Seeking Alpha

optionsgirl's  Instablog

***If you think it is time to limit congressional terms, please go to this website: www.termlimits.org/ **Want to follow the money and see what industries and companies are donating heavily to political campaigns to determine the outcome of pending legislation? Check out... More
  • 7 Strategies for Profiting Off the Next Downturn by Jack Hough 24 comments
    Jun 18, 2009 01:55 AM | about stocks: SH, SDS, BGZ, RWM, TWM, TZA, SJF, SFK

    This article was written on May 27th by Jack Hough for smartmoney.com.

    ON THE STREET by Jack Hough (Author Archive)7 Strategies for Profiting Off the Next Downturn

    PERSONALLY, I DON’T EXPECT much financial drama over the next year. Stocks seem only a touch expensive relative to earnings. Earnings seem normal as a share of the economy. Powerful deflationary and inflationary forces (lax consumer demand and looming money creation, respectively) are offsetting each other, and should do so until world economic growth heats up, perhaps a year from now. And the dollar seems wobbly, but no more so than currencies that compete as a store of the world’s winnings.

        

    I could easily be wrong about any or all of these things, though. Stock prices and earnings spent several years too high, and so might now plunge to depths that are too low by the same degree. Emerging economies might grow fast enough to spur energy, food and metal inflation, even if rich countries stagnate. America might create so much money that the dollar plunges in value. For investors who fear the worst, and who wish to make protective or pessimistic investments, here’s a round-up of ones that don’t require options or futures trading, physical asset storage or the opening of foreign accounts. All are exchange-traded funds, or ETFs, which can be bought and sold like stocks in ordinary brokerage accounts.

    Make Money If Stocks Plunge

    The market is more likely to rise than fall on any given day. The longer you hold a broad basket of stocks, the better your chances of profiting. With inverse or bear funds, just the opposite is true. They’re meant as short-term bets on a decline in stock prices, and are unlikely to pay off as long-term holdings. That means investors needn’t agonize over slight differences in management expenses; an extra two-tenths of a percentage point per year compounds considerably over 20 years, but doesn’t mean much over one summer.

    Start by choosing an index. Broad-market ones like the S&P 500 or Russell 2000 are fine for generally pessimistic strategies. There are also style indexes, if you think, say, stocks with high price/earnings ratios (growth stocks) will get hit harder than ones with low P/Es in the market’s next leg down. (That’s just what happens during most market downturns, but it hasn’t happened so far during this one.) Most of these funds are available with or without leverage. Levered bear funds try to produce double or triple the underlying indexes’ movements, but in the opposite direction.

    Three warnings on leverage: First, needless to say, it multiplies risk. On Tuesday market averages jumped 2.4% to 3.5%, merely on news that consumers in a survey guessed conditions would improve in coming months. A skeptic might say that consumers are only more chipper because stocks have risen in recent weeks, and that their mood shouldn’t thus be used to predict yet more stock movements, but the point is, it doesn’t take too many perplexingly bullish days to hurt a levered bear investor. Second, levered funds are usually tuned to daily index performance, not yearly performance. Depending on market volatility, those amplified daily returns might compound to well higher or well lower than the indexes return over weeks, months or years. Third, bear funds in general aren’t great for minimizing taxes, since they’re for short-term bets, but levered bear funds especially spew out heaps of taxable gains during “good” years, because the derivative contracts that power them don’t enjoy the same tax benefits as stocks.

    Have a look at some bets against stocks on this table, and then move on to inflation.

     

    Inverse (Bear) Stock ETFs
    TickerBenchmarkTypeLeverage?
    SHS&P 500Large companyno
    SDSS&P 500Large company2X
    BGZRussell 1000Large company3X
    RWMRussell 2000Small companyno
    TWMRussell 2000Small company2X
    TZARussell 2000Small company3X
    SJFRussell 1000 ValueValue2X
    SFKRussell 1000 growthGrowth2X

     

     

    Profit From Soaring Consumer Prices

    Gold is too often touted as the best protection against inflation. I’ve argued before that its price is mostly linked to doomsayer speculation, not actual industrial demand, making gold a poor choice for the job. If prices soar, the world might believe more in gold, but it won’t need more gold. Better to buy diversified metals ETFs like the ones listed below, along with ETFs that track energy and food prices. (Again, I list these as options for betting on raging inflation, not as recommendations. I think we’re ultimately headed for heightened, but not runaway inflation, and that the best hedge is stocks, especially cheap ones attached to dividend-paying companies that sell needed goods.) If you’re not sure which basket of commodities will see the most inflation (and you’re not), opt for a broad commodity ETF that holds all of them.

     

    Commodity ETFs
    TickerCommodity
    IAU, GLDGold
    SLV, DBSSilver
    DBBAluminum, zinc, copper
    DBACorn, wheat, soy beans, sugar
    DBO, USOOil
    DBELight sweet crude, heating oil, Brent crude, gasoline, natural gas
    GSGAgriculture (approx. 24%), metals (11%), energy (65%)
    RJIAgriculture (approx. 35%), metals (21%), energy (44%)
    DJPAgriculture (approx. 36%), metals (30%), energy, (34%)

     

    Cash In on a Dollar Crash

    For the dollar’s value to drop, it must do so relative to something. A decline relative to the price of goods is simply a restatement of inflation, covered above. But the dollar can lose value relative to other currencies, too. To protect against that, use ETFs to either bet against the dollar or for some other currency. Note that dollar bear ETFs necessarily bet on other currencies, usually a basket of them. You can accomplish the same thing by buying funds that bet on the currencies of rich nations, emerging economies, geographic regions and so on. Finally, you can buy a fund that purchases currencies associated with high interest rates while shorting ones with low interest rates. Such “carry trade” funds net holders attractive interest rates, and rise in value if the high interest rates force currency-boosting frugality while the low ones allow currency-damaging profligacy.

     

    Currency ETFs and ETNs (Exchange-Traded Notes)
    TickerType
    * These currencies are officially tied to the dollar, making the note a bet these countries will revalue their currencies, allow them to float freely or link them to other currencies.
    ** This fund buys the three highest-yielding and shorts the three lowest-yielding among Group of 10 currencies (U.S. dollars, euros, Japanese yen, Canadian dollars, Swiss francs, British pounds, Australian dollars, New Zealand dollars, Norwegian krone and Swedish krona).
    UDNDollar bear (against euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc)
    FXE, ERE, EROEuro
    ULE, URREuro 2X
    FXY, JYFYen
    YCLYen 2X
    FXB, EGB, GBBPound
    FXC, CUDCanadian dollar
    FXMMexican peso
    BNZNew Zealand dollar
    BZFBrazilian real
    CYB, CNYChinese yuan
    SZRSouth African rand
    SZESwiss franc
    INRIndian rupee
    FXSSwedish krona
    FXAAustralian dollar
    JEMEmerging markets
    PGD *HK dollar, Singapore dollar, Saudi Arabia riyal, United Emirates dirham, Chinese yuan
    DBV **Carry trade (G10)

     

    Bet On Other Assorted Mayhem

    Another meltdown for banks, once credit card and commercial real estate losses worsen: ProShares UltraShort Fianncials (SKF: 44.88, +1.85, +4.29%) or Rydex Inverse 2X S&P Select Sector Financial (RFN: 10.79, +0.44, +4.25%).

    Consumers becoming even less able to afford niceties: ProShares UntraShort Consumer Goods (SZK: 66.55, -0.24, -0.35%)

    Weak U.S. consumption taking exporters down with us: ProShares UltraShort MSCI Emerging Markets (EEV:22.37, +0.47, +2.14%) and UltraShort MSCI Japan (EWV: 57.78, -1.76, -2.95%)

    A spike in interest rates, once America’s foreign creditors tire of seeing their meager yields erased by dollar losses (see story): ProShares UltraShort 20+ Year Treasury (TBT: 54.17, +0.58, +1.08%) or Direxion Daily 30-Year Treasury Bear 3X Shares (TMV: 85.66, +1.68, +2.00%).

    Follow SmartMoney on Twitter & Tip'd:
     
     
     

    Themes: defensive strategies in a down market Stocks: SH, SDS, BGZ, RWM, TWM, TZA, SJF, SFK
Back To optionsgirl's Instablog HomePage »

Instablogs are blogs which are instantly set up and networked within the Seeking Alpha community. Instablog posts are not selected, edited or screened by Seeking Alpha editors, in contrast to contributors' articles.

This post has 24 comments:

  •  
    YH: Your suggestion to buy some eev was excellent, thank you. I am in the money on the 22 calls and the 23 calls are rising nicely. I saw this article and thought it is a handy list of ways to hedge.
    Jun 18 01:58 AM | Link | Reply
  •  
    Good article.

    I'm bearish right now and have hedged my longs, mostly weak dollar plays, by buying Oct SRS out of the money calls, FAZ and EEV.

    So far so good. If we get a 10% retracement in the S&P, I'll sell 2/3rds of these hedges and see what happens with the rest.
    Jun 18 05:41 PM | Link | Reply
  •  
    I'm watching the S & P, too. 944 resistance. If it breaks thru 944 and closes above that, I think we will see another pop to the upside. If it doesn't...
    Hello, Bear. The 3 month chart tells the story.
    Jun 18 08:44 PM | Link | Reply
  •  
    YH-

    read an entire research paper on FAZ and the ridiculous nature of 3x ETF. interesting stuff. gist of the paper was negative and it is a fools game...but hey im gonna hold onto mine until end of summer. fundamentals obviously in our favor- im not a technician.

    OG-

    much appreciated on currency ETF. work mostly with futures but have colleagues interested in currency ETFs. good info
    Jun 18 10:50 PM | Link | Reply
  •  
    Mono- look thru Cliff Wachtel's articles on etf's on SA. I think he might have written about the issues of 3x. I know someone did, I remember reading about it, and it wasn't that long ago. Glad you liked this article. I liked it too, I used to write lists with all that stuff, and then a bunch of etf's were taken off the market, so it's nice to have something current.
    Jun 18 11:25 PM | Link | Reply
  •  
    agreed

    futures give way to margin...leveraged ETF are a pseudo margin

    thanks again
    Jun 18 11:30 PM | Link | Reply
  •  
    I'll only hold FAZ for maybe a week. I figured it would only shoot up around options x or not at all. The EEV, I'll hold longer. The SRS calls I'll probably stick with for at least a month. I'm way up over 50% on them already and see more upside than down.

    Your right about triple leverage. It's not the sort of thing you buy and forget about.


    On Jun 18 10:50 PM Mono wrote:

    > YH-
    >
    > read an entire research paper on FAZ and the ridiculous nature of
    > 3x ETF. interesting stuff. gist of the paper was negative and it
    > is a fools game...but hey im gonna hold onto mine until end of summer.
    > fundamentals obviously in our favor- im not a technician.
    >
    > OG-
    >
    > much appreciated on currency ETF. work mostly with futures but have
    > colleagues interested in currency ETFs. good info
    Jun 19 10:46 AM | Link | Reply
  •  
    YH: are you still holding DAG?

    If you have the stomach for it or don't follow it Daily, You actually Can buy an ETF and forget about it. I look at them the same way I look at individual stocks.

    What matters is the Chart and the Trend, daily/weekly contractions can happen at any point. But if the Chart doesn't indicate a change in Trend, you will get out and Never get back in or you will wind up paying more when you try to get back in.

    Take the Banking Sector, If you seriously believe that Nationalization will occur, FAZ is a buy and Hold. Otherwise FAS is the route to go. The TARP paybacks have assured me that The Banking Sector will not only survive but will really thrive in an environment where lendors borrow at low rates and Lend at ennormously higher rates. The Move up in Long term yields on Treasuries assures that profitability.

    Congress passed it consumer "friendly" Credit Card regs., but they are also very friendly to the Bottom Line for Banks, They won't issue Credit Cards to every Tom, Dick and Jane walking past their doors, Credit will go where Credit worthiness lies. And High Credit Card defaults will be a thing of the Past.

    I'm holding FAS for the Next year at a Minimum, Target Upper Teens. DAG ditto but maybe higher.

    Oren Samuelson? Hard to see the spelling on a Radio Show, especially with one eye.
    Jun 24 03:52 AM | Link | Reply
  •  
    Just got back into DAG. A word of warning though, DAG is an ETN and is a slave to the stability and credit worthiness of the issuer. In another meltdown situation, I would likely sell my position for safety, even if commodities were rising.

    I'm out of FAZ and would not recomend holding any triple leverage ETF for over a week. FAS and FAZ will eat you alive over an extended period of time. I've thought about shorting both simultaneously.
    Jun 24 04:45 PM | Link | Reply
  •  
    Hey, guys, why wouldn't you buy (or sell) options on fas and faz? You've got the leverage working with you, so you can invest much less $ for an equivalent position and have staying power? I'm no lover of etn's, but that's what I'd consider, first. If the position works in your favor, you can exercise the call or put, buy the stock and sell it for an arbitrage opportunity. (And please, no lectures on what arbitrage Really means. You both know what I am talking about.)

    So, who has heard of EMP? It's not a stock ticker. It's a way of killing electrical infrastructure. go to pajamas tv and click on their 4 minute video about electromagnetic pulse. This is as interesting as a Tom Clancy novel.
    Jun 24 05:05 PM | Link | Reply
  •  
    Fascinating. I had no idea that such chaos could be achieved through a single EMP.

    Thanks.
    Jun 24 05:30 PM | Link | Reply
  •  
    Doesn't that put North Korea's latest threats in a new light?
    Jun 24 06:30 PM | Link | Reply
  •  
    You bet.

    What's scarier to me though is the idea of North Korea as a cutout for another country that wishes us ill.

    I don't think North Korea is capable of pulling it off. But China or Iran could pull it together for them, or make it look like they did it.

    Poof! New number one. China.

    Poof! Death of the Great Satan. Iran.
    Jun 24 07:13 PM | Link | Reply
  •  
    Very nice article - good information
    Thanks
    Did a recent bit of research on EMP in '08
    An EMP pulse generated from a detonation 180mi above the center of the US would instantly destroy tech and thrust the country to the center of the abyss. All tech; gone! Try accessing brokerage, financial resources/data then. Gives a whole new meaning to "cash is king". Interesting though, contrary to popular opinion, it would appear cars and trucks are more resistant to the effects of EMP than seems logical given all the semiconductors in them these days.
    www.wnd.com/index.php?...
    www.globalsecurity.org...

    For personal electronic asset protection, an easy and cheap Faraday's cage will preserve electronics from such an event.
    At least the electronics on your end. Public networks would likely be toast.
    standeyo.com/News_File...
    Jun 25 06:04 AM | Link | Reply
  •  
    OK, this question just shows how dumb I am. Let's say a person has a defribrillator ( I don't even know how to spell it) for heart troubles. Those things use a phone to check if it's been triggered. Would that mean the defribrilator would burn out, right in someone's chest?
    Jun 25 11:09 AM | Link | Reply
  •  
    thanks for sharing your sources!


    On Jun 25 06:04 AM Sphira wrote:

    > Very nice article - good information
    > Thanks
    > Did a recent bit of research on EMP in '08
    > An EMP pulse generated from a detonation 180mi above the center of
    > the US would instantly destroy tech and thrust the country to the
    > center of the abyss. All tech; gone! Try accessing brokerage, financial
    > resources/data then. Gives a whole new meaning to "cash is king".
    > Interesting though, contrary to popular opinion, it would appear
    > cars and trucks are more resistant to the effects of EMP than seems
    > logical given all the semiconductors in them these days.
    > www.wnd.com/index.php?...;pageId=72801
    > www.globalsecurity.org...
    >
    >
    > For personal electronic asset protection, an easy and cheap Faraday's
    > cage will preserve electronics from such an event.
    > At least the electronics on your end. Public networks would likely
    > be toast.
    > standeyo.com/News_File...
    Jun 25 11:18 AM | Link | Reply
  •  
    Many of our Communication Hubs are in "Hardened" buildings built to withstand EMP effects, as is NORAD, the Nerve Centers of the Pentagon, etc. The whole System won't go down. Most of this was done during the "Cold" War.

    I believe one was used in the Ocean's 11 movie to fry the lights in Vegas. Small, easy to put into a truck and transport.

    If I wanted to put the Fear of God into Iran or North Korea's leadership, I would start by resurfacing "old" weapons Technology. Leaking it to the Media and having them run with it, a blast from the Past, the Neutron Bomb.
    Jun 25 11:53 PM | Link | Reply
  •  
    On Jun 25 11:18 AM optionsgirl wrote:
    > thanks for sharing your sources!

    optionsgirl
    My pleasure, and glad they were of interest. Significant threat or not, we must all look out for each other or no one will. Right? If you do a search for Norman Dodd on video.google.com Topic: 1953 U.S. Congressman Carrol Reece - The Reece Special Committee on Tax Exempt Foundations - I bet you will also find that of interest. Here is his Bio
    "During or after the 1929 stock market crash he was assigned by his superiors the task of restructuring the bank he was working at"
    en.wikipedia.org/wiki/...

    Take Care
    Peace,
    Sphira
    Jun 26 03:43 AM | Link | Reply
  •  
    Also,
    I Love free exchange of thoughts and ideas
    I read an article on the disruption to pace makers, so I assume your concern is valid optionsgirl.

    one eye:
    Yes, but most infrastructure is not hardened. Server farms, Co Los - routers - grid power - your personal DSL/T1/Cable interface what have you - and on and on it goes. So if it were to occur, The whole System may not go down, but hardened network access for the "little guy" is likely to be non existent.

    Peace,
    Sphira
    Jun 26 03:58 AM | Link | Reply
  •  
    Also,
    I Love free exchange of thoughts and ideas
    I read an article on the disruption to pace makers, so I assume your concern is valid optionsgirl.

    one eye:
    Yes, but most infrastructure is not hardened. Server farms, Co Los - routers - grid power - your personal DSL/T1/Cable interface what have you - and on and on it goes. So if it were to occur, The whole System may not go down, but hardened network access for the "little guy" is likely to be non existent.

    Peace,
    Sphira
    Jun 26 03:58 AM | Link | Reply
  •  
    Not sure how the heck that happened - sorry for the double post there.
    I promise I will not do it again ;-(
    Dang - now triple post with this explanation. Guess sometimes I'm a technodunce early in the mor.
    Now I feel stupid/human. but on the bright side, I can share that google vid link
    video.google.com/video...
    Jun 26 04:27 AM | Link | Reply
  •  
    Sphira: Don't hold that button down, just tap it once. Your Mouse settings must still be geared for speed.

    Do we know how an EMP will affect Wireless comunication? Communication Sattelites which have been shielded against Radiation?

    I don't know, just asking
    Jun 26 05:23 AM | Link | Reply
  •  
    Aye Aye, Eye - too funny, yes my mouse is sensitive.
    It seems the great issue here is when a EM pulse with sufficient force is generated then readily conducted through devices to the tune of about 10 kvolts for only a millisecond or so, it zaps the ICs and other components which is what the Faraday cage would prevent. CMOS semiconductors are especially vulnerable. There are not enough, if any, unaffected replacements available to get going again considering how everything that does anything has a chip these days. It seems probable that just the radiation (assuming nuke detonation) alone would halt normal satellite communication capabilities for a time. Also, a cage will not be nearly as effective if the device is networked. The cable is a conduit to the device internals. Literally, we are talking back to the horse and buggy days in an instant if this actually happened. The effectiveness is dependent on High Power, short wavelength of the pulse. Starvation follows, unless the world feeds 300mil Americans for free - for a long time. Don't know how likely any of this is, but considering how dependent we are for Maslow's hierarchy of needs on everything but ourselves, it would be prudent to hedge on that a bit whatever the events.

    Though, whatever is coming for us all soon it seems it is not good. optionsgirl has good info here to work with. Bank the dough. Convert a percentage to truly tangible worthy assets. Less we are not able to get our hands on it (our dough) or buy things in time if the s hits the fan.

    This (EMP) has already sort of happed in 1962 with STARFISH
    glasstone.blogspot.com...

    "The purpose of an EMP is not to radiate, destroy buildings or cook people. It just fries everything electronic so that nothing works. Nothing...Not trains, not planes, not automobiles. No lights, no water pumping, no tv, no refrigeration, no gas, no food...Yet, not killing off the population...At least not immediately..."
    Jun 26 09:19 AM | Link | Reply
  •  
    This is a wonderful post! Thanks OG and all the commenters.
    Nov 17 05:37 PM | Link | Reply
Full index of posts »
Latest Followers

StockTalks

  • sold jag 12.50 calls for march 2010 @ .85
    Dec 14, 2009
  • nvax buying opportunity this afternoon? It's dropping precipitously. Looking for news on it.
    Dec 11, 2009
  • jag
    Dec 08, 2009
More »
Posts by Ticker

Latest Comments


Most Commented
  1. Quick Chat #23- 12/2/09 After Market Close (144 Comments)
  2. QUICK CHAT # 29 Thursday 12/17/09 (128 Comments)
  3. QUICK CHAT #9- Starts after Market Close on 10/26/09 (126 Comments)
  4. QUICK CHAT #30 Start 12/18/09 after Market Close/Bernanke Villian of the Year (125 Comments)
  5. QUICK CHAT #27- Start 12/13/09 pm (124 Comments)
Posts by Themes
2009, 2nd article: Climate Control/Copenhagen, Afghanistan, Aluminum Alloys- REE, another public forum the burning platform, Article on Platinum group, Australia on Chinese stock purchases, Bank Failures, banking, BANKING, Batteries, BRAZIL, Brazilian Real, BRIC, Canada, cap and trade, cash for caulkers, Cash4Gold, CDO's, CEMENT, CHINA, china, China, china/trade agreements, Chinese Agriculture Stocks, Coal, COAL, companies hoarding cash!, Copenhagen/Climate Change , Copenhagen/Climate Debate, cre, defensive strategies in a down market, Dodd's bill, Dubai, economy, Economy, ECONOMY, eestor, EESTOR, etc., European Banks, Extending Unemployment benefits and $8000 homebuyers credit/economy, FED, FED POLICY, Federal Reserve/Banking, FOOD INFLATION, FUEL, G-20, GASOLINE, Gold,
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.