Doubling Down on Continued Weakness in Real Estate, Financials

The gig is up. The Fed’s repeated intervention is having a diminishing effect, and the media’s consistent denial is becoming less and less believable. The economy is in very bad shape, and by any honest assessment is already in recession. Understating inflation to produce the facade of economic growth only delays, and exasperates the inevitable. The dollar is toast, and is showing no sign of stabilizing as Chinese officials continue talk of diversifying their reserves away from dollars. Investing in tangible assets such and gold and silver will protect your wealth, but even mining companies will likely be hit by a downturn in the economy, at least temporarily. So it is worthwhile to diversify your contrarian investment strategy, and consider shorting the overall market.

I am not an expert on the housing and financial sectors. My focus and expertise is within precious metals and alternative energy. But it doesn’t take a genius to see the writing on the wall, and so I decided to short both the housing and financial sectors via a relatively new and attractive investment option known as the ProShares UltraShorts. The two ETFs are UltraShort Real Estate (SRS), and UltraShort Financials (SKF). The “ultra” part of the ETF refers to funds attempt to track twice the inverse of the daily performance of various indices. If the Dow Jones Financials Index goes down 5% (like today), the UltraShort ETF goes up 10%, and likewise with the Dow Jones Real Estate Index.

These new ETFs provide a better way to short the market because they don’t carry the unlimited risk or dividend costs inherent in shorting stocks or ETFs. They also don’t carry the added risk or time restraints of put options. Another advantage of the UltraShort ETFs is that they are not subject to IRA trading restrictions, which often forbid shorting.

These two funds were up 8% and 10% on Wednesday alone, as I was able to capitalize on what I see at the beginning of turbulent times for the markets. “Turbulent” is putting is lightly, as one of America’s prized corporations and the largest car-maker in the world reported a third-quarter loss of $39 billion. Let’s write that out longhand to underscore the point: GM lost $39,000,000,000 in the last three months alone!

But why stop there? The country’s biggest mortgage finance companies, and Washington Mutual Inc. (WM) warned the housing downturn would extend well into next year. New York Attorney General Andrew Cuomo said his office was sending subpoenas to government-sponsored mortgage finance companies Fannie Mae (FNM), and Freddie Mac (FRE) as part of a probe of the home loan industry. Their stocks tumbled 10% and 8.6%, respectively. Hello SKF. This seems like a no-brainer to me. Declining stocks outnumbered advancing ones by a ratio of about 10 to 1 on the NYSE, and by about 4 to 1 on Nasdaq. Oil prices are flirting with $100 as war propagandists are employing scare tactics once again, and urging the Bush administration to attack Iran. Has Iraq really taught us nothing?

Gold, silver, and energy are rocketing to all-time highs, but you may want to consider diversifying your contrarian plays by taking positions in one or more UltraShorts. We expect the Real Estate, and Financial sectors to be the hardest hit in the coming meltdown. It is our opinion that the troubles are just starting for these two sectors, and there will be at least another 6-12 months of significant downside.

For a full list of ProShares Short and UltraShort ETFs, click here.

Disclosure: The author owns shares of both SKF and SRS.

Comments

[DlphcOracl]

You're jpking, right?? NOW is the time to short the homebuilders and financials ??? After the homebuilders have lost 70-80% of their value since January 2006 and the financials have declined 30-50% this year??

My, what a prescient call. Nothing like being ahead of the curve with a "short" call. Let's get serious. Shorting these stocks now at their current valuations is akin to squeezing blood from a turnip. No, thanks. This call would have been great 12 months ago. Your suggestion to go short now falls under the broad heading of "too little, too late".

[DlphcOracl]

You're jpking, right?? NOW is the time to short the homebuilders and financials ??? After the homebuilders have lost 70-80% of their value since January 2006 and the financials have declined 30-50% this year??

My, what a prescient call. Nothing like being ahead of the curve with a "short" call. Let's get serious. Shorting these stocks now at their current valuations is akin to squeezing blood from a turnip. No, thanks. This call would have been great 12 months ago. Your suggestion to go short now falls under the broad heading of "too little, too late".

[Jason Hamlin]

Well, we disagree. Let's check back to this post in 6 months and see if I was able to squeeze any more "blood from the turnips." I'm betting it will be more of a bath.

Housing equities have only been in decline since Feb/March (8 months) and financial equities since June/July (4 months). Now sir, would it have been "too little, too late" if an investor shorted the Nasdaq 4 months or even 8 months after it started the decline?

No, it would have been less than half way down, with the bulk of the decline still ahead and the majority of the profits (via shorting) still to be had. But somehow I am late to the game by shorting these sectors 4 or 8 months into their decline? That makes no sense and it is not consistent with the history of bubble bursts.

[bobbyjoe]

"...exasperates the inevitable"

You mean "exacerbates,&quo... which means to "increase the severity."

And it's not really "doubling down" that you are advocating here.

When did you put this trade on? You would have made a shitload if you did it before this week's tumble but somehow I don't think you did.

[Jason Hamlin]

Thanks for the spelling correction Jordan. I picked up both SRS and SKF on Tuesday of this week, so yes, I did quite well.

[bobbyjoe]

Well done. I disagree but that's why markets exist.

Apologies for coming across harsh.

[Georealist]

Jason...Tried to post earlier but computer problems prevented me from pre-empting half wits like Dlphc whatever. You are a bit late but those who think equities like XHB have seen the end of their troubles are less than prescient. SRS was a great buy at 80 and is now a reasonable defensive position at 100. This mess has only begun to play itself out. Please remember that many who post on this site were expelled from the 8th grade and thought further education useless.

[James]

The market will not collaspe - even though I wish it would. I am short and have been for long time Ibelive 12 000 is our next target, banks need to sell stock to shore up assets and get their books more into balance. I also think the equity compoenent of some of the toxi waste that has been sold will also be realised. The credit markets need a capitualtion as well, this will be the beginning of the end (but not the end) as it wll cause a further month of declines after it happens.

When the market goes down it causes a mania between the bears, but they have to keep some objectivity. These are the Bears that said the Dow was going down to 5000, instead it rallied to 14 000. Yes the market/ecomony is in a bad shape, yes the market will go down (I hope lol ). But Amercia is not about to go bankcrupt,collaspe and die. Come on bears...get a grip. It not your friend down the road who's lost all his money. This is the biggest most power nation in the world.

I think the dollar has aropund another 7-8% to go. But if that does happen and it stabilises. Think about all the foreign investment that will flood in to USA (China/Japan etc etc). Also if sanctions are put on China imports (which they should have been at least 2 years ago), think about domestic demand that will create. They are lots of very big factors that people are not lookign at because they are concenrating on the Sub Prime issues. In the enxt few months, I think everyone will be so bored with hearing Sub Prime - Sub Prime that there risk aversion will start to subside.

Of course you all know that 50% of the credit problems are due to confidence issues among the participants. Why ealse has the USA government be buying the equity market everytime it falls sharply.

Any Now we are going down and I will add to my position the whole way down. However in 2-3 months when i can pick up solid companies at PE ratios of 10 - I will put my horns back on and blow my trumpet.

Be a bull. be bear - really who cares?
Isn't trading about making money....

[James]

The market will not collaspe - even though I wish it would. I am short and have been for long time Ibelive 12 000 is our next target, banks need to sell stock to shore up assets and get their books more into balance. I also think the equity compoenent of some of the toxi waste that has been sold will also be realised. The credit markets need a capitualtion as well, this will be the beginning of the end (but not the end) as it wll cause a further month of declines after it happens.

When the market goes down it causes a mania between the bears, but they have to keep some objectivity. These are the Bears that said the Dow was going down to 5000, instead it rallied to 14 000. Yes the market/ecomony is in a bad shape, yes the market will go down (I hope lol ). But Amercia is not about to go bankcrupt,collaspe and die. Come on bears...get a grip. It not your friend down the road who's lost all his money. This is the biggest most power nation in the world.

I think the dollar has aropund another 7-8% to go. But if that does happen and it stabilises. Think about all the foreign investment that will flood in to USA (China/Japan etc etc). Also if sanctions are put on China imports (which they should have been at least 2 years ago), think about domestic demand that will create. They are lots of very big factors that people are not lookign at because they are concenrating on the Sub Prime issues. In the enxt few months, I think everyone will be so bored with hearing Sub Prime - Sub Prime that there risk aversion will start to subside.

Of course you all know that 50% of the credit problems are due to confidence issues among the participants. Why ealse has the USA government be buying the equity market everytime it falls sharply.

Any Now we are going down and I will add to my position the whole way down. However in 2-3 months when i can pick up solid companies at PE ratios of 10 - I will put my horns back on and blow my trumpet.

Be a bull. be bear - really who cares?
Isn't trading about making money....

[James]

I do appologise about typing errors...my keyboard needs a clean.

[mogog]

where can i buy this eft? i am not based in the US, whos a quality international broker?

thanks for help

[mogog]

where can i buy this eft? i am not based in the US, whos a quality international broker?

thanks for help

[Valueplay98]

From what I gleaned this is your first market bearish article ... my money says contrarian indicator. XLF at 31.00 - see ya in 6 months.

[Jason Hamlin]

Just checking back in as promised.

For those who blasted me and said it was "too late" to short the housing and financial sectors in early November, I am happy to report that SRS is up about 30% and SKF is up about 35% since I recommended them 4 months ago!

Anyways, thanks for the spirited discussion. If you would like to view my portfolio and track my stock picks, go to login.goldstockbull.co...