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After Coming Rate Cuts, Some Appealing Short ETFs

by: Larry MacDonald October 05, 2008 | about stocks: EFZ / EUM / SDS / SZK    
Larry MacDonald

Larry MacDonald

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The downward spiral of de-leveraging appears to be gathering pace. Now shares in insurance companies are tumbling. Mutual funds experienced a record exodus in September. And tremors are rippling through the hedge fund world, most visibly in the rising wave of lockdowns, redemptions, and predatory behavior (hedge funds shorting the positions of their weaker brethren).

Paulson’s bailout package diverted attention away from the deteriorating economy but now investors are getting blindsided by increasingly dismal data releases on the economy. Stocks sold off sharply Friday on some weak economic indicators.

Since the Paulson bailout has gone through, it’s tempting to use any ensuing stock-market rally to increase exposure to some of the bear exchange traded funds [ETFs], of which a handy list can be found on Stock-Encyclopedia.com. Examples include the ProShares Short MSCI EAFE (EFZ), ProShares Short MSCI Emerging Markets (EUM), UltraShort Consumer Goods (SZK) and UltraShort S&P 500 (SDS).

But don’t stay too long. When the central banks start chopping their interest rates, stocks could see a good rally. Indeed, some investors may want to wait until the central banks start the chopping to get into the bear ETFs near the top of the ensuing stock rallies. In time, there will be a recovery but the forces of deflation are out front now and it will take a while for fiscal and monetary responses to catch up and wrestle them to the ground.

The Stock-Encyclopedia.com list does not include all the bear ETFs in Canada. For example, the Horizons Betapro S&P/TSX Capped Financials Bear Plus lets one double-short Canadian banks and financial companies. They have so far fallen little by comparison to U.S. financials, but could make up for lost time as the commodity boom winds down more.

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This article has 12 comments:

  •  
    Oct 05 08:16 AM
    i wonder how much the (legitmate) short selling ban, and threat of another at any time on any stocks, has had or will have on the short etf's

    has there been reduced volume or correlation in the short financial etf's?

    if anyone has good data, that'd be great, thanks
    Reply
  •  
    Oct 05 08:24 AM
    The Canadian banks have not fallen as much for good reason, they lack the exposure to poor credit. They have already priced in a mild recession which will likely happen in Canada and at this point I'm not sure that is the first sector I would want to bet against going forward.
    Reply
  •  
    Oct 05 09:07 AM
    Dont bet against CDN banking stocks. They are off their highs by anywhere from 12% (BNS) to 44% (CM) and are paying dividends ranging from 4 - 6%. Canada is stable politically and economically and is a member of G7, G8 and UN. Canada is running a budget surplus .... a refreshing idea in the world of ever increasing government deficits. There is no housing crisis in Canada.
    Reply
  •  
    Oct 05 09:14 AM
    No housing crisis in Canada... YET
    Reply
  •  
    Oct 05 09:53 AM
    The perfect storm is going on in one Canadian Stock. The fourth quarter is always a weak one for GLHIF as rain fall is typically diminished over the Northeast and eastern Canada during this period. We can also see the decline in the "Loonie" continuing through year end. While there are impending 2011 tax issues with this company their business model is fundamentally sound. Hydropower! The dividend is getting ridiculously rich at the current price. If the Fed cuts rates and the Canadian central bank fails to follow the "Loonie" could easily make a stand at 90/110. While the Nat resources are indeed getting hammered many of those companies have hedged contracts in place and should muddle through. There is also the chance that US deflation will turn to inflation sooner than most expect. The world is still afloat in liquidity. If the Chinese start moving some of their cash out of US treasuries. (The last US Treasury TIC report for the month of July was a negative $75 Billion) Canadian resource companies look like good acquisition targets at cheap valuations. The Canadian model looks a lot stronger going into next year than the US economy. Their economy should also benefit from the 2010 Winter Olympics in greater Vancouver. If GLHIF were to cut it's dividend or the "Loonie" sink below 90 then GLHIF could trade back to around $6 US dollars and change. Any recovery in oil prices by next year due to inflation or a weakening dollar will have a leveraged positive benefit to GLHIF. With global warning initiatives possibly becoming more in vogue or mandated by law the value of hydro power itself can be seen to increase, as utilities buy hydro to off set their carbon footprints. Investors should keep in mind that under the current tax treaty with Canada the current 15% with holding on these trust payouts will be eliminated when the 2011 tax change occurs. These companies will no longer operate as trusts but convert into MPLs,REITs or other more commonly seen corporate structures. Many like GLHIF should be able to continue paying strong dividends. In this case many of these types of investments will be seen as good bets for tax sheltered US investors looking for yield.
    Reply
  •  
    Oct 05 10:08 AM
    The short ETFs all use derivatives to accomplish their magic. These derivatives come from companies like AIG and from hedge funds that could fail at any moment. If there is a crash the big payoff for these ETFs will have to come from companies that will probably be bankrupt.
    www.trendsimwatching.c...
    Reply
  •  
    Oct 05 10:40 AM
    adan,
    since that fateful day (9/19) SKF has indeed seen a 75% decrease in volume. Take a look at the 1 month chart with volume overlay and you'll see the dramatic difference. If SKF were 'yin', then UYG would be its 'yang'. Comparing the two on the following trading day (9/22) saw UYG down about 10% while SKF was up only about 3%, so the two had indeed lost their inverse correlation. I was able to get into SKF on the 19th at $90 and 9/22 made me worry I'd made a mistake. However, since 9/22 SKF and UYG have slowly resumed their inverse correlation. Presumably ProShares accomplished this as they do not directly short Financial stock, but rather look for buyers of futures contracts, etc. (search SA with 'SKF' and you'll pull up articles that explain it better than I can.
    Reply
  •  
    Oct 05 11:06 AM
    Before going off the deep end, take a deep breath.

    What Sector Bottoms before all of the others? What Sector presages an end to a recession?

    IMHO, I would be very adverse to short either the Currency or Country Index of any resource Rich Country. Unless the Global Recession does indeed become Global, not just a drop from 11-12% GDP to say 8-9% in China.
    Reply
  •  
    Oct 05 02:10 PM
    for more on deleveraging, redemptions, hedge fund turmoil: www.marketfolly.com/20...

    and hedge fund september performance #s: www.marketfolly.com/20...
    Reply
  •  
    Oct 06 05:26 PM
    There are two very good Bear Market mutual funds as well. These are: 1) Prudent Bear Fund (BEARX). This one shorts some indexes and individual stocks, and also keeps around 15-20% of their money in precious metals stocks; 2) Leuthold's "Grizzly Short" fund (GRZZX), which uses a quantitative methodology to choose its shorts. These actually own short stock positions, not just derivatives. Keep in mind, once you are already have a short position, you can keep it, no one forces you to sell. Of the two, GRZZX has by far had the better year, in fact, I own quite a bit of it and I'd have been sunk with out it!
    Reply
  •  
    Oct 06 08:40 PM
    Rate cuts got us into the the easy money credit mess. Does the USA want to another Japan that suffered a lost decade?
    Reply
  •  
    Oct 10 04:48 PM
    Monty Man "No housing crisis in Canada... YET ". I think your right. After all the chips fall, many Americans may be heading north. I would go long property in Ontario and also the Montreal area.
    Reply
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