Short Mutual Funds, ETFs Clean Up

No matter how tortured the investment environment becomes, there is always a bull market to be found somewhere if you look really, really hard. This week the stampede of winning funds was made up of those that play the short side of the market.

As fear of a U.S. recession spread across the country and around the world, the Dow Jones Industrial Average slipped 5.4%, the S&P 500 gave up 6.1% and the Nasdaq 100 lost 5.7% for the week ended Jan. 17.

Meanwhile, the average inverse fund we track gained 11.46%. An aggregate score that high is a result of the leverage employed by many of these inverse funds.

Never before have we produced a best-performing list with such large, across-the-board gains. One-week returns like these would make a respectable year. Topping the list is UltraShort FTSE/Xinhua China 25 ProShares (FXP Quote), a new exchange-traded fund that bets against Hong Kong and mainland Chinese stocks with 200% leverage. It returned 38.4%.

Three of the fund's holdings contributing the most 'bang for the renminbi' are China COSCO Holdings (CICOF Quote), plunging 25%; China Merchants Holdings International(CMHHF Quote) slashed 16%; and Aluminum Corp. of China (ACH Quote), losing 14%. The first two companies are in the container shipping business. Lower U.S. retail sales cut projections of China-to-U.S. shipping demand. Aluminum Corp. of China is suffering from rising costs of electricity & bauxite, the main two raw materials needed to make aluminum.

The next two spots on the best-performing inverse fund list are held by two funds betting against emerging markets indices with 200% leverage. The (UVPIX Quote)ProFunds UltraShort Emerging Markets (UVPIX), up 29%; and the (DXESX Quote)Direxion Emerging Markets Bear 2X Fund (DXESX), up 29%; caught the reversal of one of last year's hottest investment sectors.

In fourth place, the (UKPIX Quote)ProFunds Ultra Short Japan ProFund (UKPIX) advanced 17.75% by tracking twice the inverse performance oft Japan's Nikkei 225 Stock Average. J Front Retailing, a fund holding, sank 23% on the back of data showing overall Tokyo department stores sales for December shrank 1.6%. The engineering company Kumagai Gumi, another holding, fell 18%, hurt by weak November Japanese machine order and industrial production reports.

In fifth place, the (DXSSX Quote)Direxion S&P 500 Bear 2.5X Fund (DXSSX) turned the S&P 500's negative 6.1% performance into a positive 17% return using 250% negative leverage. Two bond insurers in the index, AMBAC Financial Group (ABK Quote) and MBIA(MBI Quote), were taken out to the woodshed and chopped down by 68% and 35% respectively on the possibility of losing their triple-A ratings.

Another fund constituent that is having a hard time navigating this economic landscape is Harman International Industries (HAR Quote),which heading downhill by 45%. The company's earnings forecasts have been reduced due to contracting prices for the navigation devices it makes.

Best Performing Inverse Funds Ranked by returns for the week ending Jan. 17, 2007
Fund	Ticker	Rating	Fund Type	1 Week Total Return
UltraShort FTSE/Xinhua China 25 ProShares	FXP	U	ETF	38.40%
ProFunds UltraShort Emerging Markets	UVPIX	U	Open-End	29.35%
Direxion Emerging Markets Bear 2X Fund	DXESX	U	Open-End	28.54%
ProFunds Ultra Short Japan ProFund	UKPIX	U	Open-End	17.75%
Direxion S&P 500 Bear 2.5X Fund	DXSSX	U	Open-End	16.64%
ProFunds UltraShort International ProFund	UXPIX	U	Open-End	15.96%
UltraShort MSCI EAFE ProShares	EFU	U	ETF	15.29%
Direxion NASDAQ 100 Bear 2.5X Fund	DXQSX	U	Open-End	15.17%
Direxion Developed Markets Bear 2X Fund	DXDSX	U	Open-End	15.09%
UltraShort Russell MidCap Growth ProShares	SDK	U	ETF	14.60%
Source: Bloomberg

Click here for an explanation of our ratings.

Real estate is continuing the slide I wrote about last week. However, the 3.24% return of (SRPIX Quote)ProFunds Short Real Estate ProFund (SRPIX) looks puny compared with the other reverse index funds. It was the worst-performing fund in the group.

Coming in third was the Short SmallCap600 ProShares (SBB Quote). Contributing to its 5.2% gain were California Pizza Kitchen (CPKI Quote), down 29%; BankUnited Financial (BKUNA Quote), down 28%; and Steak N Shake (SNS Quote), down 26%.

As for the DOG's of the Short Dow30 ProShares(DOG Quote), Intel(INTC Quote) was off 14%, American Express (AXP Quote) off 13%, Citigroup (C Quote) off 11% and McDonald's (MCD Quote) off 11%, barked the loudest this week.

Worst Performing Inverse Funds Ranked by returns for the week ending Jan. 17, 2007
Ranked by returns for the week ending Jan. 17, 2007
Fund	Ticker	Rating	Fund Type	1 Week Total Return
ProFunds Short Real Estate ProFund	SRPIX	U	Open-End	3.24%
Prudent Bear Fund	BEARX	B+	Open-End	4.68%
Short SmallCap600 ProShares	SBB	U	ETF	5.15%
Short Dow30 ProShares	DOG	C-	ETF	5.19%
Short Russell2000 ProShares	RWM	U	ETF	5.58%
Grizzly Short Fund	GRZZX	E	Open-End	5.71%
Profunds Short Small-Cap ProFund	SHPIX	E	Open-End	5.78%
Rydex Series - Russell 2000 Strategy Fund	RYSHX	E	Open-End	5.83%
Rydex Series Trust - Inverse OTC Strategy Fund	RYAIX	E	Open-End	5.94%
Profunds Short NASDAQ-100 ProFund	SOPIX	E-	Open-End	5.95%
Source: Bloomberg

Click here for an explanation of our ratings.

On Friday, President Bush announced his stimulus plan to inject a sliver of hope back into the economy. His "economic growth" package calls for a total matching 1% of gross domestic product to be advanced to businesses who make new investments and to individuals for immediate spending in 2008.

The details of the plan are yet to be negotiated between Treasury Secretary Hank Paulson and the U.S. Congress. Early speculation is that the plan may include accelerated depreciation on new equipment and software purchases for businesses and tax rebate payments of $800 to individuals and $1600 to families. If both parts of the plan result in higher taxes next year, we will just be stealing from the future to save the present. The market didn't buy the plan, sinking further by midsession.