The Top Investment for 2009

01/15/2009 10:24 am EST

Focus: ETFS

Michael Shulman

Editor, Short-Side Trader

Michael Shulman, editor of ChangeWave Shorts, says the best investment for 2009 will not be a stock, but a double-short ETF.

Everyone wants to know what the great stock for 2009 will be. Well, it's actually not a stock—it's an ETF.

It tracks the financials—to the downside. The UltraShort Financials ProShares (NYSEArca: SKF) mirrors the movement of the Dow Jones Financial Index in inverse—actually, double the inverse. When the Dow Jones Financial index goes down 1%, this ETF goes up 2%.

This is a high-risk, high-reward play that is extremely volatile. SKF's trading range in 2008 was $87 to $304.

But even if you decide that SKF is too volatile for you, you need to avoid the banks in 2009.

Some people believe that the current problems with the big banks are over thanks to the huge injections of capital (i.e., taxpayer money) by Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson. It's enough, right?

[And] the bank write-offs are over or, at least, we know how much they are going to be, right?

Wrong. Ever hear of option adjustable-rate mortgages (ARMs)? These mortgages are funkier than subprime, if you can believe it, and we're talking about $150 billion or so.

Plus, $530 billion in commercial property loans comes due in the next three years, and there is no money to roll them over. Oh, and credit card debt is no longer being securitized, as no one will buy the bonds.

Defaults and foreclosures will climb throughout 2009, ruining more bonds and assets than Wall Street expects. There are more write-offs than anticipated and modeled into bank balance sheets coming. Strike one!

Housing problems means less spending and less money to pay off auto loans, home equity lines of credit, and credit card debt—and much more of this is held directly on bank balance sheets. Strike two!

And Citigroup’s (NYSE: C) off-balance sheet assets as of its latest SEC filings in November are more than $1.2 trillion, and it's anyone's guess what they're really worth.

Strike three! You're out!

Big-name banks make up more than 40% of the Dow Jones Financial Index. General financial stocks make up 23%, and their businesses are cratering. Real estate investment trusts (REITs) having trouble collecting rents comprise 13% of the index. Insurance companies writing off assets every day and getting 2% on their Treasury bills are 20% of the index.

So, the Dow Jones Financial Index will be in deep trouble as earnings and losses come in over 2009. And as the index falls due to weakening fundamentals, the UltraShort Financials ProShares will rise. This ETF is very liquid, trades like a stock, and is very volatile.

The ETF is trading around $127, and that is a good entry point given that most people agree the banks will have another major leg down in 2009.

And even if the SKF is not your speed, please ignore the long-only money managers on CNBC and avoid the banks at all costs in 2009.

Subscribe to ChangeWave Shorts here…
  By clicking submit, you agree to our privacy policy & terms of service.

Related Articles on ETFS