Thomas J. Gordon

Distressing Details of the UltraShorts

Do people think there is a psychological component to these ultra shorts or are they only priced according to the value of the assets they hold? srs is an etf. It sits on the market and people can trade it. Those days in november when it went over 200 there were lots of people who thought the reits were done for and that they'd never borrow another dollar in the credit markets. Is that why it went over 200 and quickly fell back?

Distressing Details of the UltraShorts

I sold my long reits and bought srs in april 2007. I was happy with it until about mid december 2008. When it went over 200 I felt very intelligent. Then it fell apart. I actually suspected it might fall apart but I couldn't get anyone to explain to me how Proshares was accomplishing the double short. Somebody said Proshares does swaps but I don't understand swaps that well and I don't see how they could use them to be short. I see all these people say "Ultra Short vehicles only try to get their results day by day". I don't know what that means. No one would buy srs or sks if it was only good for a day. As James Grant said in a recent newsletter about Proshares Ultra Short "Don't forget to sell".

Portfolio Preservation in a Down Market

I wanted to add one quick comment for anyone using this as a reference article. I have learned something since I wrote this article concerning the "Ultra" short funds I mentioned. I know that Proshares and possibly Rydex 2* suffer from "Index Fatigue". The ultra short funds are not using real shorts. They are using swaps and possibly puts to short. These contracts expire. That means they don't have a clean, consistent double inverse of the index for as long as you hold them. They suffer from "Index fatigue", in other word they may perform your short for 6 months to a year (some people are saying the timing is shorter than that) but eventually, even if you are right with direction they will only be short from where the index is currently, not from where you bought in to the ultra in the first place. In case this is hard to understand, I'm going to give you a concrete example. srs a year and a a half ago was 75. Even though the index it was based on has dropped by half in the year and a half, srs was selling in the 60's last week. srs is "fatigued" and is only working from where the index is right now.

Portfolio Preservation in a Down Market

This is the author:
trader_murf
thanks for the nice words. Sounds like you are doing some of this already, much to your benefit. If you clear a sector and then buy the ultra short you might make money even if the market rose.

etf ster
I thought about the monday morning quarterback aspects of this, it is a valid observation. I hate monday morning quarterbacks. Here are my thoughts:
- I had this idea two weeks ago, these articles take a long time to research and write.
- My contrarian financial writers had the ideas about srs, fxf, and fxy in plenty of time to benefit during the october downturn. I don't know if there is any benefit of my putting an article on seeking alpha that saying "Hanke and Grant said this in Forbes".
- Some of the points in the article deal with specific hedging and porfolio techniques, not just how to deal with a general downturn.
- Life is long. The market will go up again, people will now remember they have some tools to prepare for a possible downturn, good investors remember and benefit from all situations they experienced.
-Maybe you are familiar with all the tools mentioned in the aritcle, I think there is a class of investors who may not be aware some of these options (if you'll forgive the pun) exist.

general:
I want to say one more thing about diversification. It seems on the surface diversification should work. If one had the presence of mind to invest in Singapore, you would think that the economic activity in Singapore is very different and separate from the U.S. or whereever you live. You would think the u.s. could go down and singapore could stay flat or go up, but doesn't seem to work that way. Globalization is the probable culprit.