Saturday, November 1, 2008

Seriously. Start shorting things.

Apparently Citigroup just lost $1.4 billion on credit cards alone. And those write downs are just getting started.

Folks, that the stock market is going to fall in a big way over the next 12 months is a near certainty. There are only a few other times in my investing life where I've ever been so sure of something. It is true in America, but is especially true in the emerging markets where they don't have rich taxpayers. Once the emerging markets collapse, this will cause the EU to collapse, because the Europeans are the ones who financed the emerging markets. Once again, I'd recommend you just short all of them so you spread yourself around so you're not too vulnerable to excessive government bailouts.

Let's come back in one year and take a look at the value of these inverse funds:

I predict they will all have skyrocketed. I predict SDS will be up at least 60%, EEV will be up at least 100%, and EFU will be up around 75%.


Anonymous said...

I love how we are able to short companies and sectors by using the inverse ETF's without exposing ourselves to the possible unlimited losses that come with actually shorting a stock. But I'm curious and hope you can answer a question: Since we don't have the risk of that, who does shoulder the risk of getting squeezed by the positions that make up these funds?

Thanks in advance,

Rick said...

Hi Walter,

That is a fantastic question, and the answer is that the fund assumes all of that risk. I don't have room to explain it all here, but the fund actually assumes an enormous amount of risk because they are not doubling the results of the S&P...they are doubling the DAILY results. That means every day they need to readjust by buying more of things that are dropping and selling more of things that are rising. So how can the fund survive by taking on all of this risk? Easy. They also sell a 2x long leveraged fund! The short and the long balance out and all they deal with is the enormous fees they charge. Long-term, these leveraged funds would be a bad investment because their fees are so high. But over the course of a year when a bubble is exploding it is worth paying.