A Contrarian Twitter Strategy

For years I’ve advocated using Yahoo Message Boards as an indicator of the investment herd. The theory is that the most promising investment ideas are usually those found well off the radar screen of most market participants. By the time investors are busily chatting about the bullish prospects of XYZ, the real gravy has already been made.

It used to be that if you wanted exposure to the broad stock market, buying Vanguard’s Index Trust S&P 500 (VFINX) was just about the only option in town. As the 1990s bull market—and faith in indexing—wore on, other funds cropped up to compete, along with an ETF (the first ETF), the now legendary SPDR S&P 500 (SPY). For years it traded in near obscurity on the American Stock Exchange before ETFs because as ubiquitous as, well, as mutual funds themselves.

Stock index futures have been used by institutional investors since the early 1980s, but failed to attract a dedicated retail investor base until the successful introduction of the Chicago Mercantile Exchange’s (CME) electronically traded E-mini futures contract in 1997. I was on the CME floor the first day it began trading and couldn’t help but notice the old timers from the open-outcry hog and cattle pits dismissing it. Now those guys are all retired or looking for work.

Traders with an interest in stock indices generally choose between either ETFs or E-Mini futures. In a recent white paper, the CME is making the case for using the E-mini over comparable exchange-traded-funds.

Essentially, the advantages include true 24-hour trading and substantial ability to leverage your capital more than you can in a stock account. The E-minis also offer deep liquidity. More than $138 billion worth of E-mini S&P 500 futures trade each day, exceeding the value of the ETFs by more than $100 billion.

While the leverage advantage is attractive, the problem with futures contracts for most retail traders is the—eventually, they expire, and therefore must be rolled over into new contracts, a process most speculators don’t understand or particularly like. They’d much prefer to wait for a security to “come back” before accepting a loss and rolling over the position into another expiration. Additionally, a spate futures account is still a novelty for the average speculator who is much more comfortable trading through securities firms like Fidelity, Scottrade or E*TRADE (ETFC).

Casual speculators should stick to the ETFs. More advanced participants, especially those comfortable with higher leverage and more active trading, should most certainly look into the E-mini.

Even as the a soaring budget deficit expected to top $1.85 trillion this year, Moody’s Investors Service (MCO) sees no “credible alternative” to the US dollar, telling Bloomberg that the U.S. credit remains solid and well-supported.

They say that predictions are like smiles—everybody’s got one. After completely missing the credit collapse, Moody’s reputation has seen better days, one reason hedge fund wunderkind David Einhorn of Greenlight Capital has been betting against shares.

What Moody’s fails to acknowledge that, even if the greenback remains the world’s reserve currency, even a small shift in capital allocation can make a huge difference in price.

Source: IMF

Indeed, since 2000, the percentage of official foreign exchange reserves held in dollars has dropped from 70.5% to 64%. Those held in Euro, on the other hand, have risen from 18.8% to 26.5%. With the exception of a dramatic pop in 2008, the US dollar index has dropped steadily since the turn of the century—from 120 to around 80 today.

Clearly, the dollar isn’t the only comfortable store of value anymore and it’s easier than ever to pass judgment on the relative merits of any country’s particular currency using funds from providers such as CurrencyShares or WisdomTree. Most simply, individual investors can bet against (or for) the dollar using funds such as PowerShares DB US Dollar Index Bullish (UUP) and PowerShares DB US Dollar Index Bearish (UDN).

If you trust Moody’s, I invite you to go ahead and keep all your dollars in dollars. But of all the ways to diversify a portfolio, I believe foreign currency, even now, remains the most compelling opportunity for enterprising traders looking to spread the risk.

Back in 2003, the developing market for political futures was dealt a severe blow as a Department of Defense funded Policy Analysis Market, which would have listed futures contracts based on events in the Middle East, was publicly eviscerated. The program was immediately denounced by pundits and politicians, including Senator Byron Dorgan (D., N.D.), who called the idea “useless, offensive and unbelievably stupid.” The program was canceled within a day and the leadership behind it immediately resigned.

No matter, because the private market has been successfully trading event futures for years now, most notably through markets such as TradeSports and Intrade. I myself was among the early participants in the Iowa Electronic Market during the internet’s earliest days.

Waiting in the wings is the soon-to-be-launched American Civics Exchange, billed as the first U.S.-based commercial market for political futures. Unlike existing event futures, which often center on a particular economic statistic such as the Consumer Price Index, the upstart exchange aims to offer contracts to hedge against changes in public policy. One functioning, you’ll be able to buy or sell contracts based on increases in the minimum wage or even the enactment of “cap-and-trade” emissions regulation.

Unfortunately, thanks to SEC regulations, right now the exchange will be limited to financial corporations, and individuals with—wait for it—a net worth of greater than $10 million. It’s yet another example of the government prohibiting you from investing your own money as you see fit.

For individual investors interested in political futures, Intrade remains the best option. Contracts now trading indicate only a 40% chance of a federal government run health insurance plan to be approved before the end of the year, down from 50% in June. Traders are indicating a 7% chance either the U.S. or Israel executes an air strike against Iran before October, down from 40% odds last year.