Quote from Maverick74:
Welcome to the thread trader31. Let's tackle the USD/JPY first. Yes, you are correct that if you are long Japanese stocks, you will get hurt somewhat by the yen depreciation. The volatility impact is far greater in stocks then in currency. The Nikkei is up over 50% YTD and the Yen is down about 16% vs the Dollar. And yes, the stocks are going up as a result of their weakening currency. Again, and I'll go over this several times, the easy way to think about this is if you had to pick one to hold, which is safer. If your currency is being devalued, do you want to own the currency or the equity. Generally speaking equities will go up. Why? Because companies are earning higher profits as a result of inflation. Their profits are higher in nominal terms, not in real terms. But you need nominal protection if you are holding cash. Now there is a ETF that I have talked about on this thread quite often that owns Japanese stocks and shorts the currency to hedge out the currency risk and that is DXJ. But the benefit in my opinion of saying being in the currency pair vs trading the Nikkei, is one, simplicity, it's not terribly easy to buy Japanese stocks. Yes, there are ETF's but you have to investigate how they are structured and their fees and all that. Then there is the futures, but then you have to roll and deal with insane volatility the Nikkei has. Being long USD/JPY has less volatility, is easier to put on and trades in a more controlled fashion.
Your second question about being long AAPL/USD or SPY/USD, think of it like this. If I'm long shares of AAPL and I want to convert the shares into cash, do you want cash to be cheap or expensive? Cheap right? Because you are buying cash in a way. And when you are holding cash, what do you want? You want the price of cash to go up and you would like to see APPL go down. Because if you wanted to purchase those shares back, you want to do so at a lower price. So put another way, by being long shares of AAPL, you are forgoing all the benefits of holding cash, thereby short. An easy way to try to conceptualize this is by following the cash flows.
I've tried to explain to people how you can synthetically short the housing market. It's hard to get your head around it at first until you map out the cash flows. A renter is a defacto housing short. Why? Because they are forgoing all the benefits of owning the house. What does a renter want? He wants housing prices to go down right? So he is a natural short. You can take a owner and a renter and line them up in both columns and their cash flows will net out over time so that one's gains is the others loss.
You can do this with currency as well. In fact, the decision for money managers to be long bonds vs equities is often solved by evaluating the opportunity costs of money. If stocks get too rich and bonds get too cheap, then it might make sense to buy bonds and sell stocks. When bonds are cheap, rates are high. If rates get high enough they become more attractive then stocks. And vice versa. So a long stock investor could see himself as being a natural bond short and so on.
When you make investments you always want to understand the opportunity costs. And also the true economic costs. The cost of owning something is not just the price of that product but also what you are giving up. That is the TOTAL economic cost. Hopefully these examples help explained this better.
