Tripling Down

Ulli Uncategorized Contact

Inverse funds and ETFs have made it easier than ever for investors to play the short end of the market. Even double and triple-leveraged funds have been around for a while, and recently Direxion has added another group to its ever growing stable as SeekingAlpha reports:

Direxion, the provider of revolutionary triple-leveraged exchange traded funds (ETFs), is out with a new set of funds. This time, they come with exposure to Treasuries.

These new funds allow investors to go three times long or short on 10-year and 30-year Treasury bonds, essentially making a bet on rates. The indexes give 300% the daily performance, or 300% the inverse, of the NYSE Current 10- and 30-year U.S. Treasury indexes.

The new funds are known as:

* Direxion Daily 10-Yr Treasury Bull 3x Shrs (TYD)
* Direxion Daily 30-Yr Treasury Bull 3x Shrs (TMF)
* Direxion Daily 10-Yr Treasury Bear 3x Shrs (TYO)
* Direxion Daily 30-Yr Treasury Bear 3x Shrs (TMV)

The current rate on a 10-year bond is 2.76%; on a 30-year, it’s 3.66%. Treasuries were mixed after Wednesday, and longer-term bonds saw their yields rise slightly, reports Nick Godt for MarketWatch. Signs of improvement in the economy, however slight, tend to decrease the appeal of U.S. government debt.

Adding to pressure on the debt is that foreigners sold another $97 billion in net U.S. assets in February, the second consecutive decline following a $146.9 billion drop in January.

Also, Direxion will be changing the name of all of its ETFs to include the word “daily,” to better reflect that these funds seek daily investment goals and should be used only as short-term trading vehicles. Leveraged ETFs have become more popular, and along with that has come attention. Leveraged and short ETF providers have done a great job of educating investors about these tools.

All of these leveraged instruments have the potential to turn an ordinary investor into a gambling fool. Caution is advised and, unless you know what you’re doing, you better stay away from these hot potatoes. Wild price swings in either direction can do a number on your psyche as well as on your portfolio value.

To me, these instruments are used best in combination with a hedge strategy. I am looking forward to these Treasury Bull and Bear ETFs to establish some volume and price pattern over the next few months, and I hope to find a use for these tools in combination with a hedged income generation appraoch.

Disconnect

Ulli Uncategorized Contact

The stock market has been in a total disconnect mode from economic reality over the past 6 weeks all based on the glimmer of hope that an economic turnaround may be lurking on the horizon over next 6 months or so.

It’s too early to tell if yesterday’s sharp sell off means that the markets have shifted back to reality mode, or if this was a one day interruption of the recent rally.

This past weekend, Dr. Housing Bubble had this to about Wall Street being disconnected from Main Street:

The stock market at least in its current form is a horrible indicator of the actual economic carnage falling upon the majority of Americans. Most Americans are witnessing the current rally and wondering why the massive run up (largely in financial related stocks) is going forward while they are getting called into supervisor offices behind closed doors and being laid off or seeing their hours cut back.

Wall Street has completely disconnected from Main Street. It is also hard for many to understand how they are having their limited income being taxed to finance the bailouts of Wall Street and financial cronies while they are asked to do more with less. They are seeing these same institutions, alive because of the massive funding from the American people since our government ideally should reflect the will of the majority, shut off credit lines and raise rates while the government through the U.S. Treasury and Federal Reserve showers the banks and Wall Street with easy low rate financing thanks to the American taxpayer. Welcome to the new America. Where unemployment is good news for Wall Street and bailouts are now seen as a new source of revenue for financial companies. New accounting students will learn how to incorporate bailout funds as a new source of revenue.

It is easy to turn a profit when trillions are funneled into the financial system. This is like jumping into the blue ocean and being shocked you got wet. Yet the problem of course is very little of this money is trickling down to the real economy; you know, the economy that doesn’t involve Bloomberg Terminals and pinstripe suits? Imagine a giant person eating at a table and the mice are running around on the floor hoping to pick up the scraps. Guess who the mice are?

The last few weeks have been great for the financial companies because they are now operating in a pseudo reality that is for the privileged few. These are the new financial overlords and all it took was the collapse of debt to show them for what they truly are. Many people for the last few decades have confused debt with actual wealth. That is a mistake we are now coming to terms with.

As always, Dr. Housing Bubble is right on with his observations, and I suggest you read the entire article if his viewpoints resonate with yours.

I still believe that this rebound over the past 6 weeks is a classic bear market rally. If you were fortunate enough to participate, and you regained some of your losses, you are well advised to implement some kind of sell stop discipline in case we are heading back south with the long-term bearish trend resuming its course.

Another Hedge Experience

Ulli Uncategorized Contact

Reader David emailed and had this to say about the recent discussion about the use of the SimpleHedge Strategy:

I have enjoyed your weekly newsletters and daily blog for some time. Thank you for sharing your knowledge and wisdom. I noticed a recent blog from ‘Foster’ concerning your simple hedge strategy where he used mutual funds as the long position. Some readers commented about using ETF funds.

Maybe my simple hedge will be of help to readers wanting to use ETF funds.

I set up my hedge on March 23 with 20% of my portfolio as follows;

10% in SH purchase price $75.69
5% in VBR (beta 1.22) purchase price $35.94
5% in VOE (beta 1.20) purchase price $29.33

as of 4/16/09 SH=-5.88%, VBR=+11.8%, VOE=+10.16%, Total hedge= +2.87%

I’m using ETF funds so I don’t have to worry about trading fee’s etc. I pay $8 per ETF trade.

I hope this helps some of your readers who may want to use ETF funds with the simple hedge.

To see what he has actually done, let’s look at my matrix again:



[Click on table to enlarge]

We have a slight discrepancy in total return, but that’s really not that important. What matters is that David has applied the hedge concept successfully to ETFs, since that is what he prefers using for his investments.

It does not really matter whether you use ETFs or no load mutual funds, as reader Foster described. What is important is that both understood the concept and applied it correctly.

I really have no preference either way, since my testing has shown that during some periods in time, ETFs prevail over mutual funds and vice versa.

I will continue tracking these two examples to show how they will fare in different market conditions.

Sunday Musings: Prison Survival

Ulli Uncategorized Contact

Hat tip to reader Tom for submitting this article called “Madoff’s Niece Calls Prison-Survival Expert:”

Bernie Madoff’s niece is so worried about doing jail time that she’s seeking prison survival tips from a consulting firm, sources told the New York Post.

Which brings to mind at least one curiosity: There’s a consulting firm that helps would-be inmates prepare for incarceration?

The answer is yes, and it’s called Wall Street Prison Consultants. On its Web site, in big, capital letters, WSPC asks visitors: “ARE YOU SCARED AND CONFUSED?”

Shana Madoff contacted the firm’s founder, a former federal prisoner named Larry Levine, the sources told the Post.

“A female relative of Bernie Madoff contacted me,” is all Levine would confirm to the paper. It sounds like she has reason to be scared.

Shana Madoff, 38, was a compliance officer for her uncle’s firm before it was exposed as one giant Ponzi scheme. As compliance officer, Madoff’s neice signed her name on a lot of legal documents.

Shana Madoff contacted Levine so that she can “learn how to game the system, so you end up in Club Fed, not Leavenworth,” a source told the paper.

With its “Fedtime 101” course, Levine’s firm instructs white-collar offenders on how to survive federal prison and earn an early release. These skills would come in handy for Shana Madoff, who grew up on six acres on Long Island. Her dad, Peter Madoff, is Bernie’s brother.

Levine said that another male member of the Madoff family has called him, the Post reported.

“I give people a wakeup call,” Levine told the paper. His course costs $850.

This story would be pretty funny if the situation surrounding it would not be so serious. Hopefully, if justice prevails as I mentioned in yesterday’s post, this business has an opportunity to blossom big time.

But why only charge $850? $85k or even $850k would seem more appropriate to me. Make those in need of this kind of information pay for it.

Rescuing The Economy

Ulli Uncategorized Contact

MarketWatch featured an article with the intriguing title “Rescue the economy? Try the SEALS.” Here are some highlights:

President Barack Obama has put the wrong federal agency in charge of the rescue of the financial system. Instead of hiring Tim Geithner and the TARP, he should have hired the U.S. Navy and the SEALs.

When lawless pirates captured an American sea captain, the Navy put the hostage first. Now he’s safe, and the hostage-takers are dead or jailed.

When lawless bankers captured the global economy, Geithner put the hostage-takers first. And the hostage-takers are stepping up their demands: Change the accounting rules, guarantee us against any losses from the toxic assets, and rig the stress test so we all come out smelling like roses.

Old-timers may remember with nostalgia the days when it was easy to tell the difference between a major financial institution and a criminal enterprise. Those days are long gone.

Consider, for instance, the indictment unveiled last week against a San Diego street gang on multiple counts of mortgage fraud. According to federal prosecutors, the gang arranged to buy 220 properties for more than $100 million from 2005 to 2008. They overpaid for the properties by taking out liar loans using phony appraisals. They then funneled a kickback to a company controlled by the defendants, the indictment says.

Liar loans? Phony appraisals? Kickbacks? That sounds pretty much like the business model for the mortgage brokerage industry in California during the bubble. Maybe the real complaint is that the mob was muscling in on their territory.

Or consider the report in Monday’s Wall Street Journal that the Troubled Asset Relief Program oversight panel is investigating complaints that the banks that received money from the TARP are raising interest rates and imposing new fees on customers.

It is indeed shocking to learn that banks are behaving like banks. Isn’t the whole point of the TARP to help the banks get back on their feet? And if they can’t sell trillions of dollars in credit default swaps to each other, the most profitable line of business they have left is the customer-gouging unit, also known as their credit-card businesses.

Citigroup defended a recent loan promotion that didn’t disclose that the annual interest rate was 30%. The interest rates “compare competitively to similar offers in the market,” a Citigroup spokesman told the Journal. So this is like an offer you can’t refuse?

[My emphasis]

Liar loans, phony appraisals and kickbacks have been the mode of operation for the years leading up to the bursting of the real estate bubble. In order to really rescue the economy those, who led us into this mess, need to first be removed from their positions of power and replaced by management with competence and integrity.

That’s one issue but to me, there is much more at stake. While there has been much talk about outright fraud and deception in the banking and mortgage industry, I have yet to see anyone being brought to justice. Quite the contrary; you only read about the very few who have been let go on good terms, and they are happily sailing into the sunset with their golden parachutes.

This really concerns me, and I have asked myself on many occasions “has the American justice system failed?”

What’s your view?

No Load Fund/ETF Tracker updated through 4/16/2009

Ulli Uncategorized Contact

My latest No Load Fund/ETF Tracker has been posted at:

http://www.successful-investment.com/newsletter-archive.php

Choppy activity, but with an upward bias, pushed the major indexes to their 6th week of gains.

Our Trend Tracking Index (TTI) for domestic funds/ETFs remains below its trend line (red) by -3.50% thereby confirming the current bear market trend.



The international index now remains -5.84% below its own trend line, keeping us on the sidelines.



For more details, and the latest market commentary, as well as the updated No load Fund/ETF StatSheet, please see the above link.