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
gave up 6.1% and the
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
, 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
, plunging 25%;
China Merchants Holdings International
slashed 16%; and
Aluminum Corp. of China
, 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
ProFunds UltraShort Emerging Markets (UVPIX), up 29%; and the
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
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
, another holding, fell 18%, hurt by weak November Japanese machine order and industrial production reports.
In fifth place, the
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
, 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
,which heading downhill by 45%. The company's earnings forecasts have been reduced due to contracting prices for the navigation devices it makes.
here for an explanation of our ratings.
Real estate is continuing the slide I wrote about
last week. However, the 3.24% return of
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
. Contributing to its 5.2% gain were
California Pizza Kitchen
, down 29%;
, down 28%; and
Steak N Shake
, down 26%.
As for the DOG's of the
Short Dow30 ProShares
was off 14%,
off 11% and
off 11%, barked the loudest this week.
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.