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Market Commentary

Friday, Sep 26, 2008
There When You Need Them
By Patrick Watson

12:03 pm Central Time

Inverse mutual funds and ETFs are, in theory, useful alternatives investors can use in difficult times.  But not always. 

Last week the SEC imposed new restrictions on short-selling of certain financial services stocks.  This created problems for inverse funds that specialize in that sector.  The 2X-leveraged ProShares UltraShort Financials (SKF) seems like an ideal trading vehicle for the current market.  Unfortunately, the SEC action made it very difficult for the fund manager to continue tracking its index correctly.  As a result, last Friday ProShares asked the exchanges to halt trading in SKF and its unleveraged sibling SEF.  The fund sponsor then announced that it was suspending creation and redemption activity in these two ETFs.  In other words, SKF and SEF are now operating much like closed-end mutual funds.  The arbitrage mechanism that keeps ETFs from trading at a significant premium or discount to net asset value is no longer in effect for these two funds.  You can still buy and sell them, but you may not get the results you expect.

It is not entirely clear how these funds work internally to deliver inverse performance results. It may not be so simple as just shorting the stocks of the underlying index; ProShares might rely on swaps, options, futures or other derivatives.  Whatever financial instruments ProShares uses in SKF and SEF are apparently not working under the new short-selling restrictions.  Rydex announced similar restrictions for its Rydex 2X Inverse S&P Select Sector SPDR Financials (RFN). 

That said, it is important to note that the SEC is taking an expansive view of what constitutes a "financial" stock for the purpose of short-selling restrictions.  The list includes companies like Ford (F), General Electric (GE), International Business Machines (IBM), and Medco Health (MHS).  GE is potentially problematic because it constitutes 15% of the index tracked by another inverse ETF, ProShares UltraShort Industrials (SIJ).  Even broad-based inverse funds are likely affected, since the stocks that can't be shorted collectively account for a huge part of total market capitalization.

I suspect a comprehensive study would find that bid/ask spreads and index tracking error rose significantly for all inverse ETFs over the last week.  Those that specialize in financial stocks were hit the hardest, but are by no means the only victims.  This isn't necessarily a reason to avoid those funds -- but be aware that the price you get could represent a substantial premium or discount to the actual value of the shares.


Thursday, Sep 25, 2008
Triple Your Money!
By John Schloegel

2:30 pm Central Time

I received the following ad today in my inbox:

Worried about the economy?
Become an elite Charter Member of

 and you could...


TURN $5,000 INTO $16,000
XXXX is the guru who gave us...

  • The $2.8 billion IT infrastructure provider that's
    up 4,745.20%.
    (No misprint.)
  • The $1.8 billion online advertising agency that's
    up 1,295.44%.
  • The $762.6 million business software company that's
    up 1,213.19%.

Overall, XXXX is up 680% since January despite the big problems in the stock market. He's the master. He's the best. Many have tried, and all have discovered that the only way to equal his remarkable track record is to follow XXXX on a daily basis.

Any stocks in your portfolio making you 790.87% richer each year... year after year... for the last six years?

Here's one.

If you had put $5,000 into the IT infrastructure provider I recommended in 2002, you'd now be sitting on...


And that's just from one stock! Here's more.

The online ad agency I recommended turned $5,000 into $69,772. The business software company I uncovered turned $5,000 into $65,659.50.

With just those three stocks, you could have
turned $15,000 into $377,691.50!

There's much more.


I can't stomach it anymore, so I'll save you the pain!

But wait!

Why would I want to only triple my money every month?

I received an ad yesterday saying I could quadruple it every month.

I can become a billionaire a couple months sooner with the quadruple system.

Oops - per the Ad,

   Overall, XXXX is up 680% since January

   Any stocks in your portfolio making you 790.87% richer each year... year after year?


Apparently, XXXX isn't following his own advice

$5,000 should turn into $5.7 B in a year if you triple every month (115,292,050% richer)

Through the end of August, he should be up to $55mm (1,099,411% richer)


  If you had put $5,000 into the IT infrastructure provider I recommended in 2002, you'd now be sitting on...



Wait a minute XXXX, that's only 90.9% a year.  Why are you showing me this chump-change example?  You said I would triple every month.  What gives?

Tuesday, Sep 23, 2008
Tom Tomorrow: Behind the Scenes
By Patrick Watson

2:02 pm Central Time

Ever wonder what goes on behind closed doors at the White House? There are numerous explanations for how Paulson's Bailout deal went down. No doubt economic historians will someday pen tomes on the subject. Until then, a cartoon will have to suffice.


Monday, Sep 22, 2008
ETF Death Count Surges to 45
By Ron Rowland

3:07 pm Central Time

There are 15 fewer ETFs trading today.  Friday was the last day of trading for 15 HealthShares ETFs, bringing the official ETF death count to 45.  Calendar year 2008 has not been kind to un-popular ETFs, with 40 of the 45 ETF deaths occurring this year. 

The year is only 73% over, and at the current pace, we could see the death count climb to 60 before year-end.  I fully expect the count to reach triple digits in 2009, probably in the first half.

The reason for this is basic economics -- supply and demand.  The supply of ETF IPOs (new ETFs) coming to market is unprecedented.  More than 180 ETFs have made their debut in 2008 so far.  Most investors would be hard-pressed to name 10 of them.  Therein lies the problem.  It is virtually impossible for 180 new products to attract enough attention (and assets) to make them economically viable.

I published my initial ETF Deathwatch list on August 30, 2008.  The 15 HealthShares that stopped trading on Friday were excluded from this list because their closure had already been announced.  Look for an update in early October.

Two of the ETFs on that list are in critical condition, but have not been officially declared dead yet.  Opta S&P Listed Private Equity Index Net Return ETN (PPE) and Opta Lehman Brothers Commodity Index Pure Beta Total Return ETN (RAW) are not currently trading.  These two products, along with Lehman Brothers Commodity Index Pure Beta Agriculture Total Return ETN (EOH) are a specific type of Exchange Traded Product known as Exchange Traded Notes (ETNs).  ETNs are essentially bonds linked to an index that tracks equities, commodities, or bonds.  Since they are bonds, they also carry the risk of default by the ETN sponsor.  Lehman was the sponsor of these three ETNs, and Lehman's filing for bankruptcy places their future in jeopardy.  There has been no official word from Lehman regarding these products, but trading has been halted.




DISCLAIMER: This is not investment, trading, tax, or legal advice. All opinion in this blog is intended for informational purpose only. Nothing provided in this blog constitutes a recommendation or solicitation for the purchase or sale of securities. Blog authors sometimes hold positions in the securities mentioned. Invest at your own risk. Blog authors not liable for any losses incurred in your portfolio.