Macro Tsimmis

intelligently hedged investment

BUY UltraShort Consumer Services/Goods ETFs (SCC/SZK)

Posted by intelledgement on Fri, 19 Sep 08

The DOW soared 400 points yesterday—and is up again in early trading today—on reports that US Treasury Secretary Henry Paulson is shopping a plan to members of Congress that would fund the purchase of “toxic” securities held by banks and other financial institutions by the US government to get them off the balance sheets of the banks and thus hopefully render those institutions credit-worth again. There is a lot of uncertainty here: we have no idea precisely how the plan would work, when or even whether it will be adopted, and only the vaguest notion of who would be included (what about foreign-based financial institutions who have US mortgage-backed securities fouling up their balance sheets?).

However, we can say with utter confidence that the fact this plan is being proposed is not a good reason for stocks to be going up here. Manifestly, Paulson and Ben Bernanke have concluded that the bursting of the housing price bubble has at last spread to the rest of the US economy, in the form of tighter credit. To us this sounds like the final nail in the coffin of consumer spending, which means we are in for at least 12-to-18 months of pain…and it could be worse. This plan to loosen credit—by improving the balance sheets of the financial institutions thus making it easier for them to both lend and borrow—does almost nothing to address the underlying problem of falling real estate values. In effect, it treats a symptom of the disease, which may or may not make our convalescence less painful, but the disease must still run its course.

Consequently, we are persuaded that the time is ripe to short the consumer sector of the US economy. Until now, we have considered that a meltdown of the market was most likely to occur after the US presidential election, but the odds for it to happen sooner have risen appreciably here. Paulson and Bernanke are wielding baling wire and spirit gum and there was never a question about whether or not those tools were adequate to keep the wings of the economy from being blown off—they are not—but only when the winds of the coming storm would rise to the danger level. It is happening sooner rather than later.

The Ultrashort Consumer Services ETF (SCC) is an almost pure reflection of the US consumer sector; the Ultrashort Consumer Goods ETF (SZK) does include some exports, but we anticipate the effects of this consumer slowdown to be felt globally, so we are buying both here. The SCC is designed to rise or fall 2% inversely for every 1% move in the Dow Jones U.S. Consumer Services Index, which is primarily comprised of retail, media, and travel and leisure sectors…hotel, car rental, airline and cruise line companies. The SZK is designed to rise or fall 2% inversely for every 1% move in the Dow Jones U.S. Consumer Goods Index, which primarily includes companies that manufacture consumer products. Managers for both funds aim to achieve their goals by selling short equities and trading futures, options on futures, swap agreements, forward contracts, and options on individual securities or indices.

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