Leveraged ETFs: A Scapegoat For Market Declines

It shouldn’t surprise that scapegoats are being sought to blame for market declines. The latest attempt is to blame leveraged ETFs for problems that even include market manipulation.

Crammer [no typo] has called ProShares products “evil” so I’m told. But let’s remember his famous admission from May 15, 2006, “I am not allowed to short stocks per my deal with CNBC.” So, there you have his conflict. Any inverse levered issues will incur his wrath since if shorting is off the table for him, it should be for you as well. Naturally, during his hedge fund days he had no troubles shorting stocks or indexes. It’s laughable.

Then there is the assertion via a WSJ story this morning that levered ETFs are responsible for market manipulation citing end of day volatility. That’s interesting but let’s remember, the amount of mutual fund redemptions timed toward the end of day has been enormous and no doubt dwarfs levered ETF trading. Is there late day activity in levered ETFs? Sure, but they’re tinker toys compared with other activity.

Manipulation? Good grief! Manipulation of markets has been dominated by both the Treasury and Fed either directly or indirectly for the past year at least. Throw in the normally bullish financial media, “what are you buying today?” and, well, you get the picture.

Finally, if market participants wish to manipulate prices they’ll do it more effectively and easily in futures and options markets.

I say, “Thank you for these new issues since they’ve given average investors a chance to protect themselves from bear market losses and/or profit just like Crammer did everyday before he became conflicted by contractual restrictions.”

No, market declines are primarily the result of all the financial engineering products gone off the rails period. Have investors become more interested in financial products that take advantage of this mess? Sure. That’s what they’re there for, so putting up a chart showing increased trading volume in any ETF or security when conditions are overheated [up or down] is an exercise in obviousness.

Okay, that’s off my chest.

Volume was light with Monday’s decline. I’m going to wait until after the Fed decision and Goldman Sachs (GS) earnings Tuesday to write an in-depth market commentary.

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