|
-- Posted Wednesday, 28 April 2010 | Digg This Article | | Source: GoldSeek.com
Yesterday US stocks took their biggest tumble for a couple of months. Indeed, global stock markets were a sea of red. It could get much worse if this is really the final end of the 14-month rally in global markets that has left stocks at valuation levels only seen before in 1929 and 2000, both years of horrendous crashes. Protection for most investors means a flight to bonds, US dollars and precious metals, although in the most recent collapse of 2008 gold prices also suffered a big fall. This time it could be bonds that suffer aka Greece and precious metals that do better. Consider short ETFs However, there are also the short exchange traded funds like SUK2 for the FTSE, or SE2P for the eurostoxx, up 5.9 per cent and 8.2 per cent respectively yesterday. There are many US equivalents. Professionals describe these ETFs as horrible instruments. That is because they compound down in a rising market by more than they compound up in a rising market, so you do not want to be on the wrong side of this trade. They can also move erratically, although do generally capture major market moves. However, in a very big market correction then these ETFs would be the biggest winner, and precisely because of this compounding effect. Imagine what happens if you get performance like yesterday’s repeated over weeks or months. This is like pressing fast forward on a time deposit. Besides the downside risk is somewhat exaggerated. These instruments are heavily diversified so the only risk is the market risk. Investors who bought them a year ago still have residual value, albeit with a considerable haircut. Those who bought more recently still have considerable upside potential and what is the downside risk in these markets? The next edition of the ArabianMoney investment newsletter will offer a more detailed look at the strategic use of short ETFs based on the experience of the past year. Risk diversification It is not that T-bonds, cash and precious metals are to be avoided, simply to argue for greater risk diversification. Short ETFs can capture and monetize a falling stock market for even the most humble investor with just a few dollars in a brokerage account. If markets resume their upward trend then this is a bad strategy. But how likely is this? Goldman is in the dock. Greece is causing a European bond crisis. The UK election threatens a hung parliament with no leadership. The Chinese economy is overheating. The US housing market remains in a depression that will get worse if interest rates rise courtesy of the Greek crisis spreading. ArabianMoney has spent months trying to debunk the bullish nonsense about a recovery but it seems the tipping point has come, and the reality of the global economy will now be only too obvious. But investors need to do something and not just sit back and take it.
-- Posted Wednesday, 28 April 2010 | Digg This Article | Source: GoldSeek.com
Previous Articles by Peter Cooper
About Peter Cooper:
Oxford University educated financial journalist Peter Cooper found himself made redundant by Emap plc in London in the mid-1990s and decided to rebuild his career in Dubai as launch editor of the pioneering magazine Gulf Business. He returned briefly to London in
1999 to complete his first book, a history of the Bovis construction group.
Then in 2000 he went back to Dubai to become an Internet entrepreneur, just as the dot-com market crashed. But he stumbled across the opportunity to become a partner in www.ameinfo.com, which later became the Middle East's leading English language business news website.
 Over the course of the next seven years he had a ringside seat as editor-in-chief writing about the remarkable transformation of Dubai into a global business and financial hub city. At the same time www.ameinfo.com prospered and was sold in 2006 to Emap plc for $27 million, completing the career circle back to where it began a decade earlier.
He remains a lively commentator and columnist as a freelance journalist based in Dubai and travels extensively each summer with his wife Svetlana. His financial blog www.arabianmoney.net is attracting increasing attention with its focus on investment in gold and silver as a means of prospering during a time of great consumer price inflation and asset price deflation.
Order my book online from this link
|
Short ETFs Are A Way to Make Money in Falling Markets
