Recently, a reader mentioned that he was using my M-Index to pick bottom of the barrel ETFs, namely real estate related beaten down indexes. My personal preference is to buy ETFs that are on the way up and not trying to catch the proverbial knife.

Especially, real estate appears to be the next super bubble, which may take many years to unwind. Case in point is the Chicago Mercantile Exchange’s (CME) extension of the futures market on the S&P; Case-Shiller Home Price Indexes from one to five years. Now, futures investors can make bets on where home prices will be as far out as 2011. Matthew Hougan of Index Universe featured the gloom and doom tables along with their estimated percentage change in real estate prices on the most recent futures sale on the CME:

Matthew makes 2 important points:

1. Read that chart carefully. Over the next 12 months, traders expect prices to fall in each of these cities by 5-13%. By November 2009, prices will be down more than 10 percent in every city save Chicago. By November 2010, prices will be down 20% in Miami and San Francisco, and 15%+ in San Diego, Las Vegas and Washington, D.C. It gets worse in 2011.

2. As a point of emphasis, remember that these are priced in actual dollars and do not take into account inflation. Factor in 3% annual inflation and the real value of these homes falls a further 11.5% by 2011, putting prices in Miami and San Francisco down 37% and 36% respectively on a real-dollar basis. Who said house prices never fall…

Of course, there is no guarantee that this will actually happen to the exact degree, because traders are notorious for being wrong. However, my feeling is that there is certainly some validity to this down trend given what happened with the dot com bubble, which took years to unwind.

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

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

The markets inched higher this week supported by a benign inflation report and positive consumer spending numbers.

Our Trend Tracking Index (TTI) for domestic funds/ETFs has moved to +5.47% above its long-term trend line (red) as the chart below shows:



The international index moved sharply higher to +3.87% above its own trend line, keeping us safely on the buy side.



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

As a regular reader of my weekly StatSheet, you will have noticed the wide discrepancy in performance especially now that all funds and ETFs are ranked based on my M-Index.

Currently, the 2 top performers out of over 1,700 funds/ETFs are FXI (China) and SLX (Steel sector), which have been on an absolute tear not only over the past 4 weeks, but YTD as well. Take a look at a chart comparing the two:



Over the past 4 weeks, FXI and SLX have advanced a strong +13.24% and +19.86% respectively. YTD they are up +55.46% and +68.12%.

Is there more upside potential? While no one has that answer, in my advisor practice we have added both ETFs to our holdings within the last month in conjunction with our clearly defined exit strategy, in case the market turns against us. I invested about 10% of portfolio value each, and I am using a trailing sell stop point of 10%.

That means my risk is, if either ETF declines 10% immediately after my purchase, it will affect the portfolio by a negative 1%. Obviously, this did not happen, and we’re ahead at this moment.

My point is that you can take a position in a strong performer late in the game as long as you identify your exit point at the time of purchase and can live with the consequences if this trade goes against you. It’s a simple risk vs. reward equation.

To give you more current data to work with, I will occasionally publish a mid-week update of the ETF Master List. This one features all updated momentum figures through Tuesday:

http://www.successful-investment.com/SSTables/ETFMaster092507.pdf

Even though the markets paused yesterday, the lack of selling to me is an indication of underlying strength. Even on slow days, some ETFs will move up in the rankings while others will move down.

Bloomberg’s story titled “Subprime Borrowers to Lose Homes at Record Pace as Rates Rise” offers some surprising data showing that as many as half of the 450,000 subprime borrowers may lose their homes. The obvious reasons are increases in their adjustable mortgage payments which, in combination with lower real estate prices, won’t allow them to sell, refinance or “qualify for help from the U.S. government.”

Hmm, qualify for help? Why? Isn’t buying a piece of real estate a personal decision that adults make knowing full well that they will have to live with the consequences? If we want all of the profits if that real estate investment works out fine, should we not have all of the responsibilities that come with it, if it fails?

I am sympathetic to others, but you can’t have it both ways. I have had some real estate investments that worked out better than others but, no matter what the results, they were my problem and not the government’s.

One issue is that people want a bailout solution; the other one is that most of them are homeowners who should not have purchased a property in the first place. Remember, ‘Subprime’ means “you don’t qualify for a loan!”

The real responsible parties are the unscrupulous mortgage companies, and other lenders, who used unethical, yet legal, methods of creating a large group of non-qualified homeowners, who did nothing but provide a broad buyer base in a pyramid scheme which pushed the housing market into a bubble stage.

Pyramid schemes never last for the simple reason that eventually you run out of people to feed the base. It’s time to pay the piper for the reckless lending and, if a fall guy is needed, it should be those who created the problem in the first place.

For most of this year (and last), Wall Street traders have been hoping that the Federal Reserve would cut interest rates, a whish that they can now finally cross off their list. Market reaction was swift and euphoric with all major indexes gaining handsomely last week.

By the market’s sharp up move you could get the impression that all of the world’s problems have been resolved in one final swoop. Far from it! Perception is not the same as reality, especially in Wall Street world.

Minyanville had an article featuring a list of things that have changed after the rate cut and a list of things that didn’t change. While the jury is still out on the longer term effects of the rate change, short term only stock market investors have been the immediate beneficiaries.