A.I.M. Users Bulletin Board

[BowlerBob]

Ray,

I have been waiting for someone to "chime in" in response to your post, but no has, as yet, so I will attempt to do so. I see two conflicts with your statements that I wish to address: 1)

The problem is the daily "compounding" problem. If a fund drops 10% in value then it requires an 11% increase in value just to get back to breakeven. A 25% value decline requires a 33% increase to get back to breakeven...etc.

This statement is misleading, not because the math is untrue, but because the math is true of anything you discuss in terms of percentages. It is true of Inverse ETFs; Leveraged ETFs; regular,basic ETFs; all stocks; mutual funds; etc...anything you express in percentages. So, to apply it to Inverse or Leveraged ETFs, as though it was a problem unique to them, is misleading.

2)

With that in mind using any sort of inverse fund as a cash substitute for any lengthy period of time really creates a problem that is hard to correct. Suppose for example someone had bought a 3X leveraged inverse etf for the S&P 500...SPXS...on January 2nd this year for a cash substitute. ... So,IMO,inverse funds...leveraged or not...are terrible holdings as a long-term cash substitute.

Then two paragraphs later you give an example that directly contradicts this opinion.

Getting back to SLW. Looking at a chart of SLW and how far it has declined there is no way I would now hedge it with an inverse fund. The time to do that was about a year ago when SLW was around $40 a share...now it is around $19.40. At the time SLW was selling for $40 a share DSLV was then selling for approximately $20 a share. DSLV has since tripled in value and currently selling for almost $60 a share, while SLW has lost 50% of its value.

So, which is it? You shouldn't hold these ETFs for more than a short-term period, or DSLV gained 200% in a year, while its underlying ETF (SLW)lost 50%? Let's see, a non-leveraged Inverse ETF should have gained about 50% while SLW lost that amount, a 2X Leveraged Inverse ETF should have gained about 100%, and a 3X leveraged Inverse ETF should have gained about 150% -- BUT it, instead, gained nearly 200%. That is not a bug, it's a feature.

As far as the timing is concerned, that is what AIM is helping you with -- Buy low and Sell high. When your basic investment in SLW is rising enough to cause AIM to give Sell advice, the price of the inverse ETF is falling. So the cash AIM is generating is buying more of the decreasing inverse fund. And when the market finally turns around and SLW begins to fall, the inverse fund is then rising in price and is worth more than you paid. So you are buying low and selling high with both your basic investment vehicle AND your cash. I would suggest though, that Clive's advice about putting only 1/3 of your cash in the 3X ETF is a wonderfully wise bit of caution, and is better than putting all your cash in a non-leveraged Inverse ETF.

I am going to send a second post to cover the part of your discussion that I agree with.

Regards,

Bob