Short ETFs gain as US markets plunge for a sixth week
Posted on 07 June 2011 with no comments from readers
The longest sell-off in US stocks in seven years showed no sign of stopping on Monday as it entered its sixth week with markets down around one per cent. The ArabianMoney newsletter’s basket of short ETFs rose by four per cent (sign-up here).
On Monday other alternative asset classes were pretty stable with treasuries and precious metals broadly flat. UAE stocks have settled into a summer sleep with volume down to 87 million in Dubai.
Cash as king
If there is enthusiasm for any asset class it is cash, although the US dollar is still gradually trading down. One analyst in Barron’s yesterday predicted a 20 per cent decline in US stocks by the end of October, followed by a year-end rally.
That was greeted as a radical call but should it be seen as so unlikely? This is just an extrapolation of a falling trend and after such a long rally something more dramatic might be expected, especially with stimulus packages winding down and QE2 about to stop.
Albert Edwards of Societe Generale is the king of the bears with his forecast of 400 on the S&P. That would take the market below the devil’s bottom of March 2009 of 666. Dr Edwards was one of the few to get 2008-9 right, will it be any different this time?
But clearly the economic data would need to get substantially worse to pull the markets down this far and there would have to be another geopolitical shock or two, not that it takes a lot of imagination to think of things that may well happen on that front.
Positive catalysts absent
Indeed, it is the fragility of the recovery, or lack of it, and the absence of any reason to expect an improvement that worries market analysts most. You could not imagine interest rates moving lower, for example, rather the reverse with inflation mounting.
Even the possibility of a QE3 does not excite immense enthusiasm as QE2 has been such a big flop in terms of economic recovery, and a decrease rather than an increase in US public spending looks on the cards in the present political environment.
Then again the ‘old’ crises refuse to go away: eurozone sovereign debt, US housing and Japan’s natural and manmade disasters. Those who decided to ’sell in May and go away’ have been well rewarded this year, and short ETF buyers are well in the money.
