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International Investing: The Best Use For Your Failing Dollars

Posted November 29, 2007

Today’s Financial News Research Report:
The Best Use For Your Failing Dollars: Options Against This Overseas Telecom Stand to Gain 60%-100% When the Dollar Tumbles Another 6%

by Adam Lass, Market Analyst, WaveStrength Options Weekly
November 29, 2007

Today’s Financial News feed provides an independent and practical perspective on the U.S. and global investment markets. Subscribe in a Reader or Subscribe via e-mail

A popular exercise this time of year is to note how much more it takes to buy the various items listed ad nauseum in a 16th-century folk ditty.

Officially published in London in the late 18th century in a compendium titled “Mirth Without Mischief,” and updated by Frederick Austin in the early days of the 20th century, “The Twelve Days of Christmas” offers wags and pundits an annual opportunity to carp as to how low the dollar has sunk over the past year.

I believe that it costs some 6% more this year to pay maids (young or old) to milk, etc, etc. Not that this is news to any great extent.

Washington’s “strong” policy shrinks the dollar 30%

Washington luminaries, such as U.S. Treasury Secretary (and former GS “Maximum Leader”) Henry Paulson, insist that the Feds have a strong dollar policy in place for years. This leads one to wonder what the Forex landscape might look like if they espoused a weak dollar, as the poor thing has withered some 30% over the past five years.

This slide does not appear to be coming up short anytime soon. An array of depressive forces ranging from generic fears of recession to specific concerns regarding available credit, all lead one to assume that various agents of the government will continue to open the cash taps.

And since we are on a GDP oriented economy, and said GDP is not growing anywhere near par with the rate of dollar creation and distribution into the economy, one cannot be surprised that the U.S. Dollar has fallen to a record low against the euro at $1.4968 and to a 2½-year low against the yen at 107.55 yen.

A familiar “flushing” sound

Indeed, when perusing the statements coming from outside the Washington Beltway, one hears that the market is looking for any confirmation that the Fed will need to cut rates this year as opposed to next, and the more the market becomes convinced of that possibility, “the more the dollar will be under pressure” (this from RBC Capital Markets’ Matthew Strauss).

Banc of America Securities is more specific, calling for the Fed to deliver three cuts, which will chop the fed-funds rate to 3.75% by the end of the first quarter. These expectations are confirmed by the Futures markets, which continue to price in a December rate cut to bring the fed-funds rate to 4.25%.

And speaking of Mr. Paulson’s Treasury Department, shorter-dated maturities are falling fast, with yields on the U.S. government’s two-year bond losing another third of a percentage point last week, eroding the yield advantage that the U.S. had over other nations.

Get your dollars out of town

With all this dollar doom and gloom resounding throughout the global markets, it is easy to understand why one might look to Europe or Asia for places to park what remains of one’s dollars.

There is, however a more imaginative solution available located dead center between the two.

Turkey has lived on the great divide between East and West for millennia at least, vacillating one century to the next between European Emperors and Asian Khans. Of late, they have had ambitions toward joining the great Western commercial alliance a.k.a. the EU.

Turkey turns it around

Problem is, at the beginning of the 21st century, Turkey was in complete and utter economic shambles: as of 2001, GDP growth was negative 7%, and inflation was 54%. So the Turks hired a polished 22-year World Bank veteran and evident economic genius, Kemal Dervis.

Dervis used his independence from the Byzantine political structure to push through a tough stabilization program with far-reaching structural implications, including the liberation of Turkey’s central bank the reform of agricultural, energy and budget policies.

The end result? The reduction of government controls on foreign trade and investment and the privatization of publicly owned industries allowed Turkish inflation to fall off to single-digits. Unemployment fell, GPD jumped and investor confidence and foreign investment surged.

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Relaunching the lira

As a capstone, on January 1, 2005, Turkey re-launched its currency by dropping six zeroes off the old lira to create a powerful new lira. Now, instead of worrying about annual inflation of 106%, Turkey’s economy minister must worry (if that’s truly the right word) that the lira is now too strong.

In a recent interview with Reuters, Mehmet Simsek noted that, ” …the lira is probably overvalued to some extent. The currency is a bit strong, the lira is rich.” Internationally, the lira is trading just off six-year highs against the dollar, having appreciated some 20 % in 2007.

While some whine that this might slow Turkish exports, Simsek appears to be reveling in the prestige and claims no intent to interfere in the decisions of the central bank: “We have a floating exchange-rate regime and we are not in the business of micro-managing the currency. We do not have a target for the lira… I am as convinced as any hawkish central banker that this country needs to lower inflation on a sustainable basis.”

Turkcell phones in a winner

One could surely do worse than simply trading dollars for Turkish lira. However, I believe that there is a more elegant solution. Turkey’s leading mobile firm Turkcell (TKC: NYSE) has just posted 29% annual rise in third quarter net profit, propelled both by the strong lira and a steady flow of new subscribers.

Turkcell is reporting net profit of $401.2 million on third-quarter revenues of $1.7 billion. Earnings before interest, tax, depreciation and amortisation (EBITDA) rose 62% to $771.5 million.

As I sit to write, shares of TKC (easily purchased on the New York trading floor) are trading for $25.20. There is every reason to presume that TKC can continue the rally dating back to August 2004. Continued progress will carry shares over the $30 mark by early 2008, a short-term gain of roughly 20%.

Triple your gains

Should you wish to triple this gain, I advise purchasing TKC April 25 call options (TKC DE) currently being offered for $480 with a delta of 0.58. A $5 increase in underlying shares should add $290 to the value of these calls, for a gain of 60%. Continued strong upside could easily drive gains on these contracts over 100% prior to their entering their front month on March 20, 2008.

You might care to hedge against volatility with TKC April 20 put options, currently available for $1.70. (These prices will in all likelihood have shifted a bit by the time you read this, and are intended primarily as a guide. We will enter opening prices as of the morning following publication into the official track record.)

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