Short Mutual Funds, ETFs Clean Up

The S&P gave up just over 6% the week ended Thursday, but the average inverse fund tracked by TSC Ratings gained 11.5%.
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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) - Get Report

, 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)

, plunging 25%;

China Merchants Holdings International

(CMHHF)

slashed 16%; and

Aluminum Corp. of China

(ACH) - Get Report

, 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) - Get Report

ProFunds UltraShort Emerging Markets (UVPIX), up 29%; and the

(DXESX)

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) - Get Report

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) - Get Report

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)

and

MBIA

(MBI) - Get Report

, 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)

,which heading downhill by 45%. The company's earnings forecasts have been reduced due to contracting prices for the navigation devices it makes.

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) - Get Report

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) - Get Report

. Contributing to its 5.2% gain were

California Pizza Kitchen

(CPKI)

, down 29%;

BankUnited Financial

(BKUNA)

, down 28%; and

Steak N Shake

(SNS)

, down 26%.

As for the DOG's of the

Short Dow30 ProShares

(DOG) - Get Report

,

Intel

(INTC) - Get Report

was off 14%,

American Express

(AXP) - Get Report

off 13%,

Citigroup

(C) - Get Report

off 11% and

McDonald's

(MCD) - Get Report

off 11%, barked the loudest this week.

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.

Kevin Baker became the senior financial analyst for TSC Ratings upon the August 2006 acquisition of Weiss Ratings by TheStreet.com, covering mutual funds. He joined the Weiss Group in 1997 as a banking and brokerage analyst. In 1999, he created the Weiss Group's first ratings to gauge the level of risk in U.S. equities. Baker received a B.S. degree in management from Rensselaer Polytechnic Institute and an M.B.A. with a finance specialization from Nova Southeastern University.