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I’ve made my share of money on housing, but not in the same manner as the Donald Trump’s or Robert Toll’s of the world. The housing and financial markets have been struggling for quite some time, but you won’t see me begging congress to do something about falling home prices. If we are going to insist on calling ourselves a market economy, then we need to start acting like one, and let the chips fall where they may!

As for housing, I won’t say much about it. There are plenty of great housing related blogs to keep you busy reading for months.

As for the current state of housing, what I will say is that a picture is worth 1000 words:

Yesterday I mentioned a simple way to hedge a portfolio using either the profunds or proshares. Today I will offer a sample portfolio that demonstrates a simple hedged portfolio that has yielded an impressive 15.1 percent return year to date. The portfolio below is NOT A RECOMMENDATION. It is simply a backtest demonstration of a 4 way combination of proshares ETF’s and what the strategy would have returned this year. This particular sample portfolio is comprised of the following:

• Proshares Ultra Technology ETF (symbol ROM) - bullish on technology
• Proshares Ultra Oil and Gas ETF (symbol DIG) - bullish on energy
• Proshares Ultrashort S&P 500 (symbol SDS) - bearish on the market in general, to hedge other positions
• Proshares Ultrashort Financials (symbol SKF) - bearish on financials, also used to hedge other bullish positions

If you decide to use proshares to either enhance or hedge your portfolio, you will have to determine the best combination that suits your own investment style and bias. The results below are just a quick demonstration of their usefullness. The strategy assumes purchasing 100 shares of each of the 4 proshares ETF’s on January 2, for a total outlay of $34,249. As of today, such a portfolio would be valued at $39,418, for a cumulative YTD return of 15.1%. This compares very favorably to the current S&P YTD return, which at last glance was DOWN 11.2% YTD.


Details of this simple backtest are below. You can try your own combinations to see how this combination and hedged strategy would have worked for you.

If you are in mutual funds, your fund manager generally only has two choices - cash or equities. A conservative and well hedged fund manager will maintain a reserve cash position during times of lofty valuations. When prices return to a decent value, the fund managers with cash on the sidelines can swoop in to steal the value. But what if you think valuations are to high at any level, and the US is headed for a major downturn? Or what if you buy into the current valuations, but you just can’t stomach the wild ups and downs of the market? This is where the inverse funds and shares come into play. Profunds and proshares are two such vehicles for easy portfolio hedging, or downright bets against the economy.

The difference between the profunds and the proshares offerings are the same as the difference between mutual funds and exchange traded funds. I personally personally prefer ETF’s for the following reasons:

Benefits of ETF’s

• Intraday trading (mutual fund purchases and sales are settled only at end of day pricing)
• Lower expenses then mutual funds
• Tax efficiency (mutual fund owners get hit with end of year distributions)
• You can short and even write options with ETF’s

The proshares ETF’s offer low fee methods to gain exposure to market indexes. But through their ultra shares, short and ultra short shares, they also offer an innovative way to manage risk and enhance return of your portfolio. The list of proshares is available here. My personal favorite is the Ultra Short S&P 500 shares (SDS), the objective of which is to double the inverse performance of the S&P 500. I’ve used it in the past as a downside hedge to my otherwise mildly bullish portfolio, and have also sold short term options against it.

The profunds offerings are similar in nature to proshares, but using mutual funds instead of ETF’s. The Ultrabear profund seeks to double the inverse of the S&P 500. There are also classic profunds, ultra profunds, and sector profunds to choose from.

There are several groups that measure consumer confidence or sentiment, but probably the most widely known is the monthly report from the conference board. Their consumer confidence report is released the last Tuesday of every month, and is based on responses from as many as 5000 households. An entirely new set of households are queried every month, but rarely do they all respond. From “The secrets of economic indicators”, the respondents are asked for a simple 3 state answer, based on the following key questions:

1. How would you rate the present general business conditions in your area? Good, normal or bad?
2. Six months from now, do you think they will be better, the same, or worse?
3. What would you say about available jobs in your area right now? Plenty, not so many, or hard to get?
4. Six months from now, do you think there will be more jobs, the same, or fewer jobs?
5. What would you guess your total family income to be six months from now? Higher, the same, or lower?

Based on the responses to those questions, plus a few others, the conference board produces three seasonally adjusted headline indices:

• The Present Situations Index reflects consumers’ attitudes about current conditions.
• The Expectations Index represents how consumers feel conditions might change in the next six months.
• The overall Consumer Confidence Index is based on a composite of the main five questions, with a 60/40 weighting for expectations vs current situation.

The consumer confidence monthly data can have an impact on the stock market, but it is somewhat erratic. Marketwatch reported at 7:18am pst that the Dow Jones Industrial Average lost over 100 points after the June consumer confidence number came in at 50.4, vs the May 58.1 reading. As of 9:10am pst, the Dow Jones had recovered earlier losses and was up over 15 points.

It’s information overload in the financial markets, and out of control marketing from the maniacs on wall street. What kind of returns are you looking for? Do you want Mad Money from the likes of Jim Cramer (“BUY BUY BUY”)? How about a daily dose of insanity from the Fast Money Team? When all else fails, there is always the 10 million plus links from the “Stock tips” google search. Beating the markets shouldn’t be to difficult this year, since the S&P, Dow Jones, and Nasdaq are DOWN 9%, 7% and 14% respectively so far this year. Those types of “returns” start to make the 1% bank yields look mighty attractive!

Is there any reliable way to achieve outsized returns in any market? Sure, plenty of sophisticated, experienced and good options traders continue to make 50% or more per year in any market, up, down or sideways. And many of those great traders and firms will try to sell you their systems and educate you on how to match their 50% returns. When you add it all up, however, it is nothing more than a market sum game. While some exceptional traders will continue make their living from trading in the markets, many more will go broke trying. The dollar sum (positive and negative, commissions withstanding) of the returns of all the traders in the world will always net out to the total return of the markets, year after year.

Trading the markets can be fun, but often consuming and addictive. The brokers will always win with the commissions they charge, assuming their expenses are lower than net commissions. For everyone else, it’s a market sum game. If you want an easy way to match the markets year after year, just throw your money at the index funds that do exactly that. If you can’t resist trying to beat the markets, then be prepared to learn everything you can, filter out the nonsense, and most importantly be careful!

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