wulfmeister

Gold Cannot Be Inflationary, But the Dollar Sure Can

Paco - A comment on TBT and other short leveraged ETF's. In a research report entitled "DIG"ging Deeper into the Effects of Compounding on Leveraged and Leveraged Inverse ETF's," published Jan 13, 2009 by Morgan Stanley: "On average we found that... ETFs captured 90-110% of their expected daily return 48% of the time and captured 70-130% of their expected return 77% of the time...." " Even if leveraged and leveraged inverse ETFs capture 100% of their targeted daily return, they are unlikely to match a point-to-point doubling of their underlying benchmarks as a result of the effects of compounding." So let's say you buy TBT when the index is at 100. On day two the index is down 10%. due to the doubling effect, TBT is down 20% and you are down to 80. On day three, the index is up 10% so TBT is up 20%. But since your capital base is now 80, then 80X1.20=96. A tidy -4% loss. Note that even thought the daily doubling was perfect each of the two days (down 20% when the index was down 10% and up 20% when the index was up 10%). Simply stated, the larger the base value, the greater each day's percentage change has on the notional value of each security." Also... "In order to provide +200% of an index's daily return, Utlra ProShares need to increase exposure when the market rallies and decrease exposure when the market declines."

Assuming a ProShares Ultra ETF (+200% market exposure) has a net asset value (NAV) of $100, it needs $200 of exposure to generate a doubling of it's benchmark index's return the next day. If the market rallies by 10%, the NAV of the ETF would increase by 20% (double the index return of 10%) to $120. To double the next day's return, the ETF now needs $240 worth of exposure. This would be represented by $120 of NAV and $120 worth of leverage. Effectively, the ETF needs to increase the dollar value of its leverage by $20 to keep its leverage ratio constant ($1 of leverage for each $1 of NAV). The opposite occurs during a market decline when Ultra ProShares need to reduce leverage to maintain 200% daily exposure. In effect, Ultra ProShares increase market exposure as the market rallies (buying high) and decrease exposure as the market declines (selling low).

What Works When the Investment Tide Turns?

Seriously, look at the article on double short ETF's in Barrons Jan 12th issue, and look at it good. And oh, and buy the way my friend, if you're shorting anything, it should be 20-30 year Treasuries and not the equity markets. Short the bubble, go long when on what's bloody. In the words of Buffett, "I sell when everyone else is greedy, and buy when everyone else is terrified." (paraphrase).


On Jan 19 05:45 AM ROLEX18K wrote:

> For long only investor the previous long only strategy stopped working
> and every week investors see how little by little the red ink grows
> and grows even when the market looks like it stopped crashing.

>
> The answer to your question, what works? Is very simple - what didn't
> worke for the last 10 years, and it is double short ETF like DXD,SDS,TWM
> and the like, any double short index would not work since last year,
> but now the best advise to save the passive investors is for them
> to reverse their losing, long only accounts and instead of buying
> the market, start selling the market using any short or double short
> also called inverse ETF, that's the only way.
> In the beginning this strategy may not work as markets can make short
> covering rally, but sitting put and tight, such an investor will
> see that this strategy will generate him every year for many years
> maybe even 10% per year on average for double short ETF, maybe more.

>
> It is the opposite of what worked before, now it will work for a
> long time as well.SELL THE MARKET, IT IS TOO DANGEROUS FOR YOUR HEALTH.

Finally Time to Short U.S. Treasuries?

Seriously, You guys need to read the Barron's article in the Jan 12th issue regarding the problems with leveraged inverse closed-end funds, especially when holding long term. Think about it, if the index is at 100 and declines to 90, and you are in a 2x levered fund, then YOU are at 80. If then the index moves back to 100, you are now at 96. A tidy -4% LOSS. Day trade them, don't hold them. Over time this multiple only gets worse. This it NOT a long-term or even mid-term trade.


On Jan 06 10:07 AM Dan Lonowski wrote:

> I bought TBT on Dec 31. We'll see if I was too anxious. Gained 10%
> so far...