Monday, April 22, 2013

Updating the Alpha-D for April 2013

I did not make any changes at all to my portfolio today.  This is the first trading day after an options expiration weekend, but I did not have any options expire last month.  My only option position is a long put against FXE because I remain confident that the euro will not survive in its present form.

I remain long GDX as a hedge against the onset of high inflation.  I am also long FXA, FXC, and FXF because I believe the currencies of Australia, Canada, and Switzerland will retain their value if inflation devalues the U.S. dollar.

My only concern with the Guggenheim CurrencyShares products is that their custodian in the UK is JPMorgan Chase.  The prospectuses for these ETFs make it clear that JPMorgan Chase is the depository for the currency accounts and that its potential insolvency would make the ETF an unsecured creditor.  That would not have been much of a concern for me before the Cyprus debacle.  Since then, I have become convinced that the bank resolution model the troika applied there is now the model that US and UK regulators will use for insolvent banks.  In other words, unsecured creditors of JPMorgan Chase cannot expect a bailout that will preserve its existing balance sheet.  We can instead expect to see unsecured creditors get nothing.

I reserve the right to alter my currency ETF holdings at any time if I believe JPMorgan Chase will ever be in danger of becoming a Lehman Brothers or Bear Stearns.  Its derivative exposure and freewheeling "London Whale" risk bets give me pause about whether currency ETFs custodied with JPMorgan Chase are useful to me over the long term.

Full disclosure:  No position in JPM at this time.