The Scapegoating of Leveraged ETFs Is Absurd

It shouldn’t surprise that scapegoats are being sought to blame for market declines. The latest attempt is to blame leveraged ETFs for problems that even include market manipulation.

Crammer [no typo] has called ProShares products “evil” so I’m told. But let’s remember his famous admission from May 15, 2006, “I am not allowed to short stocks per my deal with CNBC.” So, there you have his conflict. Any inverse levered issues will incur his wrath since if shorting is off the table for him, it should be for you as well. Naturally, during his hedge fund days he had no troubles shorting stocks or indexes. It’s laughable.

Then there is the assertion via a WSJ story this morning that levered ETFs are responsible for market manipulation citing end of day volatility. That’s interesting but let’s remember, the amount of mutual fund redemptions timed toward the end of day has been enormous and no doubt dwarfs levered ETF trading. Is there late day activity in levered ETFs? Sure, but they’re tinker toys compared with other activity.

Manipulation? Good grief! Manipulation of markets has been dominated by both the Treasury and Fed either directly or indirectly for the past year at least. Throw in the normally bullish financial media, “what are you buying today?” and, well, you get the picture.

Finally, if market participants wish to manipulate prices they’ll do it more effectively and easily in futures and options markets.

I say, “Thank you for these new issues since they’ve given average investors a chance to protect themselves from bear market losses and/or profit just like Crammer did everyday before he became conflicted by contractual restrictions.”

No, market declines are primarily the result of all the financial engineering products gone off the rails period. Have investors become more interested in financial products that take advantage of this mess? Sure. That’s what they’re there for, so putting up a chart showing increased trading volume in any ETF or security when conditions are overheated [up or down] is an exercise in obviousness.

Okay, that’s off my chest.

Volume was light with today’s decline. I’m going to wait until after the Fed decision and GS earnings tomorrow to write an in-depth market commentary.

Comments

[Alan von Al...:]

Thank you, David.

2008 Dec 16 06:25 AM

[basehitz:]

Here's a theory bubbleTV (aka CNBC) should try out. In fact, Dennis Kneale should be the one to do it. Here goes. . .

Over the past year, most of the mistakes I have made in trading have been when I have abandoned my analysis in favor of the nonstop cheerleading where CNBC actually eroded my confidence. For example, I was long SCC, SDS and QID just before all hell broke loose. I took a modest profit cause it didn't seem reasonable that I could be right when all these CNBC "experts" were recommending buying tech and retail.

Therefore, my theory is that CNBC is actually the cause of the market mahem by dispensing misinformation on a continuous basis, and when their goldilocks myth gets debunked, it causes disproportionate market disruption as traders recognize reality and reverse unwise trades. Hey Dennis, try that theory on during your noon-time propaganda sessions?

Hey Dave, thanks for all your great work.

2008 Dec 16 09:17 AM

[makemoney2323:]

His issue isn't with shorting, it's with leveraged shorting, where 1 dollar into the etf = 3 dollars short.

2008 Dec 16 09:29 AM

[sbinvestor:]

By definition, all shorting is leveraged...Duh!!!

2008 Dec 16 10:19 AM

[Umm, yeah:]

Thank you, David.

2008 Dec 16 10:35 AM

[4Annie:]

I love your commentary, Dave. Couldn't agree more regarding assessment of CNBC, "actually eroded my confidence..." and "actually the cause of the market mahem". Does anyone remember the bozo Dorfman? They've really outdone themselves with all the self-promoting Cramer. Imagine how much money he's lost for people following his conflicting and dead wrong "advice". Remember "Nirvana" with Enya in the background "bottom" just before the market fell off the cliff? Occasionally, I will tune in just to see what idiocy he's spouting as a contrary indicator.

2008 Dec 16 11:20 AM

[John Lounsbury:]

How many people support the Efficient Model Hypothesis and also believe that shorting manipulates markets? If you know any such people, take them off your list and stop listening to them. There is no clearer logical inconsistency than that.

2008 Dec 16 11:26 AM

[John Lounsbury:]

Whoops - - - I meant Efficient MARKET Hypothesis. (Actually, in retrospect, my original choice may have been Freudian.)

2008 Dec 16 11:27 AM

[Augustus:]

Good article. Crammer is daily evidence that market participants running large amounts of money are not rational. What a terrible thing that the little guys can get a somewhat fair deal on going short?

2008 Dec 16 09:20 PM

[squark62:]

i agree with dave's commentary and the other comments. many of the proshare leveraged short etfs i trade with are market-capped an order of magnitude less, sometime 2 orders of magnitude less than the long leveraged etfs. also, these leveraged etfs have finally provided the small investor with the same protection options traders have had for years.

regarding cnbc, very few anchors are not idiologs. the good ones get drowned out by the likes of dennis kneale, larry kudlow, maria bartiromo, dylan ratigan and michelle caruso-cabrera. i can't stand listening to these folks rant anymore.

2008 Dec 16 10:42 PM