THE SOVEREIGN SOCIETY OFFSHORE A-LETTER
Your Link to Freedom, Privacy & Prosperity in the Offshore World
Monday, December 6, 2004 - Vol. 6 No. 234
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In This Issue:
* COMMENT: Profits No Matter Which Way Interest Rates Go.
* OFFSHORE: EU 'Terrorism'. Guernsey Relief. Jersey Status.
* WEALTH: Jobs Creation Act Impacts Offshore U.S. Taxes.
* PRIVACY & RIGHTS: EU Fingerprinting. Electronic Signatures.
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Our guest column is by Mark Nestmann, editor of The Sovereign Society's monthly newsletter, The Sovereign Individual.
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COMMENT: Profits No Matter Which Way Interest Rates Go.
Dear A-Letter Reader:
Where are US interest rates headed? Up or down?
That is, quite literally, the US$33 trillion question. (US$33 trillion, by the way, is the approximate size of the global bond market). And every bond trader, wherever they reside, is waiting to see whether the US Federal Reserve raises interest rates at its "open market" meeting Dec. 14.
A generation ago, traders were said to have tried to glean the likely direction of interest rates from the trajectory taken by the ashes of the cigars smoked by former Fed chairman Paul Volcker. While I'm not familiar with the smoking habits of current Fed chairman Alan Greenspan, today's Fed-watchers have developed new rituals to predict where interest rates may go.
Most of these rituals involve reviewing economic statistics from government agencies in Washington, DC, dealing with unemployment, consumer confidence and the like. In recent weeks, these statistics haven't shown a consistent pattern. Recent upward revisions in 3rd quarter GDP made bond traders think the US economy is growing more rapidly, putting downward pressure on bond prices, and supposedly increasing the likelihood the Fed will raise interest rates. But sentiment could turn on a dime if other statistics indicate economic weakness, as did last week's disappointing employment numbers.
Why are the pronouncements of a secretive quasi-government agency, headed by a gnomish 78-year-old, held in such high regard by bond investors? Because of the nature of the bond market: if the Fed does what most former ash-watchers think it will do, and increases interest rates, prices of US bonds - the world's largest bond market - will probably fall.
On the other hand, if the Fed doesn't raise rates, bond prices probably will rise, because the market 'expects' a rate increase next week. And it's not uncommon for the Fed to avoid rate hikes in December. The last time it did was in 1988. (No, it's not because they don't want to spoil Christmas, but because of the need for liquidity in the banking system during the active holiday shopping season.)
To the uninitiated, all this anticipation may sound trivial. But it's not. And not just because of the immense size of this US$33 trillion market. But because by investing in 'boring bonds' at the right time, you can earn some serious money.
Indeed, if you purchased 30-year US Treasury bonds every year from 1982 through 2000, you would have beaten the return on stocks - during one of the greatest bull markets in stocks in history. This was possible because during that period, interest rates on long-term T-bonds dropped from nearly 13% to 6%.
In the last few years, though, the bond market has been volatile. And that's spelled trouble for so-called 'widows and orphans' investors - the folks who traditionally buy bonds for their guaranteed interest payments. Sudden increases in interest rates have been followed by just as sudden decreases, leading to enormous volatility.
Out of this carnage, however, a few bond traders have not only avoided big losses, but managed to ring up huge gains. One of them is Scott Barrie, co-editor of a weekly investment service called 'Money Trader.'
Scott, a former trader at the Chicago Board of Trade, is also president of Commodity Futures and Equity Analytics, author of 'Almanacs' used by professional traders, and a consultant to institutions investing in bonds and commodities markets.
Following Scott's recommendations last year, for instance, you could have multiplied your investment 15 times by buying a call option on the Emerging Markets Bond Index as bonds soared in Brazil and other emerging markets. Or bought an option on US T-bonds and saw a US$400 investment grow over US$7,000 in just six weeks.
Strange as it may seem, Scott actually likes trading in volatile markets. He really doesn't care which way the market moves - as long as it moves one direction or the other. And he's set up Money Trader readers to make money on next Tuesday's Fed announcement, no matter where interest rates move.
This is possible using an investment called a 'straddle.' In this type of investment, you can make money whether interest rates go up or down. Making money no matter which way rates move may seem too good to be true, but it's not that complicated. At its most basic, a straddle involves buying 'put' and 'call' options on the same investment - in this case 10-year US Treasury Notes.
With the call option, you're betting interest rates go down and bond prices rise. With the put option, you're making the opposite bet. Of course, only one scenario can possibly come true, but the beauty of options is that you can never lose more than you invest in a losing trade, but you can make many times your original investment in a winning one.
That's why with a straddle, Scott doesn't care which way the market moves, as long as it doesn't stay in the same place. That's because the only way that you can lose money in a straddle is if prices don't move at all, or only move a little. And in this volatile economic environment, he thinks they'll move a lot.
If you agree with Scott's analysis, you may want to consider shifting your bond portfolio to notes of shorter maturity, as they're less affected by interest rate volatility. And, if you're willing to take on slightly more risk in the expectation of much higher rewards, you might wish to consider a bond straddle such as the one Scott is recommending to Money Trader readers.
Of course, options aren't for everyone. But used wisely, they can improve significantly the bottom-line performance of your portfolio.
Mark Nestmann
Vienna, Austria
PS: Learn more about Scott's analysis and trading strategies, click here.
LINK: http://www.agora-inc.com/reports/MTR/WMTREC01/
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* COMMENT LINKS:
* Dollar dives to new record lows. LINK:
http://cnn.netscape.cnn.com/ns/news/story.jsp?id=2004120317400002489894&dt=20041203174000
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* FROM THE EDITOR'S DESK:
* OFFSHORE:
* GUERNSEY OFFICIAL ACCUSES EU OF ANTI-OFFSHORE 'TERRORISM'
ST. PETER PORT: A member of the Guernsey parliament, The States, accused the EU of 'financial Terrorism.' Deputy David Jones, said he is sick of the heavy handed tactics of the EU in trying to force the bankrupt policies of old Europe on the "buoyant and well regulated economies" of the low tax countries around the world.
* Guernsey financial leaders express relief that the new UK budget does not contain any specific anti-offshore measures, although it does crack down on tax avoidance schemes and tax advisors.
* ST. HELIER: Measured by total assets (offshore deposits, mutual funds) JERSEY is the largest of the British offshore jurisdictions. At EUR329bn, it's more than twice the size of Guernsey and nearly 10 times that of the Isle of Man.
* Check out the new International Offshore & Financial Centers Handbook 2003/04. Information available on the Mondaq.com web site (LINK below).
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* WEALTH:
NEW U.S. TAX LAW AFFECTS EXPAT AMERICANS
The "US Jobs Creation Act" has ramifications for Americans living abroad. Below is a summary prepared by aa BERMUDA financial advisor. It's complicated, so you may want to consult your tax advisors to see how it impacts you if you live or work offshore.
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* PRIVACY & RIGHTS:
* EU WANTS EVERYONE'S FINGER PRINTS
BRUSSELS: Compulsory fingerprinting for EU citizens is set to be fast- tracked by Europe's justice ministers. Also planned; year long retention of all e-mail and phone records. Civil rights groups are not happy.
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* Electronic signatures are to have the same legal value as hand-written ones in Switzerland from Jan. 1. 2005, allowing Online contracts.
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* OFFSHORE LINKS:
* Guernsey official accuses EU of 'terrorism"
LINK: http://www.freedomandprosperity.org/blog/david_jones.pdf
* Chancellor leaves the Channel Islands alone in new budget. LINK:
http://www.thisisguernsey.com/code/shownewsarticle.pl?ArticleID=012254
* Jersey First as Largest of British Offshore Havens. LINK:
http://www.onlypunjab.com/fullstory1104-insight-Jersey Maintains Position as Largest-status-25-newsID-12011.html
* International Offshore & Financial Centres Handbook 2003/04.
LINK: http://www.mondaq.com/content/handbook.asp?
* WEALTH LINK:
* Jobs Creation Act affects expat Americans. LINK:
http://www.theroyalgazette.com/apps/pbcs.dll/article?AID=/20041203/BUSINESS/112030131
* PRIVACY & RIGHTS LINKS:
* Surveillance and fingerprinting EU. LINK:
http://www.eupolitix.com/EN/News/200412/9dfb8a4f-0b98-4a9f-a251-8775fbfd441b.htm
* Virtual signatures become a reality in Switzerland. LINK:
http://www.swissinfo.org/sen/swissinfo.html?siteSect=111&sid=5381639
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LINK: http://www.agora-inc.com/reports/SVS/WSVSECFF/
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THE SOVEREIGN SOCIETY OFFSHORE A-LETTER.
* Bob Bauman, Editor * Daniel Aponte, Jr. Editorial Asst.
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