Powershares SKF is Great for Cardiologists

The Powershares SKF is one of the new tracking stocks. This one is two times levered short the financials, which means that its movement is twice that of the financial index in a reciprocal manner. If the financials are up, this is down twice as much. This makes the thing extraordinarily volatile and dangerous.

I trade occasionally, and I have followed the banking disaster with great interest.  The road is littered with folks who have made and lost a fortune on bank stocks this year (mainly lost if you were long).  In mid-July, after the Fannie and Freddie "bailout" and the Wells Fargo earnings, fianncials have rallied.  I am not an expert of short-selling and short-selling practices, but I understand that at Lehman's insistence the SEC limited the ability of short-sellers to movea gainst the market, which has added fuel to the rally.

A popular way for shorts and longs to play the financials was introduced last year in the form of the Powershares SKF, a two-times levered short tracking stock.   The volatility of this thing has been extraordinary.  It came out at $71 a share in October, ran to $150 after the Bear collapse, ran back down to $100, then up to over $210 on July 15 which the selloff reached a crescendo.  In less than two weeks, as bank stocks have surged, this has retreated all the way to $111.

And the movement is not straightlined.  The thing can experience instant moves of more than $1 in a manner at any time.

According to my friends who trade and friends at hedge funds, this thing now represents the best way to move against the banks.  I don't know if the bet against the banks is over (as some, including Sam Cass believe) or if this is just a snap-back rally.  But, whatever your inclination is, you should be warned that the SKF is not for the faint of heart or the casual trader.  It is, in fact, a heart attack waiting to happen.

Jason Rodgers
Jason Rodgers: Jason Rodgers was an experienced research analyst for a major bank prior to retiring to run his own investment consultancy in beautiful Lihue, Hawaii. Jason contributed articles to BestCashCow from 2008 to 2014.

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  • Sam Cass

    July 25, 2008

    Since I was called out in this article, let me know. I do think that bank stocks were close to a bottom. The markets are forward thinking and they have already priced in the drop in home prices we are going to experience over the next couple of years. They also took the shock of Bear Stearns collapse, Fannie/Freddie near insolvency, and second largest bank failure - Indymac. I think that's enough to sober up anyone.

    Will bank stocks explode up and regain their past values? I don't think so. As I've written many times before, the financials' profit engine has been robbed of its gasoline (real estate fuel). They will have to keep capital on balance sheet and also have lost a revenue stream (mortgages, home equities, and other obscure and arcane securities).

    Could financials go down again? Yes, but when they do look to buy when everyone is crying fire.

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