Macro Tsimmis

intelligently hedged investment

BUY UltraShort Real Estate ETF (SRS)

Posted by intelledgement on Fri, 31 Aug 07

As we mentioned a couple of weeks back when we unloaded the Australian index ETF (EWA), we would be watching for a chance to take a position in ProShares’real estate short fund (SRS) under $100. Well patience has paid off, as with Fed Chairman Ben Bernanke’s pronouncement today that the Fed “will act as needed to limit the adverse effects on the broader economy that may arise from the disruptions in financial markets” has The Street celebrating in anticipation of a Fed funds rate cut next month. Consequently, this ETF (which rises when real estate companies decline and vice versa) is down sharply today to about a midway point between the 52-week high and low. Accordingly, we are putting the proceeds of the sale of our Australian ETF back to work here.

We don’t know if there will be a cut in the Fed funds rate or just another cut in the discount rate, but neither action is going to cure the excesses of the real estate market over the past several years. We are in this mess in part because of easy credit enabling loans to be made that should not have been for houses with unrealistically inflated values. Making mortgages a little easier to get ain’t gonna solve the bad paper problem, and it may actually make it worse. It sure wouldn’t help the dollar any.

The big picture here is that collectively, the USA has been borrowing cheap money like mad and mostly spending it on operations (vacations, jacuzzis, invasions) instead of capital investments (infrastructure, education, production capacity). This unsustainable dynamic has to end sooner or later, and the industries that depend on overpriced real estate for succor will be among the first to lose their balance and are likely to fall the furthest.

The managers of the UltraShort REAL ESTATE fund utilize leverage techniques—futures contracts, options on futures contracts, securities and indices, forward contracts, swap agreements and similar instruments—to attempt to attain daily investment results that correspond to twice (200%) the inverse (opposite) of the daily performance of the Dow Jones U.S. Real Estate Index.


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