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Europe Isn’t Crisis-Free, But It’s Righting Itself

For now, the 'risk on' trade is back on


Investors wanting to place a bet on a fourth-quarter rally could essentially mimic the portfolio that wrecked hedge fund manager John Paulson’s funds this year — taking large positions in financials (AMEX:XLF) and gold (AMEX:GLD). (To view John Paulson’s portfolio, click here.)

On the latter, be careful. While gold might enjoy a nice short-term rally, I still consider it a horrendous long-term investment and I consider it wildly overpriced relative to other commodities. Over the next 12 months, I expect it to significantly underperform other risky assets. Its value as a “crisis hedge” or “inflation hedge” is questionable at best, and I would go so far as to say patently false. Still, with the “risk on” trade in effect, gold most likely will follow other risky assets higher in the immediate future. If you decide to play gold, just remember: The barbarous relic should be viewed as a short-term fling, not a marriage. (Click here for The Sizemore Investment Letter’s comments on gold.)

And speaking of Paulson, it appears the man who made a fortune betting against subprime mortgages continues to get it wrong in 2011. After taking horrendous losses on his large bets in the financial sector (and later gold), it appears that he got defensive right before they turned around. The Wall Street Journal reports that Paulson’s flagship fund is up less than 1% in October, compared to nearly 10% for the S&P 500.

Unfortunately for his investors, Paulson is too big to get in and out of the market quickly. He bet big — and wrong — earlier this year and wrecked his portfolio in the process. Luckily, this is not likely to be a problem for most readers. If the European debt deal falls apart or if some new wrinkle spooks the market again, don’t be afraid to cut your losses early. The next year promises to be ripe with good trading opportunities.

Charles Lewis Sizemore, CFA, is the editor of the Sizemore Investment Letter, and the chief investment officer of investments firm Sizemore Capital Management. Sign up for a FREE copy of his new Special Report: “3 Safe Emerging Market Stocks for a Shaky Market.” As of this writing, Sizemore did not own a position in any of the aforementioned stocks.

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