Saturday, March 29, 2008

An Alternative Investment You Should Know About

In the superheated stock market of 1998-2000, the Platinum wife would occasionally comment on how I seemed to be spending a lot of time talking clients out of “doing crazy things.” In my clients' defense, I have to admit that it was hard not to get caught up in the "irrational exuberance," as Alan Greenspan put it, of the dotcom boom. But after the bubble burst in March of 2000, everything changed. By 2002 and 2003, the Platinum wife was telling me I should hang out a shingle as a depression counselor. She’s a very perceptive lady.

Stocks have been going up and down ever since there have been stock markets. The problem is that, with the exception of some sophisticated investors who have the stomach for "short selling" or perhaps some sophisticated option strategies, investors pretty much have to try to pick which stocks or which sectors of the market are going to go up, or just give up and buy an index fund. But the good news for them has been that with the solid long term uptrend of the last, oh, 100 years or so, that’s been a pretty good posture to take, generating annual returns in the neighborhood of 10%.

But have you ever had a strong feeling about the future direction of a commodity, or interest rates, or that a certain stock or industry is going down, not up? What could you do with that conviction? Let’s say that about 14 months ago, you thought, for example, that real estate was overpriced and due to drop. What could you have done about that?

On February 1, 2007, an obscure new class of Exchange Traded Funds (ETFs), called Ultrashort Funds, began trading on the AMEX. Each UltraShort ETF is designed to fluctuate INVERSELY with a given market sector or index. That is, they are designed to go up when the associated market sector goes down, and vice versa. The sponsor accomplishes this through short selling and other bearish strategies, and employs enough leverage to cause the funds to move DOUBLE the amount of the associated sector. (That’s where the “Ultra” comes in)

One of these Ultrashort funds covers the real estate sector and trades under the symbol “SRS”. On that first day of trading in February of 2007, a grand total of 1200 shares of SRS changed hands, and it closed at $67.47 per share (as adjusted for later dividends). Now I think you know what has happened to the real estate market, and real estate stocks have fared no better. So what happened to SRS? This past Friday, it closed at $100.66, on volume of 1,563,900 shares. And it spent much of January of this year in the $120s and $130s, briefly hitting a high of $151.99 on January 22nd, which was that big reversal day, when the Dow was down 300 in the morning, then up almost 400 by the close. Wouldn’t it have been nice watching one of your holdings skyrocket that morning, while the blood was otherwise running in the streets?

I know, I know, it’s easy to pick real estate in hindsight. But I’m not trying to convince you about SRS. I’m not trying to convince you of anything, as it says in my brand new disclaimer that I posted yesterday. I don’t even necessarily think it’s a good idea to own SRS right now, because if real estate starts to rebound by year end, and since stocks anticipate the economy by 6-9 months on average, maybe real estate stocks are ready to rebound, which would send SRS back down.

I could have picked SKF as an example. SKF is an Ultrashort on financial stocks, and has done quite well, thank you. Or I could have picked several others that I follow. In fact, although I haven’t checked all of them, I wouldn't be surprised if they ALL have gone up to some degree since their creation.

What I AM trying to convince you to do is to learn more so that you can add this tool to your investment arsenal. Head over to the Yahoo Finance website and type “Ultrashort” into the Symbol window, click on “show all results,” and then the "ETF" tab. You will see a list of all 27 Ultrashorts. Poke around and look at some of their charts. Notice how the volume has grown since inception. They have become very popular as a simple way to bet that a market sector is going to go down. And another big reason for their popularity is that they provide a way for IRA account holders to take bearish positions, whereas selling short and bearish option strategies are prohibited in an IRA... (baby boomers with brokerage IRAs take note).

Tha sponsor of Ultrashort ETFs. called ProShares, maintains a pretty good informational website, www.proshares.com. (Disclosure: I have no relationship with them, nor do I currently own any of their funds.)

So keep UltraShort ETFs in mind as a possibility for the next time some area of the market seems overpriced. I’ve always thought that it’s easier to find something that’s overpriced than it is to finding something that's underpriced, which is what most investors feel they have to do.

But not you… not anymore. – Bob

P.S Tomorrow I’m going to continue with a few more “creative” new investment vehicles, so y’all come back now, ya hear?

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