Answer To A Question

I received this question about Iceland early today but have been quite ill since last night but am feeling better to try to answer.

I wish I had sold my currency CD when it came up recently, but it was the day after the "potential for downgrade" news and I thought it would rebound. which it did briefly. The current account deficit really balloned the other day. On the other hand, their central bank is talking about another rate increase because of inflation. Any thoughts here would be appreciated. I am glad I took heed to your warning several months ago about the krona being at a high and invested no more, at least.

I'm sure I have mentioned my conflicted feeling over the CD format to buy forex. I am generally not a fan of "locking up money" in case something screwy happens like this recent move in the krona.

I would ask the reader what percentage of her money is in the Iceland CD? I tried to be clear that my weight in Iceland was 3%-4% and now it is about 2%. Obviously Iceland will not go out of business. I have read a couple of quotes that wonder whether Iceland today will do what the Thai baht did in 1997, which was to fall 38% vs. the dollar in about four months.

It could fall another 10% I suppose but that would be extreme. GDP is estimated to grow by more than 7% for 2006. That type of growth raises concerns about inflation. That the central bank would be ready to raise rates again makes sense. Inflation is currently around 4% compared to a 2.5% target. They are doing a good job, I think they know what to do and are doing it.

The large current account deficit stands to be a problem, no doubt, but I wonder if it should be viewed differently for Iceland than for the US because of how small the country and the population is. Don't confuse that sentence to be its ok to have a huge deficit, I just wonder if it need to be thought of differently.

I can emotionally withstand a 30% haircut to my Icelandic holdings, as it would be about a 60 basis point hit to my portfolio. I think at 5% of my holdings I'd be OK too, but I did sell yesterday.

My wife Joellyn was asking me about this earlier today and I remembered one other point that factored into my gut call to reduce which was the chart action in the krona. It was trading around 63 before the Fitch news. It went to 69 when the news broke, recovered back to only 65 and then hovered. We have all seen that type of chart action before, and that the krona ran out of steam at 65 contributed to my decision.

To the reader's question of what should she do, I would generalize the answer. If the downward action in something you own is making you emotionally uncomfortable I think you have too much. Iceland is a long-term theme for me. Thinking long term is not always easy to do. I have unyielding faith in Iceland but the next few months could be rough.

This is a personal thing because I could be right or wrong about Iceland over the short term. If logic has to give way to emotion, that is ok, lighten up on it. This is more state of mind advice than investment advice.