Adios FAS!

I just sold all of my FAS and cancelled all of my FAS buy orders.

The more I read about the fundamentals of the financial sector going forward, the more I am convinced that the FAS will not return to its post crash high of 40ish even if the SP500 gets back to 1500 over the next few years (which I don't see happening either).

After the SP500 and the FAS bottomed in March 2009, the FAS ran up to around 40. Now banks have to discontinue their proprietary trading activity, which historically has been a large profit center. Additionaly, they will have to increase their capital reserves, which will ultimately decrease their return on capital. For the overall health of the financial system, these are probably prudent things to do. However, market players will probably no longer pay higher premiums for this sector, and it will be much harder for the FAS to return to its spring 2010 highs (when market participants were not factoring these fundamental issues in).

I am still interested in buying the FAS if the fear of the financial system collapsing returns to the forefront of investor psychology. If the financial system does collapse, in my view it does not matter what paper assets anyone owns, they will be worth significantly less if not worthless. Based on this idea then, buying the financials into a market panic about the financial system crashing, is almost a risk-less trade.

With the FAS currently trading in the 12's, I do not find it a compelling value. There is always the chance that the Europeans create a multi-trillion dollar fund to backstop sovereign debt issuers and holders, which could send the FAS soaring in the intermediate term. But I also think there is just as good a chance that in the longer term, this fund will not solve the fundamental issue of too much debt held by nations, corporations and consumers. Buying the FAZ right now does not make a lot of sense either, because if the European fund materializes, then the FAZ could take a huge hit.

In any case, I think that at some point in time within the next few years, the FAS will retest its 2009 lows (around 4). When it starts trading in the mid single digits, I will get more interested in it.

Trading the FAS and the FAZ over the past 3 months has helped increase my IRA by 26%, a pretty good return for a short period of time. I am going to keep watching how things play out and keep my powder dry. I will also start identifying other sectors that have 3x leveraged long and short ETFs, and see if I can spot some intermediate to long term opportunities in them.

According to ECRI, the US is probably in a recession right now, and I believe the 2012 US Presidential election is going to decrease investor confidence that the US can get its budget and debt situation in order.

The next 12-30 months are going to be very interesting from a social, financial and political standpoint. Paying attention to what is going on will be important.

Disclosure: No positions in any of the securities mentioned.

***remember this is an illustration of what i am trading and my thinking...it is not a recommendation for you or anyone else to buy or sell this or any other security...trade at your own risk...my positions my change at any time without notice***