Six Reasons To Buy UltraShort Financials Again

Monday I bought the ProShares Ultra Short Financial ETF (SKF). I have bought and sold this ETF several times in the past year or so.

Here are my reasons why I think now is a good time to own SKF:

1. Financial stocks are emerging from earnings season. The somewhat misplaced enthusiasm over the way many of the financials exceeded drastically lowered expectations is beginning to fade. In terms of year-over-year results, these stocks, pretty much across the board, stunk up the place. We are now seeing some analyst downgrades, even for the likes of Goldman Sachs.


2. The winds of adversity are blowing in the direction of the financials again. Auction Rate Securities are negatively impacting a range of financial institutions. They are engaged in buying back illiquid securities and are facing potential fines as the New York Attorney General generally makes life miserable for them. It appears that bonds backed by consumer loans and credit card debt are becoming increasingly shaky. Credit requirements are tightening according to surveys of loan officers so lending is slowing. Merger and buyout activity has slowed drastically, curbing yet another potential earnings stream. 


3. Housing has not improved. Indeed, we have probably seen the peak for 2008. It is already August and as fall approaches, the residential real estate market will go into hibernation until spring of 2009. This won't help the mortgages or mortgage-backed securities still on the balance sheets of many financials.


4. The SEC ban on naked shorting of financial stocks is set to expire on Wednesday. 


5. We have seen the short energy/buy financials trade evolve into short energy/buy tech. Tech stocks are getting all the attention and financials are getting all the bad press.


6. SKF had fallen to support at about the $110 range (see the horizontal line on the chart below) and was trading at its 200-day moving average. On Monday the ETF dropped nearly to $106 but recovered and closed over $110. With the fundamental picture for financials deteriorating once again, it appears safe to buy SKF again. As I have written in prior posts, though, it doesn't pay to chase the ultra ETFs. Having fallen from its July peak of over $200 down to $110, Monday looked like it was presenting a pretty good entry point so I picked up the ETF at $111 and change.

Closing yesterday at $119.75, SKF has at least started out on the right foot. If the financials wilt as I expect, it may not be too late to jump on this trade.

Disclosure: Long SKF

Comments

[Vox Rationalis:]

Forget the technical mumbo-jumbo. The financials face further trouble because consumer debt (credit cards) hasn't yet blown up like mortgage debt did.

2008 Aug 13 10:33 AM

[User 226857:]

Your Analysis is right on ....

2008 Aug 13 10:34 AM

[bbzz24:]

I see 2 potential problems:
1. The SEC might have twisted the arms of some hedge funds and prompted them to be more restrained in shorting;
2. Analysts quietly lower earnings forecasts so they can boast at earnings time how those companies outperformed again. All too common of a practice.

2008 Aug 13 10:39 AM

[Andy Cole:]

Spot on.

2008 Aug 13 11:08 AM

[22thoroughbred:]

The SEC doesn't twist arms of Hedgies, the hedge funds run roughshod over this market because the SEC has no intention of stopping them. Just the fact they won't enforce the naked shorting rule tells you that, to make really big money in the market don't tey to overthink it, as of today bank stocks can be shorted again without having to worry about being able to cover, or be bought in, this is the same as being able to write checks on your checking account without having to worry about the fact there is a zero balance and knowing the bank will cover the checks, there is absolutely zero incentive for a hedge fund to accomodate the SEC. There will be 1 bank that will be taken over by the FDIC this week-end, DSL, due to depositer fears when they see the stock below $1, and than there are about 2-3 behind that in 1-2 weeks for the same reason. Don't complain about what they are doing, just do it as well.

2008 Aug 13 11:21 AM

[The Jackal:]

Financials are cooked.

2008 Aug 13 11:46 AM

[mkttrdr:]

Great work-keep your ideas flowing.

2008 Aug 13 12:00 PM

[redbaron:]

Good article, I agree on concept.

2008 Aug 13 12:40 PM

[poorblackman:]

The only thing safe about SKF is to sell naked options on it with 100 point spread between puts & calls. 100 put and the 200 call. It is so volatile that anything in the middle for short term trading is suicidal.

once the fed gets out of trying to prop up the market SKF will be a better play.

2008 Aug 13 02:01 PM

[will b vola...:]

Right on.. I was looking at the same resistance and ALMOST pulled the trigger w/ the SKF at 106. I didn't have the guts, and I'm kicking myself now w/ the SFK at 127 !! I like the short (wide) straddle idea what is the premium you are collecting? and how many contracts?

2008 Aug 13 05:42 PM

[kkin365:]

The six reasons given by the poster are good. As a "retail" investor, I find myself at the least disadvantage, relative to professionals, in financil ETFs, mainly because company news are broadly disseminated. Does any one have info on the main holdings of SKF? I once got a prospectus from the sponsor, but it said nothing on its portfolio or how it mimicks stock movements in the double reverse.

2008 Aug 14 09:05 AM

[CLH:]

You may be right but Im sticking with UYG which I bought July 14. The huge peak at that date on SKF looks like a final blow off.

Operator---Your reasons for more downside on the financials dont impress me.

2008 Aug 14 10:06 AM

[JudeJin:]

if all the financials trade to 1x Price to Book, SKF could easily reach 300!
if we apply 30% discount to the questionable book values, SKF could see 400!

2008 Aug 19 11:31 AM

[Kabani Takulo:]

Absolutely agree on the trend. Would be great to have a few comments on the underlying contents / insruments used in the composition of the ETF and their exposure to defaults and bankruptcies of the very financial institutions the ETF is betting on.

2008 Aug 19 10:37 PM

[merita2000:]

Response to Sharp Spirit: copy and paste following link in your browser: www.proshares.com/fund...

On the right-had side, you'll find a link www.proshares.com/incl...

It's not easy to read because it gives you the daily composition of all ProShares Funds but scrolling way down, you'll find Ultra Short Financials.

2008 Aug 20 11:19 AM

[merita2000:]

In fact, SKF holds just DJUSFN SWAPS (24,680,029.62),
Net Other Assets / Cash 4,162,181,010.08

2008 Aug 20 11:29 AM

[merita2000:]

Here is the link to the composition of DJUSFN.
averages.dowjones.com/...

2008 Aug 20 11:41 AM