Ho John Lee's Weblog

These are my links for March 2nd from 10:48 to 21:40:

• Hands-on with the Vue Personal Video Network – Battery powered mesh networked wireless webcam, shown this afternoon at demo09
• Mark Hurd’s moment – Mar. 2, 2009 – A look at Mark Hurd's approach to running Hewlett-Packard
• Detroit’s outlook falls along with home prices — chicagotribune.com – January 29, 2009 – "The median price of a home sold in Detroit in December was $7,500, according to Realcomp, a listing service. … On a positive note, Detroit's homicide rate dropped 14 percent last year. That prompted mayoral candidate Stanley Christmas to tell the Detroit News recently, "I don't mean to be sarcastic, but there just isn't anyone left to kill."
• Make Google Real-Time With Twitter Search Add-on – ReadWriteWeb –
• 40 Web Developers to Follow on Twitter | Think Vitamin –

The past few days there’s been an unending, unavoidable stream of 9/11 anniversary coverage. Thankfully, I wasn’t personally touched by the day’s events any more than most people out here in California. But in between all the usual running around and tasks of daily life, I’m finding a I’m carrying a residual layer of dissociated free-floating anxiety. Nothing specific, just a general, strong feeling of ill-being and unease when I stop and check in with myself.

This is surprising to me. Those of you who know me in person know I’m not superstitious, I’m not terribly excitable in a crisis and tend toward focusing on the facts and options at hand, looking for a path forward. So this is just weird.

I see that the HP board flap is on the cover of this week’s Newsweek. But personally I think last week’s deal in Pakistan is a much bigger issue.

I’ll be glad when the week is over. I suspect I’m not alone, either.

If you’re an stock investor, you might be considering the possibility that the markets will go down (more) sometime in the near future.

The recently launched ProShares ETFs use derivatives to implement inverse and levered versions of several popular market tracking ETFs, including the Nasdaq-100 (QQQQ), S&P 500 (SPY), DJ-30 (DIA), and S&P Midcap (MDY).

The Short ProShares provide inverse performance to the underlying index, while the Ultra ProShares provide 2x the performance of the underlying index.

The performance doesn’t track perfectly. For example, today the Q’s are down by 0.88%, and the PSQ (inverse Q’s) are up 1.39% while the QLD (2x Q’s) are down by 1.66%. At the moment they also don’t appear to track intraday price movement very tightly, which might be a function of the relatively low volume. You can see the modest tracking divergence in the 5-min intraday chart above.

These aren’t the sort of instrument you’d want to hold for years, but could be handy for investors trying to hedge market risk (especially in self-directed IRAs, which don’t allow short selling). I also think a lot of people simply aren’t comfortable with short selling or derivatives, and this makes it much simpler for people to get short or lever up. If your account allows it and you’re already comfortable with short selling, it’s simpler and more efficient to just short the Q’s or other indices directly, though.

Prior to the ProShare ETFs, the Rydex mutual funds have been around for a long time, implementing inverse and levered index and sector funds. The main advantage of using ETFs here is that they trade continuously rather than once per day, making them more flexible as a hedging or trading vehicle.

Caution: If you have no idea what I’m talking about but are thinking about buying some because you think the market is going down, please don’t unless you check it out first and know what you’re getting. While the short and levered ETFs might be handy investment tools, they can just as easily provide you with a faster, easier way to lose your money if you’re not paying attention.

Disclaimer: Not investment advice. Trade at your own risk. Not affiliated with ProFunds or Rydex. You buy it, you own it.

Update Wed 07-12-2006 13:50PDT – Took a look at these today during market hours. The thin volume results in relatively wide spreads, 0.10 or more. I haven’t tried them yet, but Barry Ritholtz has written a note about his experiment with the PSQ (inverse Q’s), with mixed impressions.

Update Thu 07-13-2006 16:42PDT – Proshares introduces 2x inverse ETFs for the Q’s, S&P, DJIA, and S&P400 starting today – QID, SDS, DXD, MZZ. They picked a good day to launch.

This evening I’ve been looking over Prosper (formerly known as CircleOne), a social lending site similar to Zopa, which provides an eBay-like marketplace for borrowers and lenders to transact loans.

Prosper manages credit scoring, loan servicing, and provides social and economic incentives for borrower groups to build their reputation as good lending risks. All loans are 36 months with no prepayment penalty, and Prosper charges a 1% origination fee from the borrower, and 0.5% loan servicing fee from the lender. Groups with good reputations can get some incentive payments for loan performance and lower rates over time.

In addition to using credit scoring, social lending and finance approaches can be effective and much less risky than the borrowers might otherwise appear. Informal lending clubs are common among many Asian and other immigrant communities, and something like this might provide an online venue for a more transparent and widely accessible model. It’s harder to bail out on a debt if everyone knows about it and is also a creditor.

Aside from the philosophical and community aspects, looking at this from the lender’s perspective, it looks like it would behave sort of like buying 36-month bonds with a call option. It’s not like you can do a lot of due diligence on the borrowers, and for the amounts involved it’s not going to be worth the effort, so some combination of reputation and diversification is needed. If there were lots of good-but-unrated credit risks in the borrowing pool, you could build a portfolio of sub-prime loans and possibly achieve something in the range of junk bond returns.

Returning to the philosophical, I like the idea of community and socially based lending, because it values good reputations and provides social incentives for people to perform. On the other hand, it looks like a lot of work for a prospective lender. If they’re looking purely at a financial investment, it’s a lot easier going after a portfolio of bonds or a bond fund, so I think you’d have to want to support the model to participate. The borrower’s case looks much more straightforward, since consumer credit tends to be readily available, but expensive. The listings posted on the site so far include a number of “pay off my credit card” loans, which seems quite sensible.

In a slightly different context, it would be interesting to see something similar which matched borrower groups in relatively poor and developing areas with lenders in relatively wealthy areas. Grameen Bank has done amazing things with microfinance in Bangaladesh, in the sense of helping the borrowing communities building new businesses and opportunities for themselves and making a positive economic return for the bank.

In another different context, it would be interesting to see some kind of market making approach for investing in and financing speculative early stage startups. This wouldn’t work for capital intensive projects, but perhaps there’s some standard terms that could be worked out for asset-light software startups (aka web 2.0). The levels of funding required are too small to justify the level of effort, and there is (or should be) a high mortality rate, which would argue for a lighterweight way to build portfolios of small investments.

(via TechCrunch)

See also:
Zopa – eBay for money?