Macro Tsimmis

intelligently hedged investment

BUY ProShares Short QQQ (PSQ) & Short Dow30 (DOG)

Posted by intelledgement on Thu, 12 Feb 09

It was only a question of when, not if, we would move to primarily short here. While strategically we expect things to get a lot worse, we had been holding off going in whole hog on the down side in the expectation that the new administration would generate some powerful optimism—or, if you will, “obtimism”—with a fresh and credible-seeming approach to the problem.

Unfortunately, what we have so far is a “stimulus” package that is more a hodge podge of liberal social spending measures than an expression of coherent strategic policy…and worse still, Tuesday’s underwhelming the-dog-ate-my-homework presentation by new Secretary of the Treasury Timothy Geithner of his “plan”—more accurately, his concept for a plan—to address the insolvancy of our banks does not appear to advance the ball beyond Hank Paulson’s original concept of bailing them out by buying the so-called toxic assets at sweetheart-deal prices.

We were hoping for a stimulus package that would focus on the housing market, which is the linchpin of the asset deflation that is driving the downturn, and we were hoping for a financial system overhaul that would usefully harness some righteous Democratic rage to nationalize the zombie banks that have so egregiously failed both themselves and us and take their good assets and launch new, better managed institutions. And we were hoping for some appreciation that government regulation—on an international basis—needs to be extended to the credit derivatives “shadow” markets.

Strike one, strike two, strike three.

We may be too pessimistic here. The new administration has only been in power for three weeks (although it’s not as if Geithner has not been intimately involved in the crisis all along). Things could still get better here, with respect to administration policies. Never-the-less, even if we are taking these positions early, we are confident—sad to say—that the market is overvalued here, and has still not properly appreciated the depth of the problems we face. So even if we start getting better policies (and the market rallies from here afterall), the world economy’s inertia to the downside will ultimately drag the short positions we are taking today into the black.

And so far, the opportunity we now have to change that dynamic that is dragging us down and limit the damage is not being well handled, and if that continues, we will—unfortunately—do better on these positions than we expect.

Consistent with our recent analysis indicating that 1x inverse funds outperform 2x inverse funds in conditions of heavy volatility, we are going with the Proshares Short QQQ (PSQ) ETF, whose managers “seeks daily investment results, before fees and expenses, that correspond to the inverse (opposite) of the daily performance of the NASDAQ-100 Index,” and their Short DOW 30 (DOG) ETF, aimed at achieving daily investment results, before fees and expenses, that correspond to the inverse (opposite) of the daily performance of the Dow Jones Industrial Average Index.” From June 2006 to 31 December 2008, PSQ was +21% while its 2x cousin, QID (started a month later), was -6%; the NASDAQ was -26% since June 2006. Similarly, DOG was +19% since June 2006 while the 2x flavor fund, DXD, was only +4% since July 2006; the DJIA was -21% since June 2006. N.B.: as we are announcing this purchase prior to the open, the basis will be today’s opening price for these funds.

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