Time to Get Serious About Utilizing Short ETFs 23 comments
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Right now and right here, I am changing the game! Pay attention so you don't miss anything! It is time to invest short for the long run! What we need here is some commitment, some discipline and most importantly a plan! It is time to give up hope, shoot Goldilocks, and just accept the fact that the long-term trend is down. Knowing that and accepting that is the key to your future success!
So, here are the new rules which are really the old rules modified for the new world:
Rule #1: Keep Things Simple but Diversified: With today's new range of ETFs there is no reason to try and pick individual equities to short. Remember, the downside on a short position is unlimited. So, I recommend a basket of ETFs heavy on the ultra short variety along with a strong weighting in precious metals and international bonds to serve as a hedge against the falling dollar.
The Portfolio
- ProShares UltraShort S&P 500 (SDS)
- ProShares UltraShort Financials (SKF)
- SRS ProShares UltraShort Real Estate
- ProShares UltraShort QQQ (QID)
- ProShares UltraShort Consumer Services (SCC)
- ProShares UltraShort FTSE/Xinhua China 25 (FXP)
- StreetTracks Goldshares ETF (GLD)
- ishares Silver Trust ETF (SLV)
- Cash in foreign bonds
Rule #2: Allocate Appropriately: Standard allocation strategies still apply but be mindful of taking advantage of the leverage used in the double short ETFs. For example, a conservative investor may choose to go 65% cash, 10% metals, and 25% allocated amongst each of the short and ultra short securities mentioned. The ultra shorts count $2 for $1 so what would have been 50% of a portfolio can now be 25% with the same net effect. This leverage can free up cash for conservative investment in foreign bonds.
Rule #3: Don't Try to Time the Markets: It is a historical fact proven out over four months that the markets go down over time. Using this diversified basket of securities and cash allocations will allow you to sleep at night without the constant monitoring that long positions have entailed lately. In this new world, I recommend simply rebalancing your portfolio once every month rather than daily as many investors seem to be doing lately.
Rule #4: Stay Focused on the Negative: The markets will have rallies, but focused short investors need to simply accept that and keep their time horizon in mind. Over the next 30 or so years the governments own accounting office estimates we have a $50 trillion shortfall on entitlement obligations (or is it $30 trillion? I forget but it is really bad.). Consumers don't have two nickels to rub together and will have to stop consuming. The real estate\credit implosion gets worse every day and defaults on loans of every kind are only just getting started. Oil is at $102 and inflation is on its way to 15%. There is a war going on, which you can read about on the 27th page of the paper sometimes. Finally, Roger Clemens will likely be investigated, indicted, and jailed for perjury. There is no lack of bad news, just focus! Well, maybe Clemens will get a pardon.
Rule #5: Ignore the Media Pundits: Cramer is great at being Cramer, but he is wrong a lot! So is Kudlow. And good God, whatever you do, DON'T LISTEN TO DENNIS KNEALE! Pay more attention to what IS happening that what people say is going to happen. For example, did anyone like that 200 point Gasparino rally last week? Sure the monolines\duolines are getting bailed out on Monday Charlie, sure they are! Maybe this Monday Charlie?
Rule #6: Never go Long Stocks: Have you noticed that on 300 point down days even "winners" go down with the market? This includes miners, oil service companies, energy producers, and even commodity plays. On big down days, stocks are stocks and being short the market is the only way to win. You hear it all the time, "hedge funds are getting margin calls and selling their winners to pay for their losers." Why was gold up while gold miners were down? The answer is, because stocks are stocks! On the 1,000 point down days that are coming, I don't care what stock you own, you are going to suffer! Being short the market will be a beautiful thing on that day! Keep disciplined and never go long a stock!
Rule #7: Think for Yourself: Whatever you do, don't pay attention to rules 1-6! Well, except the part about ignoring Dennis Kneale. So, here is the deal, I am obviously not very serious about this as a complete strategy and I believe that shorting stocks is silly for the long run. I have plenty of long investments in retirement accounts, college funds, etc. I trade a lot but I am not currently long or short any of the securities mentioned above, although I might be tomorrow. What I have presented here, however, is actually a viable short run strategy, but I do NOT "advocate" it. It is just an idea for discussion and it is really a compilation of ideas that I have been reading about. I have not seen anyone create a "complete" do it yourself bear portfolio though. There are "bear funds" and I assume this is what they do though.
In any case, it certainly is what is "working" these days. Maybe I can call it "The Do It Yourself Diversified Pessimists Dream Portfolio?" Ok, that is stupid. Anyone have a better name? More importantly, how much longer can this portfolio work? Can anyone imagine what would really happen if financial planners did begin laying out short positions as part of a "diversified" portfolio? Should they? Comments appreciated.
Disclosure: None
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This article has 23 comments:
and don't forget the DBA. just another good play on inflation and the worldwide shortage in foods.
Been in and out of SKF, SRS, a few times since December. Back in last week when both SKF and SRS around $105 and Gasparino was floating his tales. Also into QID.
Plan is to stay short 6-12 months for the big leg down then move into DBA and GLD long term.
Have been in index ETFs but am concerned about the losers dragging down the returns over all - Any comments on selected stocks versus index?
Uh.....you are saying that the markets go down over time? historically?
That is wrong. So, very, wrong.
I agree with your comments for the short term (8 months)....but I'm oh-so-confused by the above quote.
Just my dry and sarcastic sense of humor. Don't make too much of it. The article was simply to lay out a short term portfolio, the interesting point is that there are many who view this type of portfolio as indeed a long term investment. Whether it is a hedge or a long term portfolio, it continues to work. Also, if you pick certain historical periods, there are indeed long periods of years where the market did indeed trend down, the question being, are we entering one of those long periods-a la the Japanese stock market. If so, then my portfolio will be a stellar performer. Just food for thought.
One use is as a hedge. I bought the EEV to "hedge" against my prised emerging market mutual fund that is now closed to new investors and carries a penalty for early sale. When I feel global growth resuming I will drop this hedge without disturbing my coveted long position.
Lately I have soured on the market outlook for the forseeable future and have loaded up on SRS, SKF, FXP and TWM on dips. This has been very productive so far. My theory is that if I can short the worst sectors while staying long a few select stocks I really believe in, I can be green almost every day. Volitility is greatly reduced and on occasion both my shorts and longs are up for the day. And yes, it has been a successful strategy especially factoring in my restful nights!
Most recently I have added DGP (brand new, Ultralong Gold Index) to the fold as I feel inflation and a lower dollar are almost a certain trend for months to come. I slowly adjust the ratio among short ETF's, long stocks and gold to match my short term perceptions of where the market is heading and sometimes I get it right.
In your last paragraph you touched upon perhaps the most important point of all. I have recently concluded that (with the recent introduction of these short and ultrashort ETF's) no portfolio can be truly diversified unless it contains some form of shorting. Seriously, in the year 2008, how can anything less be labelled diversified?
Rule #6 (never go long stocks) is a bad strategy. Never is a long time! We should be able to use all of the tools that the markets make available to us. For the young and the non experienced investors and traders this type of guidance is a disservice.
I have been long the stock market for over 45 years. There were many, many days, weeks and months of toil along the way. My longest of longs was WPO. The IPO was $25 and it did not take long for it to go to $14. I kept WPO because their circulation was skyrocketing. Evening papers were dying then because of the advent of evening news; this made it easier for morning papers to grow faster. There are many other factoids from Watergate and the Warren Buffet affect that I can give you but I will let the facts speak for themselves.
Below is a very interesting article that may have an affect or our markets and I think it will. We already know that foreign money has been and will continue to move into US and European banks. However, now it looks like foreign funds will be moving into commercial real estate as well.
Foreign buyers see U.S. property as currency play
03/07/2008 07:00 AM EST
Copyright 2008 Reuters
By Ilaina Jonas
NEW YORK, March 7 (Reuters) - For over a year, U.S. real estate has offered bargains to foreign buyers as the euro or British pound gets ever more bang against the sinking buck.
Now, however, a shopping mall, office building, high-rise condominium, or hotel is, to some foreign investors, a vehicle to bet on the dollar.
The trend hasn't escaped Rene-Pierre Azria, chief executive of Tegris, a New York investment bank specializing in cross-border mergers and acquisitions.
Azria has been meeting with investors for Tegris' third real estate fund. The firm plans to raise $300 million in foreign currency in Rossrock Fund III LP to buy the least risky senior portion of distressed commercial real estate mortgages.
While making his rounds to British and European investors, many institutional buyers wanted the funds invested immediately instead of spreading them out for more consistent returns over two or three years.
"They said, 'I want to buy dollars now and get out whenever the fund matures ... (say) in four years, five or six years, because then I'll be making money on the exchange rate,'" he said.
On Friday, the dollar hit a record low of about $1.54 against the euro. The British pound rose to a year's high of more than $2.00.
Commercial real estate investors traditionally have hedged against currency fluctuations.
However, European and British investors remember when the dollar was on top and believe it will happen again as Europe succumbs to an even longer and more painful economic slowdown than in the United States, said Azria, former global partner with investment bank Rothschild Inc.
"Therefore, the exchange rate turnaround is going to happen sooner rather than later," said Azria, whose co-founder Janet Christensen was chief of staff to Blackstone Group LP Chairman Stephen Schwarzman.
"By the time they take their money out of the fund, which is three, four, five years down the road, it will be fully in their favor," he said.
The dollar could begin to strengthen against both currencies in the second half of 2008, said foreign exchange analyst John Normand at J.P. Morgan Securities.
A strengthening dollar could boost the eventual property sales value, as well as the rent, for European property owners who buy now and hold their U.S. investment for several years.
Even half-empty new condo projects and foreclosed houses in Florida have attracted foreign buyers, said Peter Zalewski founder of Condo Vultures, a real estate investment consulting firm in Bal Harbour, Florida.
"They're saying, 'Let's get into dollars simply because we think there's a currency arbitrage play there,'" Zalewski said.
Hedge funds from the Czech Republic, Monaco, Belgium and France, and a Singapore fund looking to recycle pounds earned from London office properties into dollars have contacted him.
One UK fund wanted only single-family homes in southwest Florida markets such as Naples and downtrodden Ft. Myers, he said. "They want to get out of pounds, get into U.S. dollars."
STICK TO WHAT YOU KNOW
Yet many real estate experts recommend that commercial property investors avoid currency plays.
"Real estate investors are not experts in currency," said Michael Pralle, president of real estate private equity firm JER Partners.
"People who get into currency speculation, that's fine, but they should recognize that's exactly what it is," said Pralle, the former head of General Electric Co's GE Real Estate unit. "That's a different business from ... real estate. The people that mix it up, they're fooling themselves."
The U.S. economy also could wipe out any currency gains by driving down rents, said Benjamin Lambert, chairman of real estate brokerage Eastdil Secured, a unit of Wells Fargo & Co .
"For the most part, the activity that we've seen has been from pretty sophisticated people," Lambert said. "A great deal of them are more concerned about a recession."
(See [Link removed for security purposes] for the new global service for real estate professionals from Reuters)
(Editing by Richard Chang)
Your are right, never would be too long. That was just me being facetious, I am even long a couple of stocks (gold miners, drillers and BAC-gulp).
Actually I did implement it at that time. I was ignorant though, I thought it would be a short term trade, didn't realize it would become a permanent fixture. I guess I was just too optimistic-stupid me.