Short ETFs the Only Winners as Markets Plunge Again

by: Peter Cooper

The fall out from the Greek debt crisis refused to die down yesterday with markets fearing similar debt crises in Spain and Portugal. The euro fell below $1.30 and acted as a transmission mechanism taking the mayhem across the Atlantic to give markets their biggest sell-off since January.

Only the short exchange traded funds enjoyed big rises yesterday. The basket of 10 short ETFs recommended in the May edition of the ArabianMoney newsletter jumped by 4.5 per cent.

Short ETFs

Short ETFs are designed to capture the inverse of market falls. If market falls continue then this performance will compound heavily to deliver a spectacular result. But markets have disappointed those shorting the long rally since March 2009 for many months, causing big losses.

Yesterday’s sell off was the most broadly based since January and also the deepest in percentage terms. The Dow Jones lost two per cent, the S&P 500 closed down 2.38 per cent and the Nasdaq dropped close to three per cent.

With government debt problems mounting in Europe, and protestors storming the Acropolis in Athens to call for a revolution, the fear of a W-shaped recession has returned with a vengeance. China has also been tightening up on lending to calm its runaway economic boom, bringing Asian financial markets sharply down.

Even Australia put the boot in by raising interest rates and announcing a new super-tax for mining companies. The realization is coming to financial markets that the recent tentative recovery has been fueled by government stimulus, spending levels and ultra low interest rates that cannot last much longer.

Gulf State implications

For the Gulf States this will mean a lower oil price for a period of renewed recession in major global economies. However, it is not clear that spending cuts are achievable and the alternative is to print money and cause inflation.

This inflation would be reflected in much higher oil prices, and this could mean another oil boom much sooner than many observers currently think is possible. The danger then is of another boom and bust cycle, with savage volatility in local equity and real estate prices.

This could mean a quick recovery in the UAE stock market after the initial shock of the latest crisis in financial markets is over. The May edition of the ArabianMoney newsletter considers this possibility in detail and recommends UAE stocks as its Trade of the Decade for subscribers.

Disclosure: No positions in short ETFs recommended in ArabianMoney