Saturday, April 4, 2009

SRS Warning/Market Bottoms

Good Afternoon Folks!

All is quiet on the news front so I thought I would share a couple of things that I picked up.

The first one is around the ETF's. I recommend that everyone reads this Morningstar article around these trading vehicles. Many of the bears jumped into the double and triple inverses like SRS(double short commercial real estate). If you held long term you made a big mistake. You can count me as one of the suckers here. I have had some SRS for about 6 months.

Take a look at the long term performance of SRS versus the IYR(long real estate) and the URE(double long real estate):



Quick Take:

Many bears got caught up in the idea of having the opportunity to double short sectors like commercial real estate. The problem with SRS is it only promises a one day return that doubles what the IYR does on each particular day. So as you can see above, if you jumped into SRS at a time when the IYR was crashing like it did last October, SRS delivered spectacular results as long as you sold.

However if you continued to hold it, the double leverage will kill you at times when the IYR recovers because it guarantees you will do twice as bad on any particular day. When you add this all up: Holding leveraged ETF's are not productive long term because nothing other than Lehman Bros. ever goes straight down!

The long term results here are shocking: The performance of SRS is about the same as going long commercial real estate via the IYR! Both resulted in about a 50% loss.

The bottom line here is ETF's like SRS are trading vehicles that should only be held for very short periods of time(Days) when you think commercial real estate may take an immediate plunge. If you want to short commercial real estate long term, you are much better off shorting the IYR via PUTS.

Market Bottoms


I came across this chart online and I thought it was great. Calling a market bottom is a fools game. Many of the bulls like Cramer are out there claiming that the bottom is in. I say bull****.

As you can see above, bear market rallies can be both viscous and extremely dangerous because they can easily suck investors back and then proceed to crush them a second time as the market heads lower. This happened repeatedly during the 1930's!

Take a good hard look at the first large bounce after the 1929 crash. There was a 50+% rally from 190 up to about 300 on the DOW. Everyone thought the bull was back and happy days were here once again! Oooops...Bad Idea! By the end of the following year, the market gave it all back and closed around 85.

History usually repeats itself folks. This IMO is the first real bounce that we have seen since the Sept/Oct crash. This current rally has been based on zero fundamentals. Its a bounce based on hope that things will get better combined with massive government interventions. The bounces seen in the '30's were based on the same things. These are not fundamental reasons to get back into the market.

You jump back into the market when you see strong economic fundamentals like job growth and affordable housing. I currently see nothing that resembles this.

The government and Wall St are going to do everything they can to suck you back into this market because they are desperate. IMO Don't be a sucker! Jump in when you see signs of a recovery. Investing based on hope is a great way to blow up your 401k.

If you want to get speculative and go long the market, test the waters with a small piece of your portfolio.

Until next time!

4 comments:

Me vs. Wall Street said...

Hi Jeff, I just stumbled on your blog through a mutual blogger friend. I like your stuff.

Inverse ETFs suffer from something known as "constant leverage traps" that force them to make a lot of value destructive actions. This is rediculous because these ETFs are marketed to investors as "hedging" tools when they are nothing more than trading vehicles.

I also agree with your take on the bottom. This rally met no resistance from 6 to 800s. There were no buyers in this level previously - the market was free to push up through nothing.

The real test is from 900 and upwards where there are a lot of trapped bulls.

Great post, thank you for sharing.

Anonymous said...

good blog, thank you for thoughtfull material

Jeff said...

Me

Thanks for stopping by. I am glad you enjoy the blog. YOu have a great site as well BTW.

Thanks for the info around the ETF's. A lot of these vehicles are so new that many including myself didn't realize the "slippage" that occured with owning them.

Live and learn as they say.

Great point on S&P 800 area. This represents the '02 lows and has become a major battleground between the bulls and the bears.

I think it fails as the Wall St fraud is exposed.

I have a great video that exposes the fraud tomorrow.

It appears the MSM is catching on.

Jeff said...

Anon

Thanks!

I will try to keep it coming.