Playing Things Short
08/25/2006 12:00 am EST
Amid the incredible market and economic volatility that we have lately seen, plus the violence between Israel and Lebanon that has created its own level of uncertainty, Doug Fabian finds an opportunity to take advantage of two special situation buys…
“Last month, we told subscribers that we were watching the ProFunds Short Real Estate (SRPIX) and the Direxion High Yield Bear (PHBRX) funds, as both were on the brink of giving us the go ahead to buy. The day after returning from our Fourth of July holiday, we made allocations to both of these two “bear” funds. Because these funds are a bit unusual compared to your average income-producing security, I’d venture a guess and say that many of my readers aren’t too familiar with them. It’s quite understandable if you aren’t, as both of these funds just came to the market in September 2005. So, I thought it would be helpful to present a recap of each of these funds, along with a quick analysis of their year-to-date price performance.
“SRPIX is a bear fund that seeks the inverse performance of the Dow Jones US Real Estate Index. That means that if the Dow Jones Real Estate Index falls 2%, the ProFunds short Real Estate fund will gain 2%. The fund normally invests at least 80% of its assets in financial instruments with economic characteristics that should be the inverse of those in the index. Assets not invested in financial instruments may be invested in debt instruments or money market instruments.
“PHBRX seeks to profit from a decline in the value of lower-quality debt instruments. The fund normally invests at least 80% of net assets in high-yield debt instruments or derivatives of such instruments. The fund’s manager will generally create short positions for the fund. It may invest up to 15% of assets in instruments generally rated below Caa by Moody’s or CCC by S&P or derivatives of such instruments, as well as invest in cash or cash equivalents for temporary safety.
“Year-to-date SRPIX is still trading below its 200-day moving average. However, the fund is now coming back off its lows with momentum fueled by the continuous decline in the housing market.
“PHBRX tested its 200-day moving average in early July and it since has made a big push higher off that technically significant level. This jump is the kind of bounce off the moving average that portends a further increase in price. And, given the pullback in the value of lower-quality debt instruments lately, I think we are positioned well for a nice bump in our overall High Monthly Income returns via PHBRX.”