Short ETF Goes Up as Consumer Spending Goes Down

In fact, let's go a little further out on a limb and praise the Fed as an institution still staffed largely on merit, in glaring contrast to the cronyism and nepotism that rule Washington. So let's assume that Bernanke and Fed Vice Chairman Donald Kohn have emphasized the downside risks to the economy in recent days not because they're in cahoots with Wall Street profiteers, and not because they're out to screw savers, but because as heavyweights in their field they know that inflation is a trailing indicator, typically peaking when the economy is already hip-deep in do-do, if not yet drowning in pink slips and red ink. And because the Fed knows that the ongoing credit contraction, real estate deflation and energy scarcity will make its rate cuts less effective than they've typically been.

Let's further assume, as I've argued recently, that the current stock-market bounce is just about played out, and that the consumer will need years, not months, to dig out from under all the bad debt, while the cost of living steadily rises alongside the unemployment rate, and pay stagnates.

It was with all those complementary assumptions in mind that I went hunting for something that might prove an effective hedge against the forces of destruction and decay. And I think I've found just the ticker. When I first laid my eyes on the UltraShort Consumer Services ProShares (SCC) Wednesday morning, the poor thing was looking downright ratty after a 16% decline from the record high set on Jan. 18. And this was after Bernanke testified "that the housing market or labor market may deteriorate more than is currently anticipated and that credit conditions may tighten substantially further." It ultimately gained not quite 1%.

The SCC (think of it as Shorting Circuit City) looks like a good value given its recent discounting. It's a short-side ETF aiming to double, on a daily basis, the inverse return of the Dow Jones Consumer Services index, which includes Circuit City Stores (CC) and 228 other consumer companies, many of them increasingly reliant on unsustainable growth rates in consumer spending and borrowing.

It's not a perfect play on a discretionary downturn, since the biggest index components — Wal-Mart Stores (WMT) with 8.2% weighting and McDonald's (MCD) at 4.3% — are lean and mean machines that ought to thrive when times get tough. But there are many maladapted beasts on this list, names like Starbucks (SBUX) and Comcast (CMCSA), Amazon.com (AMZN) and Target (TGT). And there's Carnival (CCL), which has already been thrown overboard once before on this shakeout cruise; please don't confuse it with a Noah's Ark. It's worth noting too that retail stocks tend to underperform in the spring and summer, even when not facing a rising unemployment rate.

I wouldn't recommend any short ETF as a long-term investment, the more so one as highly leveraged as this one. The risks are simply too great. But for the moment SCC looks good both as a speculative bet that fiscal stimulus and lower interest rates won't help much quickly, and as a general market hedge.

Of course, if discretionary consumer spending should somehow boom while bears roam Wall Street, owning SCC alongside long index funds would risk a double-whammy of financial pain. More plausibly, if consumers should continue to retrench while industrial exporters keep prospering, one could double one's pleasure instead.

The financial risks we run aren't confined to the investment portfolio, unfortunately. Our jobs, homes and spending power are on the line as well, every day. That adds up to a lot of unhedged personal exposure to an economy that's likely to underwhelm for quite some time. Consider buying some insurance now, while you can.