s financial woes were as serious as those of the United States, if not more so. The euro’s strength vis-à-vis the dollar was irrational, and shorting the euro was the correct thing to do.

Today, the negativity has shifted to the euro. The European Central Bank’s response to the Greek fiscal crisis had the effect of knocking the euro off of its pedestal as the alternative reserve currency to the dollar. European stock markets are in free fall, and it is now fashionable on financial news shows to predict the dissolution of the Eurozone. When comments like this become mainstream, a trend has generally run its course. In our view, closing the short position in the euro is the correct thing to do.

We were too early entering the trade, and our position in DRR lost money for the first four months. Our patience was rewarded, however, as the euro finally broke down. We may also be exiting the trade too soon and potentially leaving money on the table, but at this stage we believe the risk of staying in the trade outweighs the potential returns.

For historical reference, our original reasoning behind the trade, dated August 10, 2009, was as follows:

In light of the recent strength in the euro – which we view as unwarranted given the recessionary conditions in the Eurozone – we feel that a short position in the euro is appropriate. The dollar index is currently not far from its all-time lows. Given the extreme, almost universal bearishness towards the dollar (trader sentiment on the dollar index reached a low of 3% on August 3, 2009, according to Jake Bernstein) we feel that going long the dollar / short the euro makes sense from a contrarian perspective. Having visited Europe ourselves last month, we simply cannot find any economic justification for the current exchange rate. It is our belief that the dollar weakness / euro strength is primarily a result of the negative comments by China and Russia earlier in 2009 – in which both expressed an interest in ending the dollar’s role as the world’s reserve currency – and investor unease about the record US budget deficit, which is viewed by many as irresponsible. While we understand the bearish case against the dollar and are even somewhat sympathetic to the views, we feel that the market has mispriced the euro in response. Yes, the dollar is “bad,” but is the euro fundamentally better? We would say no. Furthermore, the US current account deficit has been shrinking since the onset of the crisis, partially neutralizing one of the most often cited reasons for the dollar’s weakness.

Other Portfolio Moves

Our short position in gold via the Proshares Ultra-short Gold Fund GLL is currently close to hitting our stop loss and is under review. Like the euro, we believe that gold’s strength is irrational. That said, we set a hard 25% stop loss when we initiated the trade, and we intend to follow it should gold continue to rise.

At this time we have no immediate plans to reallocate the cash portion of our portfolios.


Charles Lewis Sizemore, CFA

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