Bookkeeping: Making Some Adjustments

Submitted By Trader Mark
I made some adjustments late in the day today, as I hope to soon be completely rid of Ultrashorts from my inventory - those are great for bang bang in and out trading but I need long term hedges for my strategy... for that, they have been useless.

If you are newer to the blog, I was using a tracking system in the past (Marketocracy.com) which only allowed me long positions. Hence the only way to "short" was to buy Ultrashort positions (which can be placed in long only accounts). The problem with them is with their structure (long story) they rebalance each day and (summary form) don't replicate long term performance. In fact they are punitive to all who hold them over time.

For example, long before it was fashionable I was short not only financials but commercial real estate, emerging markets, and China - that was fall 2007. Despite being correct on my calls, I made little to no money, and in fact lost money over the long run. And that is with these indexes falling by 50%+ in all 3 cases. (financials fell far more) I made a minor amount of the financial short but only because bank stocks fell at a pace not seen since Great Depression.

I outlined how poorly the China and Emerging Markets ETFs acted here [Dec 28, 2008: More ProShares Ultrashorts Tomfoolery]

Summary of that piece: I wanted to hedge against emerging markets (EEM is the ETF) in November 2007. EEM was $49 when I began the battle against it. When I wrote the 'Tomfoolery" piece in December 2008 it was $24, or a 51% drop in 13 months (it fell even farther in October/November 2008). I thought in theory I'd make double that (102%?!) Instead I, in aggregate took a 7% loss. And yes I did not "buy and hold" but even the worst trader should of made 20-40% by being so correct on that call.

Same idea with China - the ETF for China is FXI, 5 days after I bought the Ultrashort for Emerging markets, I bought the Ultrashort for China... it was $58 at the time. When I wrote the piece in December 2008 (13 months later) the FXI ETF had fallen to $28 (it actually fell farther in October/November). But good enough, that means I was very smart and the ETF I bet against fell 52%. I should of made a few bucks eh? 104% maybe? Not so much. Not only did I not make money, but I lost nearly 30% in the Double Inverse ETF. Yes you read that correctly - as the Index it was betting against fell 52%, not only did I not make money, I lose ALMOST as much as the ETF I was supposed to benefit by betting against.
I wrote about the same topic with commercial real estate and financials here; I'll spare you the details. Just let it be know that all 4 groups: financials, commercial real estate, emerging markets, and China specific were among the 4 worst in that 13 month period, and the benefit to my performance was nil since I was stuck in the Ultrashorts, rather than shorting the underlying Index.

Now, the "easy money" in these trades has obviously gone by the wayside and these have been beaten so badly it's going to be more of a battle to make money go forward. But I still think these make good hedges, so I am going to make a migration from the Ultrashorts to traditional shorts now that I can in this new tracking system. I began this today....

A) I still want to short commercial real estate - there are a bevy of names I considered - VNO, SPG, PLD, MAC, EQR, KIM, DDR. They all have almost the same chart. I could probably make more money picking 3 and shorting them individually but I am going to take the simple route and just short the index iShares Dow Jones US Real Estate (IYR)

The risk with this is the government will be bailing out commercial real estate at some point. Which is a sad statement, but I cannot quantify when & how much. I just know at some moment these stocks will rally tremendously on yet another bailout. But the problem is immense as we've been outlining for a year and a half - we are overbuild in retail, office, you name it.

So on the next downturn I will be exiting Ultrashort Real Estate (SRS) and replacing with the short on IYR. I began half of this transaction with the short of IYR

B) Same logic for China: I've owned FXP as a short in this sector; go forward I will own FXI as both a long and short. I will overweight FXI as either a long or short depending on the chart and overall market mood. When people are giddy about the return of global growth I'll hopefully be more long than short - and vice versa. I began an initial short of FXI today and will exit FXP on the next downtrend.

C) Similar but not identical logic for emerging markets. Similar to China I own EEV (double short of EEM) ... I have begun a short of EEM today. But I won't own it long since there are some individual long names I'll most likely be using instead of foreign stock exposure.

Hopefully that is not overly confusing - at this moment I am essentially short these sectors with 2 instruments instead of 1. Now that we've had the first serious rally since I moved to the new portfolio tracking, it's a good time to begin this transition. If Bernanke/Obama willing the market is ever allowed to go down again I will be selling off the Ultrashorts I own - surely at a loss (since all they do is lose money if you hold them for more than 48 hours) and then embark on a more traditional hedging campaign with their replacements.

Did you like this article?