Maybe ten years ago, I thought about shorting the stock of Ernst Hardware. Ernst had stores in and around Seattle (and elsewhere) and they were lousy and deteriorating. It was clear both Home Depot and Lowes would eat Ernst’s lunch. Around the time I began realizing this, Ernst did a reverse stock split.
I think it was around a 16 to one reverse split, raising the value of one share from a dollar up to sixteen dollars. I have heard reverse splits are usually a sign of a company in trouble and are usually done just so company insiders can borrow against the stock before it crashes. So everything pointed to a massive fall but I lacked the guts to pull the trigger.
I watched the stock go from 16 to zero. Something about unlimited liability and my kids twenty years from now pointing out that my lack of stock prowess cost them a college education has stopped me from ever selling short.
But for those who are interested, ProShares last week launched an Exchange Traded Fund (ETF) that allows investors to make money if Chinese stocks tumble (h/t to The Sun’s Financial Diary blog, whose tagline is “Accumulating wealth is like building the Great Wall, one brick at a time). The new ETF is called ProShares UltraShort FTSE/Xinhua China 25 (FXP), and its prospectus describes it as follows:
If UltraShort FTSE/Xinhua China 25 ProShares is successful in meeting its objective, its value (before fees and expenses) should gain approximately twice as much, on a percentage basis, as any decrease in the FTSE/Xinhua China 25 Index when the Index declines on a given day. Conversely, its value (before fees and expenses) should lose approximately twice as much, on a percentage basis, as any increase in the Index when the index rises on a given day.
What do you think?