Short Financial ETFs: Watch Out for the Fannie/Freddie Effect

by: Gary Gordon September 08, 2008 | about stocks: FNM / FRE / RFN / SEF / SKF    
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You've been right as rain if you've been bearish on financial stocks in 2008. Bear Stearns (BS) imploded. Indymac (IMB) failed. And the public lost faith in the ability of the GSEs (Fan/Fred) to function.

Still, did you make money shorting financial companies? As a trader, maybe. As an investor, the buy-n-hold model has earned you little for your troubles.

Through 9/5/08, ProShares UltraShort Financials (SKF) had unrealized YTD gains of roughly 13%. The profits are certainly better than a kick in the head, if you banked them.

However, buy-n-hold gains are about to be wiped out. Why? The U.S. government's action to take control of Fannie and Freddie has "jazzed up" global stock investors. In fact, if the overnight surge in Asia stocks is any indication, SKF may actually have YTD losses by the time the closing bell sounds on Monday 9/8/08.

Isn't a 13% loss in a single day unlikely? Not when it comes to ultra-shorts, which seek 2x the inverse of the sector.

Ultrashort_financial_etf_2
On July 16th, for example, the markets reacted favorably to the SEC's temporary moratorium on naked shorting of financial companies. SKF fell 21.5% in a single session.

If we receive anywhere near the enthusiasm over the stabilizing of the GSEs, holding SKF will be a losing proposition for 2008. Hard to fathom.

Then again, the more excitedly that the public has embraced the new short ETFs, the more they seem to have struggled. Consider Rydex 2x Inverse Select Financials (RFN) and ProShares Short Financials (SEF). Both are down since July inception. (And they are about to lose a whole lot more.)

Rydex_etf

Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc web site.

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This article has 12 comments:

  •  
    Sep 08 07:56 AM
    Yeah, anyone holding SKF now is in deep compost.
    Reply | Link to Comment
  •  
    Sep 08 09:04 AM
    SKF is to be avoided this week. October and November calls may be a good buy as the Fannie/Freddie news wears thin and people begin seeing that this is not the nirvana many think it is. Watch the bond market over the coming week to see the relevance of this news and then act accordingly.
    Reply | Link to Comment
  •  
    Sep 08 09:06 AM
    If I am long in SKF should I hold or sell?
    Reply | Link to Comment
  •  
    Sep 08 09:11 AM
    Question is how deep will be the fall and then the bounce?
    I think it goes down to the mid $80s this month and then bounces back to around $110 by Oct end.
    Trading plan - do a calendar spread and buy Sept 110 puts and sell Oct 110 puts.
    Reply | Link to Comment
  •  
    Sep 08 10:38 AM
    How do you sell on Sunday? SKF is a buy now on Monday since it is way down; gov't has finished all socialism for now unless we become Venezuela, which is possible.
    Reply | Link to Comment
  •  
    Sep 08 11:59 AM
    For a calendar spread, buy Oct 110P and sell Nov 110P, what are actual transactions at expiration? Assuming Oct is exercised, one has to dish out cash to accept the shares. So, what are cash requirements? In this market, a couple of months is a long period. All these "strategies,"... it seems to this novice, are easily said than none -- indeed, unless cash requirements are fully disclosed, they are meaningless.
    Reply | Link to Comment
  •  
    Sep 08 12:03 PM
    Financials report next week and it won't be pretty. Capital raise in the 3Q has been nonexistant. I think SKF will blast off as the July lows fail to hold. The Financials may have a net ZERO earnings for all of 2008, and I doubt any more bailouts will be supported, so several biggie banks could go under (as they should). SKF is a BUY.
    Reply | Link to Comment
  •  
    Sep 08 10:53 PM
    I don't think SKF is a bad investment at all. I am pretty certain financials will tank again before things get better. The Freddie / Fannie bailout is good in the long run but not short term. Watch and see - Asian markets are already correcting heavily and US Futures are showing some weakness. Bottom is close but not yet.
    Reply | Link to Comment
  •  
    Sep 08 11:03 PM
    Sure SKF might be down today but lets get real, look at that graph, are you telling me that you really think the banks are worth as much today as they were in January when everyone thought things were going to be contained. After all the horrible news for nine months banks are actually up? All this signals to me is that the people running this market have no clue.
    Reply | Link to Comment
  •  
    Sep 09 01:38 PM
    Just for curiousities sake, let's say someone bought SKF at 110 and then bought more yesterday at 100, but wants to hold for 3/6 months (or the next testing of the bottoms) , can someone recommend an approx target price to pull the lever?


    On Sep 08 12:03 PM Schweizer wrote:

    > Financials report next week and it won't be pretty. Capital raise
    > in the 3Q has been nonexistant. I think SKF will blast off as the
    > July lows fail to hold. The Financials may have a net ZERO earnings
    > for all of 2008, and I doubt any more bailouts will be supported,
    > so several biggie banks could go under (as they should). SKF is a
    > BUY.
    Reply | Link to Comment
  •  
    Sep 09 07:49 PM
    Look at the bounce today -- up 10%. Fannie Mae and Freddie Mac are simply 1 piece of the overall problem -- LAX LENDING STANDARDS. Can't you see a sucker rally for what it is? Do you think bail outs are a great thing? They don't bode well for the ECONOMY, TAXES, THE DOLLAR AND OUR NATIONAL DEBT.

    As the economy spirals into a deep recession, credit cards, auto loans and mortgage underwriting will be abysmal. The mortgage problem is already starting to bleed into the prime mortgage arena. Unless you have the money, credit scores and income, people will not be buying in most parts of the country. yes, interest rates are low, but they are not affecting mortgages as a whole for 30 year fixed rates. Call your mortgage broker -- they'll tell you what I am.

    You have given one of the most simplistic, uninformed arguments imagineable for the next 6 months. We will re-test the highs on SKF. And many other banks stand to fail -- big ones and small ones.
    Reply | Link to Comment
  •  
    Sep 18 09:07 AM
    Tuck away a Jan 09' 165/170 call and forget about it. The market/financials will pop here and there but the overall contagion still has to hurt a few more big guys and a lot more little guys. One thing to watch out for in the SKF is the holdings - BofA/JPM are the largest and in my mind these are the guys who just got away w/ highway robbery and long term will be in the best shape..
    Reply | Link to Comment
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