Double Your Money Shorting Japan

By Travis Johnson, Stock Gumshoe, February 21, 2009

Here’s how this ad begins:

“Industrial output dropped 35% in December
“Exports sank 46% from 2007
“Unemployment to hit 6% in 2009
“Sony, Nissan and NEC are warning of huge losses that will eliminate tens of thousands of jobs
“Japan’s economic minister warns, “The worst is yet to come.”

Well that sounds nasty, eh?

Robert Hsu has finally thrown in the towel on at least one of his beloved Asian economies — his more expensive newsletter, Asia Edge, was designed to help people take advantage of the financial rise of Asia, with a broader mandate than his China Strategy letter that focuses just on the Middle Kingdom.

And now, he’s telling everyone to get out of Asia’s most mature stock market, and to bet against it:

“… if you have any money in Japanese stocks, please get it out NOW and then add my Japan-shorting ETF to your holdings TODAY.

“As you’ll see in tonight’s Asia Edge (posted online now), the Japanese economy is not only on the verge of a mammoth free fall …

“…but your quick action today will determine your future wealth.”

This isn’t a particularly sneaky teaser — he doesn’t tell us the name of the investment he’s recommending to his Asia Edge subscribers, but he does say that he’s telling them to use a special ETF that lets you bet double against Japan’s stock market.

And there’s only one of those.

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So what Hsu wants folks to do is buy shares of the UltraShort MSCI Japan ETF, (ticker EWV).

This is an ETF that, like all the ProShares UltraShort ETFs, tries to return twice the negative daily performance of the underlying index. The underlying index is the MSCI Japan Index, so if that index falls by 1% in any given day, the ETF is supposed to rise by 2%.

I won’t argue in favor of Japan — it certainly seems true to me that they depend heavily on exports, particularly to China and the U.S., that they have had a troubled and often barely growing economy for more than a decade even before this latest crisis, that they have terrible problems with inbreeding in their biggest corporations, and they have an aging population and a fear of immigrants that will make it almost impossible for them to grow in the future. Nothing about Japan’s stock market really appeals to me, though I’m sure there are some fine and profitable companies that I don’t know about. Throw in the fact that their currency has done well against the dollar, and their exporting companies even get a short term beating.

But of course, neither I nor Robert Hsu was the first to notice this — betting against Japan is not exactly contrarian here, this UltraShort ETF is up close to 50% so far this year (though it’s well off its highs of last Fall, when almost every UltraShort ETF was setting crazy records).

He thinks the downturn will accelerate over the next six months, and that it might take five years for Japan’s stock market to recover, which may well end up being true, I certainly have no idea.

So … do you want to get in on this trade and bet against Japan? That’s your call — I will just offer the standard warning about Short and UltraShort ETFs: They are not for the faint of heart, and they are not particularly designed for those who wish to make long term bets.

The key to these ETFs is that they use derivatives to try to double the return or the negative return of an index each day. And while they aren’t perfect in matching that performance, they at least often come close to hitting that target. But if you want to buy this ETF and hold it for six months because you think the Japan Index will fall between now and next Fall, you may well end up with a surprise.

To explain what I mean, look at a chart comparing the standard MSCI Japan Index ETF (EWJ) with this double short ETF (EWV).

You can see that over the last six months the moves on the chart look like they mirror each other as you would expect … but look at the numbers. The Japan Index has fallen by about 25%. But if you had bought the DoubleShort EWV six months ago, you would be … even. The assumption of most investors is that you would have gotten a 50% return based on the negative 25% return of the underlying index over that time period, but it didn’t happen.

This disconnect for long term performance of particularly the UltraShort ETFs is not new, it is a byproduct of the leverage that these ETFs use and it has been discussed for many months, and it doesn’t necessarily mean that these kinds of investments aren’t worth a tumble if you want to make short term bets — just be careful if you’re counting on them as a way to ride a longer term trend. One never knows what will happen in the future, but you would have been better off, over the last six months, buying puts against EWJ than buying EWV.

Have you tried out Robert Hsu’s services? Click here to review them and let your fellow investors know what they can expect from Asia Edge or China Strategy.

If you’ve got info to share about any of the UltraShort ETFs, or about making bets on the direction of Japan’s market, or the price of tea in China, by all means, let us know with a comment below. Have a great weekend



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February 21, 2009 5:37 am

I posted this in the forum a few days ago. It’s a math explanation from a math Phd. why you should NEVER buy and hold any leveraged or even inverse ETF/ETN’s for more than a day or two, whether they are from Japan or Mars.

Also, contrarians are making money BUYING Japan these days. JOF is a closed end fund that presently is in a downtrend, but trades at nearly an 11% discount to NAV. It is significantly oversold and if it can hit 8.00 it would be a reversal buy signal.

Finally, being long the Yen through FXY has been the place to be since it was mentioned in the forum on September 30th.

First suggested at 96.00, just yesterday support held at about 105 and it closed at 107 as the dollar tumbled. The Yen is still oversold.

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February 21, 2009 11:29 am

I think this is worth checking out — I lived in Japan for 13 years. When I first got there, people had signs in the rental shops that said, “No Dogs, No Foreigners…”

This was at the height of the Bubble. They were putting gold flakes on their food, calling it a health measure.

The Japanese are loath to let something fail…too much losing face. This is why this might be a good idea…based on how their society works, they’ll most likely do the same thing.

The difference? They can take it. The Japanese consumer is compliant…they’re used to being screwed, and will gladly be screwed to further the country’s progress as a whole, unlike the USA.

As long as they’re unwilling to reform, the investor might as well take advanatage of this. I saw it firsthand.


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Elissa Stein
Elissa Stein
February 21, 2009 11:30 am

And gumshoe, don’t forget to mention that these funds all had capital gains distributions last year, and did them in a sneaky way- you could have a decline in the price of shares, but they declared capital gains distributions ( I think it was over $12 per share for this one) and did the distribution on Dec 23rd, after the markets closed and didn’t reopen until after xmas-so you couldn’t sell to avoid the cap gains distribution.

February 22, 2009 1:02 am

Funny, I bought ultra short materials SMN early 2008 and made 100% ten months later.

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February 22, 2009 1:51 am

My account is up 65% since January 1st using SKF, SRS, and TWM. I buy them just after they start an uptrend and sell before they peak. I avoid holding them on OPEX.

Gravity Switch
February 22, 2009 8:23 am

Nice trades, Dons and Jim — clearly, it’s not that UltraShort ETFs don’t ever work, it’s that they don’t always work as people expect.

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Rod Thompson
Rod Thompson
February 22, 2009 3:26 pm

The mechanisms of the Ultra short are a daily return, over the long haul they perform misserably, compared to the ETFs that are designed to double on the upside. As a result, you need to be in at the market peak (lowest price for a short) and get out during a big slide when you make quick $, as the value will dwindle in a sidways market, they make money during the slide, then it’s all over. There are ultra shorts who lost value last year even though the Dow etc plunged by over 35%. You are better off shorting the long sided version of the same ETF.

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John Sloan
February 27, 2009 1:54 pm

HI Travis and all
read Hsu note in his China Strategy – thanks for bringing it up here.
1 seems to me that Japan economy depends on exports which of course are impacted by value of the yen.
When yen rises exports are hurt, when yen falls exports are helped. Currently yen has risen – Japanese exporters are hurting. But what happens when Japanese government pushes value of yen back down – export companies will be helped again

2 – the problem with the double inverse ETF is simple – it is the standard math that to equal a down move one has to gain a larger up move. A down of 40 percent requires an up of 67 percent – a down of 50 percent requires an up of 100 percent just to get even.
These funds are recalculated daily – not long term. so their downs always require a larger up and gradually over time a series of equal downs and ups result in ultimate down.

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