Bear funds don’t always behave as one might expect.

Gary Lucido, 52 years old, an active investor for 25 years, learned that the hard way. In late December, Mr. Lucido bought the UltraShort FTSE/Xinhua China 25 ProShares ETF, which aims to give twice the inverse of the daily performance of FTSE/Xinhua index, which tracks 25 large Chinese stocks trading in Hong Kong. However, when he checked in early February, he found that while the index was down 15%, the ETF was up only 17%, instead of the 30% he expected.

“This was a big eye-opener to me,” Mr. Lucido said. ProShares gave him an explanation that also appears in its literature: The fund only aims to double the return on a daily basis, but due to the effect of compounding and volatility, over a period of time the return may be more or less than double.

Indeed, some of the biggest users of bear-market funds and ETFs are financial advisers and money pros who see them as an easy way to bet against the market, or sometimes just to hedge positions. Previously, they had to ’short’ individual stocks or ETFs, selling borrowed shares with the hope they could buy them back in the future at a lower price.

However, shorting can get complicated and has the potential for huge losses if markets rocket up. Closing a short position can potentially raise the price of a stock because short-sellers must buy shares to cash in on their bets — which may force even more short-sellers to close out their bets by buying, in a spiral called the short-squeeze. Short funds, on the other hand, can be easily bought and sold like regular mutual funds, and losses for fund investors are more contained because they don’t face a short-squeeze.

Not all bearish funds are gaining this year. For instance, one ETF that bets against the oil’s price, MacroShares Oil Down Tradeable Shares, is down around 40% over one year through this past Tuesday because of buoyant oil prices during the period.

Bear-market ETFs have other wrinkles. They aren’t as tax efficient as plain-vanilla stock ETFs for various reasons. For instance, they often invest cash obtained from the short positions into money-market or debt investments, which generate taxable income passed on to investors.

A handful of bear-market mutual funds have been around for more than a decade. Rydex Investments started the first such fund in 1994, now called the Rydex Inverse S&P Strategy fund. Direxion Funds introduced the second one in November 1997, followed a month later by ProFunds Group’s first bearish fund. Today, ProFunds is the leader, with $14 billion in bear-market funds and ETFs, while Rydex and Direxion hold $1.8 billion and $250 million in such products, respectively.

In the last two years, ProFunds rapidly built its lineup of such ETFs under the ProShares brand by starting 36 ETFs, including one this week. These include ETFs, which bet against technology companies, real-estate companies, and an emerging-market index.

Rydex also is looking to introduce more funds and ETFs that will bet against foreign stocks in specific countries as well as stock sectors, said David Reilly, director of portfolio strategies.

While the new funds increasingly are based on narrow indexes, there are some actively managed funds in which managers can make bearish bets as they see them. David Tice, manager of the $1.2 billion Prudent Bear fund, shorts stocks or market indexes he thinks will fall, while also buying some gold and mining stocks that tend to do well in market downturns.

Mr. Tice has managed to prevent the fund from falling too much, even in an up market. But there’s a cost. The fund has gained 5% so far this year, about half as much as the average bear-market fund. Still, it is in positive territory during the last three, five and 10 years.

Wall Street Journalmod=todays_us_nonsub_money_and_investing

January 15, 2008, 11:55 am
Wall Street Journal

The next bubble in the U.S. economy should be taking hold right about now, entrepreneur and investor Eric Janszen writes in Harper’s Magazine.

After years in venture capital, Mr. Janszen now runs iTulip, an investment Web site premised on the idea that the financial sector has locked the U.S. into a damaging cycle of bubbles that are disconnected from the actual health of the economy. According to his theory, the finance, insurance and real-estate businesses survive by pouring capital into a sector, creating a self-fulfilling prophecy that asset prices will rise. When prices collapse back to their true value, financiers make up their losses by pouring capital into another sector and creating another bubble.

Where will the next bubble turn up? In Mr. Janszen’s view, the alternative-energy industry’s expansion is showing some of the same patterns that allowed values to swell far beyond their true worth during the dot-com and housing booms. For starters, green energy is popular with the media and with politicians – “energy security” has become a catchphrase for both Democrats and Republicans. It has received favorable legislation involving loan guarantees and subsidies, just as the Internet got a sales-tax amnesty in the 1990s and deregulation allowed banks to offer more credit to potential homeowners.

Finally, the industry is flush with fresh capital. The Internet bubble was inflated by irrationally exuberant venture capitalists and IPO investors. The housing boom exploded thanks to the packaging of securitized debt. In the case of alternative energy, venture capitalists seem once again willing to supply the new capital.

Still, without another bubble, Mr. Janszen says the financial sector would probably collapse under the weight of the losses it incurred under the previous bubble. “The only thing worse than a new bubble,” he says, “would be its absence.” – Robin Moroney

Some people think that the best way to avoid disasters like eTrade is to not trade at all. If you are trading or even stocking your IRA then the big question is how do you avoid disaters?

Avoiding Disasters Video (eTrade the focus)

Well, the best way to avoid disasters like Structured Investment Vehicles (SIVs), Collateralized Debt Obligations (CDOs) is to get some information that will teach you how to avoid them. This short, four minute video trading lesson, will show you the exact rules you need to follow to avoid meltdowns in the future. It will also show you how you can even profit from disasters like e-Trade. Watch it as my guest. No registration required.

Wanted: Prime Suspect of Housing Market Murder
By Susan C. Walker, Elliott Wave International

Helen Mirren accepted her Emmy award for best actress in the mini-series, “Prime Suspect” with elegance and grace. Just the opposite of the tough detective superintendent character she plays who tracks down murder suspects in England. Who would Jane Tennison pick out as the prime suspect for the murder of the U.S. housing market and the resulting gruesome credit crunch?

Suspect No. 1 – Phil Spector
No – sorry, wrong case, wrong suspect. Spector has been on trial for the murder of a guest at his home (the judge declared a mistrial this week), but Spector has nothing to do with the subprime mortgage fallout and ensuing credit crunch. O.J. Simpson, who stands accused of trying to “recover” his sports memorabilia, is not the prime suspect either. If the crime doesn’t fit, you must acquit.

Suspect No. 2 – Alan Greenspan
Says that he didn’t catch on for a few years that subprime mortgages could create a problem for the economy. As chairman of the Federal Reserve, he let easy credit ride, which facilitated the housing bubble and the subsequent implosion. Could liken his behavior to supplying the gun to a rampaging murderer. Guilty of aiding and abetting, but he’s not necessarily the prime suspect.

Suspect No. 3 – Angelo Mozilo
Angelo Mozilo, CEO of Countrywide Financial (largest mortgage company in the United States), says he kept his staff writing subprime mortgages day and night, because if they didn’t, then home purchasers would just find someone else to give them a low-quality mortgage. Company went from writing 4.6% of its overall mortgages as subprimes and low-documentation loans in 2004 to 8.7% in 2006. Guilty of greed and a poor business plan but not murder.

Suspect No. 4 – S. & P. and Moody’s
Oh, whoops, say these rating agencies, we thought that once you sliced up a BBB security thinly enough and packaged it with other more desirable collateralized debt obligations that we could call it AAA. Did we mislead anybody? Again, aiding and abetting but not a prime suspect.

Suspect No. 5 – Goldman Sachs and other investment banks
Says that their investors wanted higher returns and that collateralized debt obligations spiced up with subprime mortgages served the purpose. And besides, they say, the rating agencies gave them an excellent rating. Guilty of acting like a fence but not the prime murder suspect.

The True Prime Suspect
All of these are worth a look as suspects, but the true prime suspect has neither a first name nor a last. It’s known as “social mood,” and its m.o. is “herding behavior.” That’s our real murderer, the one that quashed the hopes and dreams of those who believed that house prices would always go up. Social mood changed, and with it changed the idea of what were smart financing moves to purchase a house. Suddenly, as house prices began to fall and subprime mortgagees began to default on their loans, the stick house built on low-quality mortgages seemed like a really bad idea.

Who knew? When social mood was positive, mortgage writers pushed people who couldn’t really afford a mortgage into believing they could. Then they sold the mortgages to eager investment bankers who sliced them up into small packages of risk and re-packaged them with less risky securities. Then the ratings agencies gave their stamp of approval: AA? Why not AAA? And eager investors who wanted higher returns bought them up.

But now the game is up. When social mood turns from positive to negative, fear replaces greed, and people begin to see the riskiness for what it is. When social mood changes from positive to negative, markets turn from bullish to bearish. And no one can stop it – not even the Fed.

This is how Bob Prechter, president of Elliott Wave International, describes the phenomenon:

“Like credit inflation, credit deflation is in fact an intricate, interwoven process, whose initial impetus is a change in social mood from optimism toward pessimism. If you are still on the fence about this idea, ask yourself: What changed in the so-called “fundamentals” between June and August? The answer is: absolutely nothing. Interest rates did not budge; there were no indications of recession; there were no changes in bank lending policies; there were no chilling government edicts.

“The only thing that changed was people’s minds. One day sub-prime mortgages were a fine investment, and the next day they were toxic waste. There was no external cause of the change.… According to socionomic theory, the stock market is a sensitive indicator of such changes in mood. This is why The Elliott Wave Theorist has continually said that the financial structure will hold up as long as the stock market rises. A downturn occurred in mid-July, and its consequences in terms of negative social mood are becoming swiftly evident. Remember, C waves (see Elliott Wave Principle, Chapter 2) are when optimistic illusions finally disappear and fear takes over. Sounds like now.” [Elliott Wave Theorist, September 2007]

How To Protect Yourself from the Prime Suspect Who is Still on the Loose

Social mood has turned ugly and is likely to continue its murderous rampage, leaving the policymakers helpless. As analysts Steve Hochberg and Pete Kendall write in The Elliott Wave Financial Forecast: “The Fed does not “inject” liquidity; it only offers it. If nobody wants it, the inflation game is over. The determinant of that matter is the market. When bull markets turn to bear, confidence turns to fear, and a fearful people do not lend or borrow at the same rates as confident ones. The ultimate drivers of inflation and deflation are human mental states that the Fed cannot manipulate.”

What should you do to protect yourself in this time of falling home prices, a powerless Fed and a contracting economy? Bob Prechter wrote one of the best how-to books. It’s his business best-seller, titled, Conquer the Crash, How To Survive and Prosper in a Deflationary Depression. You might want to start there.

Editor’s Note: You can read a FREE 9-page chapter from Conquer the Crash –
You will learn the implications of the massive credit expansion, what triggers the change from boom times to recession, and more.

Susan C. Walker writes for Elliott Wave International, a market forecasting and technical analysis company. She has been an associate editor with Inc. magazine, a newspaper writer and editor, an investor relations executive and a speechwriter for the Federal Reserve Bank of Atlanta. Her columns also appear regularly on FoxNews.com.

Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game

List Price: $39.95
Buy New: $21.34
You Save: $18.61 (47%)

Editorial Reviews:

Trading is a battle between you and the market. And while you might not be a financial professional, that doesn’t mean you can’t win this battle.

Through interviews with twelve ordinary individuals who have worked hard to transform themselves into extraordinary traders, Millionaire Traders reveals how you can beat Wall Street at its own game.

Filled with in-depth insights and practical advice, this book introduces you to a dozen successful traders-some who focus on equities, others who deal in futures or foreign exchange-and examines the paths they’ve taken to capture considerable profits.

With this book as your guide, you’ll quickly become familiar with a variety of strategies that can be used to make money in today’s financial markets. Those that will help you achieve this goal include:

Tyrone Ball: trades Nasdaq stocks almost exclusively, and his ability to change with the times has enabled him to prosper during some of the most treacherous market environments in recent history

AShkan Bolour: one of the earliest entrants into the retail forex market, he trades in the direction of the major trend, rather than trying to find reversals

Frank Law: a technician at heart, identifies a trading zone, commits to it, and scales down as long as the zone holds

Paul Willette: has mastered a method that allows him to harvest some profits right away, while ensuring that he can still benefit from an occasional extension run in his favor

Technorati Tags: Millionaire Traders, forex market

The Only Three Questions That Count is the first book to show you how to think about investing for yourself and develop innovative ways to understand and profit from the markets. The only way to consistently beat the markets is by knowing something others don’t know. This book will show you how to do just that by using three simple questions. You’ll see why CNBC’s Mad Money host and money manager James J. Cramer says, “I believe that reading his book may be the single best thing you could do this year to make yourself a better investor.

In The Only Three Questions That Count, Ken Fisher challenges the conventional wisdoms of investing, overturns glib theories with hard facts, and blows up complacent beliefs about money and the markets. Ultimately, he says, the key to successful investing is daring to challenge yourself and whatever you believe to be true. Packed with more than 100 visuals, usable tools, and a glossary, The Only Three Questions That Count is an entertaining and educational experience in the markets unlike any other, giving you an opportunity to reap the huge rewards that only the markets can offer.

5 out of 5 stars FABULOUS BOOK July 20, 2007
1 out of 1 found this review helpful

“The Only Three Questions That Count: Investing by Knowing What Others Don’t” by Ken Fisher is the best book I have read on investing in a month of Sundays. Whether you are a pure fundamentalist, a pure technician or a hybrid you will learn a ton about why things happen the way they do in the market and how you can take advantage of it in your investing for your serious money.

All of this and one of the most entertaining books as well! Ken always lets you know that whatever we prognosticate could be wrong so he doesn’t take himself too seriously and won’t let you take yourself too seriously either. It kept my undivided attention for 350 pages!

This book dispels a ton of myths about what causes markets to go up and down and shows you the real reasons that they do. He has the hard evidence there for you. You can see for yourself and not just take his word for it. You come away truly enlightened about what to pay attention to and what to ignore.

BUY IT AND READ IT TWICE!

5 out of 5 stars This book should be part of Finance 101 July 19, 2007
This book is an eye opening look at the myths that the media sells everyday. If you buy into strategies like “Sell in May” or root for the NFC every Superbowl then you need to read this book. I’m just waiting for CNBC to stop selling sensationalism and start talking prudent investing like this book does.

2 out of 5 stars Inconsistent & Unimpressive July 17, 2007
2 out of 2 found this review helpful

Fisher acknowledges that being smarter and better trained is not enough to beat the market based on commonly available news and information. (Page xxiii) Yet he claims that his three questions will allow you to do just that. The inconsistency is breathtaking. By using his three questions, he says, you can know things that others don’t. He is in effect claiming that his three questions will make you smarter than the market, because you will be able to look at publicly available information and then out-think and out-analyze other investors. Sorry, I’m not buying it. Maybe he would be worth paying attention to if his track record were truly outstanding. It isn’t. The book’s Appendix K gives his track record with real investments. His 10 year annualized return is 9.9%, compared to 8.3% for the S&P 500. His return is quite good but not impressive enough to discount the role of luck. What would be impressive? Well, if Fisher really had a handle on beating the market, he ought to be able to beat the market by a convincing margin, say 1000 basis points. Or even 500. Performance that good, or even better, is quite possible. The Olympic standard is Warren Buffet: when he was managing an investment partnership, from 1957 to 1969, he got a return of 29.5% per year before his fee, compared to 7.4% for the Dow. On the other hand, Fisher’s three questions are great questions for stimulating serious thinking. And some of his contrarian arguments are interesting and worth pondering.

5 out of 5 stars The Only Three Questions That Count July 15, 2007
1 out of 1 found this review helpful

Sinple, concise yet complete.Well written and easy to comprehend.
I would recommend it to any potential investor.

Higher interest rates can lead to an array of woes for the stock market. But one of the worst — a downturn in corporate profits — still isn’t among the big worries for most investors and Wall Street pros, even after the latest run-up in benchmark Treasury debt yields. WSJ

The stock market's correction gained steam Friday, as a fresh round of losses added to one of the worst weeks on Wall Street in years.

We recommend our JM Hurst ebook to every stock, commodities or forex trader regardless of their primary method of technical analysis. Why? Because it’s so easy, so objective, and so dead-nuts accurate at nailing swing tops and bottoms that after one week of trading you’d pay us almost anything to not give it back.

Kamich’s book, How Technical Analysis Works, is not for the expert technical analyst or a professional day trader. It is appropriately respectful of quantitative and fundemental analysis, limits its discussion to the most proven and reliable indicators, and offers some clever speculation about the underlying dynamics of market structure and market participants that explains why technical analysis may be useful. It also provides a little history of technical analysis back to Dow.

Trading software reviews