Short Financials ProShares (AMEX:SEF)

The investment seeks daily investment results, before fees and expenses, which correspond to the inverse (opposite) of the daily performance of the Dow Jones U.S. Financials Index.

The Emperor has no clothes
this will become more apparent after the next US election

If the Fed tells you that they're going to keep rates low until 2014, and you can get people into 5 year fixed mortgages at 3%-4% higher than your cost of funds, you should be doing alright. Plus, they've already written down so much crap that if there is even a modest housing recovery, they should do well. Plus, I'm always willing to bet against the inverse ETFs, as they degrade over time as long as there's some volatility.

BUY ProShares Short Financials (SEF)

Posted by intelledgement on Tue, 06 Sep 11

The bankster royalty are still parading down Main Street in the altogether—clothed with balance sheets crammed with chimerical toxic assets that their captured regulators allow them to carry at par when in reality they are worth next-to-nothing. The bought politicians insist that the clothes look great, and warn us that if we demur, it will be the end of the world. But more and more unruly little boys are insisting on the truth: the emperor has no clothes. It is only a matter of time before the crowd catches on.

It is the European banks that are the most exposed here. If you subtract from their mythical balance sheets the bad sovereign debts they have collected in the past few years and the bad mortgage-backed securities American banksters peddled to them in the last decade, there are several who would be insolvent. The central bank authorities are racing around handing out clouds of free money and distributing dark glasses to market participants, hoping to mask the naked truth a little longer, but any stray ray of sunlight at an indiscreet moment could reveal the truth and start a Lehman/Bear Stearns style bank run.

And of course, the US banks are integrated into the mess big time. If more than one or two Euro banks roll over, a cascade effect is likely. Even short of that, the risk levels are way up here. The stakes were raised considerably last Friday after the market close, when—in a surprise move—the U.S. Justice Department filed suit against 17 banks for fraud in the peddling of mortgage-backed securities:

http://www.politico.com/news/stories/0911/62534.html

Thus it is prudent to go short here. Our instrument of choice here is the Proshares Short Financials ETF (SEF):

http://www.proshares.com/funds/sef_index.html

which utilizes short equity positions, futures contracts, options on futures contracts, securities and indices, forward contracts, swap agreements, and similar instruments in pursuit of “daily investment results, before fees and expenses, that correspond to the inverse (opposite) of the daily performance of the Dow Jones U.S. Financials Index.” That is, if the fund managers meet attain their objective, on a day the DJ average goes down 1%, this fund should go up 1%…and vice versa. This DJ index represents banks (about two-thirds) and general financial groups (one-third), and the positions of the ETF reflect that distribution.

Over time, because of the way the SEF ETF is designed (to match the daily performance of the index), it has an inherent negative bias, and therefore exhibits a significant tracking error. The problem is that on days the Dow Jones index moves up, the ETF tends to lose relatively more ground than it gains on the days the index moves down. The fund debuted in July 2008 and is down 39% since then…while the Dow Jones U.S. Financials Index over the same time frame is down 43%. As we would expect the SEF to be up 43%, this is a tracking error of a whopping 82 points over three years. Point being, this is not a fund to hold over the long term, because even if the Financials decline, your performance is not likely to reflect that. Read more about inverse and leveraged fund tracking errors here:

http://intelledgement.wordpress.com/2009/01/05/ultra-inverse-etfs-fall-short-of-expectations/

However, during periods when the financials declines sharply over a short time period, the performance of the SEF has reasonably closely met expectations. And we believe such conditions are likely here.

In the past we have used the ProShares Ultrashort ETF (SKF) to cover this base, but the tracking error of that fund—which is down 71% since inception in February 2007 while the DJ index is down 69%—is even worse at 140 points in four-and-a-half years. The SEF falls well below our preferred benchmark levels for liquidity—only $115 million in assets when we should prefer a minimum of $1B and only 188 thousand shares traded daily on average when we like to see a minimum of one million—but we are holding our noses here and diving in as a hedge against a financial sector meltdown.

poof!

Echoing the same comments from the XLF, what makes you think after two stimulus packages within a matter of months that the US Government was going to be willing to let some of the largest financials institutions fold under credit pressure? It's amazing this got as high as it did. Now let's just watch and wait for them to reverse split so it can head even lower.

UltraLong

This market is way overbought and it is time for a much needed correction. S&P P/E is at all time highs and needs about a 20% correction. In closing, I like fantasy football.

Banks are buying foreclosed mortgages from each other with their TARP money to artificially inflate their balance sheets. Eventually they will have to write down their bad mortgages, probably when all the bad commercial loans begin to fail towards Q4. All the banks are doing now is postponing the inevitable but it will come, and when it does it will not be pretty. Short covers, technical chart watchers and day traders can only keep these guys going up for so long. They're already running on fumes as the stock prices are so incredibly detracted from the fundamentals (S&P P/E ration above 100, wtf!?!). I'll check back in on this pick in October and see if I'm wrong.

Short Financials ProShares (SEF)
$59.41 -1.94 (-3.16%)
5/14/2009 12:12 PM
52 week $38.51-$129.52

Testing a theory here with this account, shorting all short ProShares for starters.

Fading every pick made by Ultralong

SEF has a too low valuation compared to the weakness of bank stocks.