Macro Tsimmis

intelligently hedged investment

SELL UltraShort Consumer Goods ETF (SCC) & UltraShort Consumer Services ETF (SZK)

Posted by intelledgement on Thu, 02 Apr 09

We still believe the macros point down from here. However, the current rally is very strong and there are a number of factors supporting it:

  • Several financial services companies reported last month that they are now profitable
  • Timothy Geithner’s bank rescue plan has been better received than most anyone expected (although it doesn’t look so hot to us)
  • Today’s announcement of mark-to-market reform will help the companies who hold toxic assets to at least appear to be in better shape
  • The Obama administration is having a good patch here, exceeding expectations at the G20 meeting
  • Emerging markets have been in rally mode, more or less, since 20 Nov and the most recent Chinese Purchase Management Index numbers have been positive
  • There are still substantial short positions out there, and if the market heads north from here, short covering may well fuel the rally

Looking specifically at consumer spending, we still see strategic issues with housing prices falling and unemployment rising. However, for now, the horizon is brightening: consumer spending has ticked up, and the positive effects of lower energy costs, the forthcoming tax cut, and lower mortgage interest rates could keep the party going in the short run. Plus there is talk of a government mandate to force lower credit card interest rates. Such a move would be tricky, as it could hurt the weakened financial sector, but if it happens, it is likely to stoke consumption spending. Even the prospect of such an eventuality could propel consumer goods and services providers share prices higher here.

In the end, we expect all this brightness is likely to turn out to be a false dawn. However, we are in a period of profoundly extreme volatility, and following the same logic we used last month in dumping our index shorts, we are stepping aside here. If the market melts down and we have to reacquire these ETFs at a higher price, well that is a risk we are willing to take to lock in the profits we have on these positions, and avert the risk—more likely, in our opinion—of a sharply higher move. We expect to buy these ETFs again and are betting it is more likely we’ll get a chance to do so at a lower price than today’s, and not have to settle for a higher one.

Previous retailing short-related posts:

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