UltraShort Bonanza

Some new ETFs have become available over the past few years that provide investors an easy way to hedge without dancing with options, and to profit handsomely off of downward moves in the market. These are the ProShares UltraShort series. These ETFs are designed to provide a return equal to -2 times an index they track. So if the S&P500 goes down 5% for example, the UltraShort S&P500 will go up 10%. On extreme down days such as today during a period of heavy volatility, these funds are getting crazy single day returns. Here is a list of some of the UltraShort funds and their corollaries:

Index	Long (% today)	UltraShort (% today)
S&P 500	SPY(-5.45%)	SDS (+11.32%)
Nasdaq 100	QQQQ (-2.76%)	QID (+5.58%)
FTSE China 25	FXI (-10.72%)	FXP (+21.34%)
Dow 30	DIA(-5.40%)	DXD (+10.31%)

In times of less volatilty, these funds can be used as a hedge. This article details some basic hedging techniques that such funds enable.

VIX volatility index tops 80

The VIX index is predicting that the S&P500 will move up or down over 20% in the next 30-days.  The only problem is no one knows which direction the move will go.

Bargain Basement

The massive lows of late mean bargain basement prices for long-term investors. The problem is that fear could drive another 20% drop, and who wants to jump into that? For the brave however -- those that feel that they can catch flying knives -- here are some picks that seem like attractive values:

High Yield

• E - Eni @ 38.5 - 9.88% div - found large deep sea oil field off of Angola - 0.5 book
  
• BCS - Barclays @ 17.3 - 9.88% div - supported by UK government; picked up scraps of Lehman - 0.7 book

Materials

• PCU - Southern Pacific Copper @ 11.5 - 20% div - commodity darling fallen victim to hedge fund unwinding - 2.5 book
• RIO - Vale @ 11.1 - 2% div - near monopoly on iron, though there is plenty of iron on earth

Others

• MCHP - Microchip @ 22.8 - 5.8% div - PIC controller maker; offer to acquire Atmel AVR and ARM chip line - 4.6 book
• NYX - NYSE Euronext @ 27.7 - 4.33% div - completed acquisition of of AMEX, 3rd largest option market - 0.7 book - Warning: Cramer's 2007 loser is down 75% and NDAQ is stealing trade share.
  

Blue Chips

• SPY @ 90 - 3%
• CVX - Chevron @ 60 - 4.33% div - 1.5 book
  
• KO - Coca Cola @ 44.2 - 3.44% div - 4.4 book
• MMM - 3M @ 54.7 - 3.66% div - 3.0 book

Concerns: global slowdown, plummeting profits, dividends slashed, general misery... Remember that Cash is King!

Fed Slams Beige Book on Market Elation

The US Federal Reserve regularly publish a "Beige Book" reporting the state of economic activity in each of its 12 regions. In the latest report, prepared last week but released today, the news was grim across the board and the markets reacted with the 2nd largest downward move ever...

2008
Jan 16 Report	Feb	Mar 5 HTML 286 KB PDF	Apr 16 HTML 182 KB PDF	May	Jun 11 HTML 144 KB PDF
Jul 23 HTML 261 KB PDF	Aug	Sep 3 HTML 164 KB PDF	Oct 15 HTML 135 KB PDF	Nov	Dec 3

Economist Cover Metric

Sometime during the market downtrend of 2000-2002, I came up with a new metric based on inputs I was seeing: "If the cover of the Economist has a really grave picture such as someone peering over a cliff, jumping without a parachute, or anything like that, it is time to stay on the sidelines of the market." Well, the last two covers have fallen into this category. The first was the whirlpool of banks sinking down, the second was an investor peering over the cliff. The third, most recent one is of the world falling through the atmosphere, ignited in flames:

Sep 20th 2008	Oct 4th 2008	Oct 11th 2008
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Previous examples of when this would have been sapient advise are in late 2007:

Jul 7th 2007	Aug 18th 2007
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And there was another cover series, if distant memory serves, that had a man in a parachute and one peering over a cliff that predicted the dot-com bust and the subsequent recession of 2001-2002. Can't find those exact covers that inspired the metric, but certainly this one of being chained to the bottom of the ocean would fit:

Mar 24th 2001

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One could argue that selling in the midst of flames is bad timing, and that the markets will bounce back vibrantly as they did today. There is also a large amount of data that shows that the 18 months after a crash are not fun times and that the market slowly dwindles to the lows of the initial crash and beyond...

Now the question is what sorts of Economist covers trigger a buy signal?!

Iceland goes bust

Iceland banks have become insolvent. The Icelandic Krona was amidst collapse, and trading was frozen on their equity and currency markets. When it was predicted the polar ice caps would melt soon, perhaps few knew that it would happen economically first.

TED Spread Indicates Fear

The TED spread between T-bills and 3 month LIBOR is one indicator showing the immense fear in the markets. LIBOR did drop significantly last night from 6% to around 2%. Regardless, Japan had its second 10% down day in a row, and US markets were down 20% for the week.

World Markets fall off a cliff