Macro Tsimmis

intelligently hedged investment

BUY ProShares Short QQQ (PSQ), Short Dow30 (DOG), & Short S&P 500 (SH)

Posted by intelledgement on Thu, 21 May 09

We’re back short as of the close today.

When we hit the eject button on the short positions in March, we expected to be back here sooner or later. We believe that the optimism the market has reflected in the 37% surge in the S&P 500 index between 9 March and 8 May has been sadly misplaced. The collapse of the residential real estate bubble is still ongoing, with concomitant credit card debt defaults, decreases in consumer spending, a continuing rise in unemployment, and coming soon will be a spate of commercial real estate defaults.

Furthermore, the new US government has disappointingly extended the policies of the previous administration to attempt to prop up the zombie banks and keep the easy credit spigots open. While these policies have been successful in staving off “systemic risk” defaults, they will only postpone the day of reckoning and, by throwing increasingly less good money after bad, are debilitating the already-weak dollar as well.

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,” 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,” and their Short S&P 500 (SH) ETF, which seeks daily investment results, before fees and expenses, that correspond to the inverse (opposite) of the daily performance of the S&P500® Index.”

One strategy note: we seek to invest congruent with long-term, macro trends which, typically, should result in relatively rare adjustments to the portfolio lineup. Obviously that has not been the case in the last nine months or so, during which time we have switched from long to neutral to short to neutral to long (for five days earlier this month) to neutral to short! This unusually frenetic maneuvering is a function of off-the-scale levels of volatility, as outlined in this recent Motley Fool article. The specter of systemic risk has made it extraordinarily hard to assign valuations, and in the fog of this uncertainty, when you have the market moving as much in two or three days as it “normally” does in a year, more frequent adjustments are appropriate.

For example, while it would have been rational to ignore the rally that started in March and stay short—because eventually when reality reasserted itself, the market would come back down to us—by divesting ourselves of the short positions, we afforded ourselves an opportunity to reacquire them here, at a 25% discount. That is too big an opportunity to ignore.

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