Nick's Trade

My friend Nick and I talk stock & markets often.   A few weeks he told me that after a long time of waiting, he finally jumped into the current market buying a bunch of the UYG Ultra Long Powershares Financial ETF.  I use to buy and sell ETFs often when I worked as a portfolio manager but had not heard of the UYG.  This ETF is 2x leveraged and tracks an index of banks and financial services companies. Financials have been destroyed over the past 2 years and as you can see from the graph UYG got creamed as well.   You can’t see because Yahoo finance did’t include it on their Y axis, but the low was 1.37.   1.37!  This index was 65 two years ago and now it is a few bucks.   Do you see a trade here?  

Nick is a smart guy.  He doesn’t know if the worst is over for financial stocks… but do you think it is possible that these stocks might recover in the long term?  Maybe not… since business models and leverage levels will no doubt change drastically from the good ole days.  Maybe these banks will make it 1/2 of the way back?  Let’s be conservative and use 1/3.   We invest $100 today at $3.5.  Regaining 30% of what it lost over the past 1.5 years would bring this ETF back to around $20.  Our $100 would be worth around $572.  Now, it is easy to lose your head and jump into the market after last week…so keep in mind this is a long term trade.  Financials have rallied a lot off the bottom but it will likely take years (not months) to get back anywhere near where they were before the crash.  Nick told me he is looking for 2 or 3 years for the UYG to get back into the 30’s or 40’s and I think that sounds about right.  This ETF does pay a dividend while you wait… but god only knows what if will be going forward since everyone is slashing their payout ratios.  Here are the top 10 holdings for UYG:

If you’re thinking to yourself "boy… what a great idea, but, is there any way to get even more leverage?"  Well…yes. Take a look at Direxion’s 3x Financial Bull ETF.  It was up a nice 40% yesterday.  40% in 1 day…

Keep in mind FAS and UYG don’t track the same holdings (although they are similar).  FAS mirrors the Russell 1000 Financial Services whereas UGY tracks the Dow Jones U.S. Financials index.  If you are really brave and don’t have heart problems… maybe FAS is the one for you?  I followed Nick into UYG myself.  Hopefully I can buy something nice with the profits in 2 or 3 years.


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