Last weekend I attended a cocktail party hosted by an acquaintance of mine. Here are just a few of the things that were said to me when the partygoers found out about my vocation as a writer of options trading articles:
“I’m not concerned with businessmen, after all, what good have they ever done society?” asked the man with gray hair pulled back tightly in a ponytail. A self-described artist, this man had spent nearly six decades on earth without ever commanding payment for his art.
“Oh, so you’re in the financial industry? Well, then, you must agree that it’s the government’s duty to help bailout everyone from the greed of those fat cats on Wall Street?” said a woman who designs and sells jewelry at street fairs and swap meets. Although she put countless hours into creating her baubles, she felt it wasn’t fair to charge more than her material costs.
“I recently had the misfortune of being caught up in this whole subprime thing. I had to give up my house, but it wasn’t my fault. After all, how could I be expected to pay my mortgage when nobody told me that interest rates could go up or that my loan payments would adjust upward?” This from a man in his early 30s who felt it was his right as an American to be given a loan that he could afford.
Now, if it seems as though I was trapped in a scene from Ayn Rand’s “Atlas Shrugged,” well, that’s just what I thought, too.
Cocktail Party Economics
You see, when it came to the economics at this cocktail party, the ignorance was palpable.
Not only did the guests I spoke with not have even the foggiest idea of how the economy or the stock market work, most of them didn’t even know that what they were saying was part of a series of much more pernicious fallacies.
One fallacy is that businessmen are just evil and greedy, and that what they do doesn’t contribute to society in a positive way. Another fallacy was that a “fair” price to charge for your efforts isn’t what the market will bear.
Finally, there was the omnipresent sentiment that “it’s not my fault” if I can’t pay the bills, it’s the fault of those bums on Wall Street.
Then, of course, it was assumed that a person’s financial defaults, or need, should now give them a claim check on the wealth of the most-productive members of society. This claim check, of course, should be redeemed via a federal government bailout.
Alas, we live in a society populated by economic ignoramuses. So, I ask you, is it any wonder why we’re facing the distress we are?
Politicians, pundits, policy makers at the Fed and Treasury, and especially those partygoers, all are operating under the premise that all we need do is wave a magic Keynesian wand and the economy and the stock market will be back to normal. I liken this to the man with cancer who seeks the consult of a witchdoctor in an effort to expunge the diseased cells from his body.
Now, since we here at OptionsZone are primarily concerned with the practical application of these erroneous philosophic notions, I’d like to connect us back to a way for rational investors to capitalize on these prevailing irrational economic ideas.
One way to do this is to bet on an extended and even more pernicious downturn in equities courtesy of the government’s growing involvement in the housing, banking and automotive industries, to name just a few of the highest-profile victims of this mixed-economy malfeasance.
By using leveraged short exchange-traded funds (ETFs), that is to say, ETFs that move twice the inverse of the specific market indices they track, we can rapidly capitalize on the continued decline in several of these market sectors, as well as the market at large.
It is my opinion that the decline in stocks will continue well into Q1 2009, and possiblly well beyond that. So, if you want to take advantage of the current cocktail party zeitgeist, here are three ETFs that let you do just that.
Ultra Short S&P 500 ProShares (SDS)
This ETF seeks performance results that correspond to twice the inverse of the daily performance of the S&P 500 Index (SPX). That means that if the S&P 500 falls 2%, SDS will rise 4%.
This is a great ETF if you’re betting on more pain in the overall equity market.
But if you want to be a little more focused with your bets, you can go with two of the biggest losing sectors of 2008 — real estate and financials.
UltraShort Real Estate ProShares (SRS)
This levered ETF seeks daily investment results that equal twice the inverse of the daily performance of the Dow Jones U.S. Real Estate index. So, if the Dow Jones U.S. Real Estate index loses 2%, then SRS gains 4%.
In a testament to just how much upside is possible in a levered ETF like SRS, consider that on Wednesday, Nov. 19, this fund jumped 27.55%.
UltraShort Financials ProShares (SKF)
Finally, there has been no more battered market sector than financials during the past year, and the suffering in this sector is, I’m sorry to say, not over yet.
That’s OK, especially if you own the SKF. This levered ETF is designed to move twice the inverse of Dow Jones U.S. Financials index. Following the familiar pattern here, if the Dow Jones U.S. Financials index drops 2%, SKF will jump 4%.
Once again, the power of these ETFs was seen on Wednesday, Nov. 19, when SKF surged 21.37% in one of the worst sell-offs so far in what can now indisputably be called the crash of 2008.
Oh, and before you tell me that it’s too late to move into these ETFs, remember that I’ve been hearing that lament for more than six months.
Sure, you might be right this time, but in my opinion, the more scrambled action taken by the federal government to “fix” the problem, the more the smart money is going to keep on shorting.
Jim Woods is a Senior Editor for OptionsZone.com. To learn more about him, read his bio here.
