SPDN: An Inexpensive Way To Profit When The S&P 500 Falls

Summary
SPDN is not the largest or oldest way to short the S&P 500, but it’s a solid choice.
This ETF uses a variety of financial instruments to target a return opposite that of the S&P 500 Index.
SPDN’s 0.49% Expense Ratio is nearly half that of the larger, longer-tenured -1x Inverse S&P 500 ETF.
Details aside, the potential continuation of the equity bear market makes single-inverse ETFs an investment segment investor should be familiar with.
We rate SPDN a Strong Buy because we believe the risks of a continued bear market greatly outweigh the possibility of a quick return to a bull market.
Put a gear stick into R position, (Reverse).
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By Rob Isbitts

Summary
The S&P 500 is in a bear market, and we don’t see a quick-fix. Many investors assume the only way to navigate a potentially long-term bear market is to hide in cash, day-trade or “just hang in there” while the bear takes their retirement nest egg.

The Direxion Daily S&P 500® Bear 1X ETF (NYSEARCA:SPDN) is one of a class of single-inverse ETFs that allow investors to profit from down moves in the stock market.

SPDN is an unleveraged, liquid, low-cost way to either try to hedge an equity portfolio, profit from a decline in the S&P 500, or both. We rate it a Strong Buy, given our concern about the intermediate-term outlook for the global equity market.

Strategy
SPDN keeps it simple. If the S&P 500 goes up by X%, it should go down by X%. The opposite is also expected.

Proprietary ETF Grades
Offense/Defense: Defense

Segment: Inverse Equity

Sub-Segment: Inverse S&P 500

Correlation (vs. S&P 500): Very High (inverse)

Expected Volatility (vs. S&P 500): Similar (but opposite)

Holding Analysis
SPDN does not rely on shorting individual stocks in the S&P 500. Instead, the managers typically use a combination of futures, swaps and other derivative instruments to create a portfolio that consistently aims to deliver the opposite of what the S&P 500 does.

Strengths
SPDN is a fairly “no-frills” way to do what many investors probably wished they could do during the first 9 months of 2022 and in past bear markets: find something that goes up when the “market” goes down. After all, bonds are not the answer they used to be, commodities like gold have, shall we say, lost their luster. And moving to cash creates the issue of making two correct timing decisions, when to get in and when to get out. SPDN and its single-inverse ETF brethren offer a liquid tool to use in a variety of ways, depending on what a particular investor wants to achieve.

Weaknesses
The weakness of any inverse ETF is that it does the opposite of what the market does, when the market goes up. So, even in bear markets when the broader market trend is down, sharp bear market rallies (or any rallies for that matter) in the S&P 500 will cause SPDN to drop as much as the market goes up.

Opportunities
While inverse ETFs have a reputation in some circles as nothing more than day-trading vehicles, our own experience with them is, pardon the pun, exactly the opposite! We encourage investors to try to better-understand single inverse ETFs like SPDN. While traders tend to gravitate to leveraged inverse ETFs (which actually are day-trading tools), we believe that in an extended bear market, SPDN and its ilk could be a game-saver for many portfolios.

Threats
SPDN and most other single inverse ETFs are vulnerable to a sustained rise in the price of the index it aims to deliver the inverse of. But that threat of loss in a rising market means that when an investor considers SPDN, they should also have a game plan for how and when they will deploy this unique portfolio weapon.

Proprietary Technical Ratings
Short-Term Rating (next 3 months): Strong Buy

Long-Term Rating (next 12 months): Buy

Conclusions
ETF Quality Opinion
SPDN does what it aims to do, and has done so for over 6 years now. For a while, it was largely-ignored, given the existence of a similar ETF that has been around much longer. But the more tenured SPDN has become, the more attractive it looks as an alternative.

ETF Investment Opinion

SPDN is rated Strong Buy because the S&P 500 continues to look as vulnerable to further decline. And, while the market bottomed in mid-June, rallied, then waffled since that time, our proprietary macro market indicators all point to much greater risk of a major decline from this level than a fast return to bull market glory. Thus, SPDN is at best a way to exploit and attack the bear, and at worst a hedge on an otherwise equity-laden portfolio.

My Buddy Mario – A True World Traveller and Conoisseur of Intercultural Experiences

In the 16 years that I have known my friend Mario I have heard many different tales of his world travels and he is one of those people who have lived, worked and hitchhiked through different exotic countries. Mario is a Toronto high school teacher and teaches French and world issues. He spent time living and working in places like Thailand, Indonesia, Mexico and Quebec and came face-to-face with often vastly different cultures.Mario is also an immigrant in two different countries, Australia where he moved as a small child in the 50s, and Canada, where he arrived as a teenager. Here is his story, the story of an immigrant, traveler and global adventurer.1. Please tell us a bit about your background. Where were you born and where did you grow up?I was born in San Vita al Tagliamento in northeastern Italy in the province of Friuli. But my parents are of Calabrese origin from Southern Italy. After his military service in the north of Italy my father decided to stay there due to his fondness for Friuli culture. In 1953 my father moved our family to Australia where he worked with a French contracting firm and we settled in Brisbane, Queensland when I was 2.5 years old. It was there that I had my first memories of the immigrant reality which was a very simple house made of wood. The roof leaked into our house and we had plants growing through the floor in the kitchen. The conditions were very basic, but this would set the stage for 11 years of a very challenging cultural adjustment period, following which my father moved us to Canada in 1964.At that time, Italians faced a lot of discrimination, even harassment or sometimes violence in different forms, physical and psychological. My family was actually the target of a number of different forms of attack because we were immigrants. It made for a rather paranoid existence, constantly having to looking over your shoulder.Remember, this was the 50s and Australia was still governed within the framework of the “White Australia Policy”, a form of institutionalized apartheid. I witnessed various acts of brutality towards Australian aborigines with whom I was often mistaken, given the darkness of my skin. The proximity to the sea, however, made me appreciate the beauty of Australia in its purest form. During this time I developed a strong sense of self-reliance and I learned the importance of defending myself.In the mid 70s I returned to Australia and I noticed that the work of many of those earlier immigrants had born fruit in the form of comfortable lifestyles and accomplished middle-class experiences. Italians had finally become mainstream and accepted. This also corresponded with Australia’s new multi-cultural policy. Australia started to open up to different nationalities, which made for a more tolerant society.2. You are a gifted multi-lingual individual. How many languages do you speak and what are they?English and Italian are my first two languages. I also speak French, Spanish and Portuguese at a pretty high level. In addition, I also get by in Indonesian and I speak basic German and some phrases in Russian. The sound of different foreign languages fascinates me and I also appreciate that speaking the language is the key to these foreign cultures. Apart from the initial period during high school when I was exposed to English, French and German for the first time, the rest of my languages were acquired through living in the culture.3. What was it like when you first came to Canada?I remember it being very very cold since we arrived in Canada on February 16, 1964. My first observation was a very abrupt introduction to the Canadian climate. For a good several years I found it very difficult to adapt to the climate. On the other hand, as far as culture went, I could finally tap into my Italian-ness. It was actually in Toronto that the whole notion of being an Italian took on a new meaning for me because I felt accepted. I felt embraced here and felt that I could express my Italian heritage which led to me perfecting my Italian, considering I had suppressed speaking Italian in Australia. Once we came to Toronto I felt a desire to further go into the language.High school in Canada was an appreciation of many other languages. We were offered courses in French, German, Latin and Spanish at the high school level. The school I went to reflected the transitional nature of Toronto at that time, which had been very WASP (white, Anglo-Saxon, Protestant) until the 1960s and from then on started to change into a more cosmopolitan environment. There were people of different backgrounds which made you comfortable expressing yourself. By the time I went to university I was fairly at ease with my own intercultural identity.My appreciation for Portuguese started on a construction job in Tecumseh, Ontario, where 2 gangs of construction workers, one Italian, one Portuguese, were confined to a very small house, provided by the construction company and were forced to live and interact with one another. I started to appreciate the similarities and differences with Portuguese culture, which I found absolutely fascinating. This was my initiation into the Portuguese language.4. What were your earliest travel experiences?Apart from the immigrant boat travels, my first travel memories were when I hitchhiked to Niagara Falls and Barrie, a medium-size town 90 minutes north of Toronto, when I was 15 years old. This gave me a sense of independence and the ability to design my own path on any trip. I felt in control and decided where I wanted to go. We did not realize that we needed a passport to cross into the United States, so we learned the lesson that you need your documents in order when traveling to foreign countries.The next big trip was at the age of 17, crossing Canada with a fellow student in a VW beetle. We went to Vancouver for one month, picking strawberries, working on farms to survive. The second leg of that trip was to Mexico via California. This was the period of Height-Ashbury, the Summer of 68, and we truly experienced Flower Power in San Francisco. This left a lasting impression on me because of the freedom and the camaraderie among the youth. Anybody would open their house to you and you felt a bond with many young people.The paradox of this period was that it was during the Vietnam War. So just as you had young people bonding with each other, believing that peace was the answer to the world’s dilemmas, people were getting killed on the other side of the globe. The administration in Washington believed that war was the answer and these young people had in effect opted out of the system.Mexico in itself was an eye-opener. It was my initiation into Latino culture and decrepit third world conditions of the masses. This was my politicization when I realized the plight of the majority of humanity and it made me even more curious to go back and get in contact with these people.When I came back from Mexico it was very difficult to adjust to mundane middle-class values, just fitting into my place into my system. So I dropped out of 2nd year university and continued traveling without a set itinerary.I went to Europe first, starting with London, worked in a hospital, and then spent 2 months traveling Europe on a Eurail pass. After Spain I visited Morocco where I met a guy called Giovanni Pozzi who turned me onto images and illusions of Afghanistan, a place he had been to before. This created a great desire in me to also discover that part of the world.After Morocco I intended to meet up with Giovanni and travel with him from Brindisi, Italy, overland to Afghanistan. In September of 1971 I visited him in Milan after having gone back to discover my Italian heritage, and I then linked up with him in Brindisi from where we took a ferry to Greece and began our overland journey in the direction of Afghanistan.We made it to the Turkish-Iranian border after a harrowing incident on a Turkish train which derailed. Unfortunately I had not learned the lesson of my teen years and had not checked out visa requirements for Canadians. Iran required a visa for Canadians, so I had to return to an Iranian consulate on the Black Sea where I obtained my Iranian travel visa. Somehow Giovanni and I got separated and this was the beginning of true independent traveling. I learned never to depend on other people’s information, always double-check everything yourself.3. Please tell us of your experiences and impressions during your first trip to Asia.After traveling through Iran for about a week, which was during the repressive reign of the Shah, I hitchhiked with 2 Pakistani truck drivers from Tehran to Mashad, the site of the Blue Mosque, one of the most beautiful mosques in the Islamic world. From there we went to Herat, Kandahar and Kabul in Afghanistan, where I was privy to some of the most fantastic images of Afghan culture. I saw horsemen in bright green silk pants, in attire suited more to the Middle Ages than the 1970s. Afghanis appeared to be a very proud people, dignified and ferociously independent.After a short stay in Kabul I went through the Khyber Pass into Peshawar in Pakistan. This too was an amazing view into the gun culture of this region. Every man had a gun 4, 5 feet long and it was truly an overwhelming sight to see this much weaponry on display. Unfortunately this was to continue since a war would erupt between Pakistan and India at this time, and after leaving Pakistan I ended up traveling through India during a time of war.I was traveling on trains with a mobilized army, a people in frenetic motion not knowing what to do. The whole country was in a state of tension. Foreigners were asked to leave the country, so after a month in New Delhi I had to change my plans of visiting Ceylon (present-day Sri Lanka) and take the next flight out of Calcutta in the direction of Bangkok. The flight ticket at that time cost US$80 one way in 1971. Calcutta was also the site of millions of refugees pouring in from what would eventually become Bangladesh. They literally overtook Calcutta. I was about to sleep outside when I was approached by a couple of Anglo-Bengalis who insisted that it was absolutely improper for a European to sleep on the ground that way. They then insisted that I go and stay with them for a couple of nights. Their only requested favour in return was to send them a Levi jacket when I’d get back to Australia.4. From India you moved on to Thailand. Please tell us about your experience in South East Asia.In Bangkok of 1971 I would stay at the Atlantic Hotel for $1 a night, Bangkok was still a relatively small capital at that time. I left Bangkok and headed south, hitchhiking where I was brutally initiated to Thai culture. I was at the back of a pickup truck and dangling my feet out of it, the pickup truck was passed by another vehicle whose occupants got out and threatened me, pointing to my feet. Luckily a young Canadian from Saskatoon, Murray Wright, was sitting in the front of my pickup and explained that it was a big mistake to show the soles of your feet. This is a major insult in Thai culture. I then realized that when traveling it is very important to understand non-verbal communication as well. This was a major lesson for me.This meeting with Murray was fortuitous. He had had an accident building a Japanese sugar factory and asked me if I would take over his job as a carpenter. This led to one month working with Thais and understanding to some degree Thai culture. It was also my first experience of amoebic dysentery, a tropical disease, which nearly killed me. This is how I was initiated to eating conditions in the developing world.

Best in Class Finance Functions For Police Forces

Background

Police funding has risen by £4.8 billion and 77 per cent (39 per cent in real terms) since 1997. However the days where forces have enjoyed such levels of funding are over.

Chief Constables and senior management recognize that the annual cycle of looking for efficiencies year-on-year is not sustainable, and will not address the cash shortfall in years to come.
Facing slower funding growth and real cash deficits in their budgets, the Police Service must adopt innovative strategies which generate the productivity and efficiency gains needed to deliver high quality policing to the public.

The step-change in performance required to meet this challenge will only be achieved if the police service fully embraces effective resource management and makes efficient and productive use of its technology, partnerships and people.

The finance function has an essential role to play in addressing these challenges and supporting Forces’ objectives economically and efficiently.

Challenge

Police Forces tend to nurture a divisional and departmental culture rather than a corporate one, with individual procurement activities that do not exploit economies of scale. This is in part the result of over a decade of devolving functions from the center to the.divisions.

In order to reduce costs, improve efficiency and mitigate against the threat of “top down” mandatory, centrally-driven initiatives, Police Forces need to set up a corporate back office and induce behavioral change. This change must involve compliance with a corporate culture rather than a series of silos running through the organization.

Developing a Best in Class Finance Function

Traditionally finance functions within Police Forces have focused on transactional processing with only limited support for management information and business decision support. With a renewed focus on efficiencies, there is now a pressing need for finance departments to transform in order to add greater value to the force but with minimal costs.

1) Aligning to Force Strategy

As Police Forces need finance to function, it is imperative that finance and operations are closely aligned. This collaboration can be very powerful and help deliver significant improvements to a Force, but in order to achieve this model, there are many barriers to overcome. Finance Directors must look at whether their Force is ready for this collaboration, but more importantly, they must consider whether the Force itself can survive without it.

Finance requires a clear vision that centers around its role as a balanced business partner. However to achieve this vision a huge effort is required from the bottom up to understand the significant complexity in underlying systems and processes and to devise a way forward that can work for that particular organization.

The success of any change management program is dependent on its execution. Change is difficult and costly to execute correctly, and often, Police Forces lack the relevant experience to achieve such change. Although finance directors are required to hold appropriate professional qualifications (as opposed to being former police officers as was the case a few years ago) many have progressed within the Public Sector with limited opportunities for learning from and interaction with best in class methodologies. In addition cultural issues around self-preservation can present barriers to change.

Whilst it is relatively easy to get the message of finance transformation across, securing commitment to embark on bold change can be tough. Business cases often lack the quality required to drive through change and even where they are of exceptional quality senior police officers often lack the commercial awareness to trust them.

2) Supporting Force Decisions

Many Finance Directors are keen to develop their finance functions. The challenge they face is convincing the rest of the Force that the finance function can add value – by devoting more time and effort to financial analysis and providing senior management with the tools to understand the financial implications of major strategic decisions.

Maintaining Financial Controls and Managing Risk

Sarbanes Oxley, International Financial Reporting Standards (IFRS), Basel II and Individual Capital Assessments (ICA) have all put financial controls and reporting under the spotlight in the private sector. This in turn is increasing the spotlight on financial controls in the public sector.

A ‘Best in Class’ Police Force finance function will not just have the minimum controls to meet the regulatory requirements but will evaluate how the legislation and regulations that the finance function are required to comply with, can be leveraged to provide value to the organization. Providing strategic information that will enable the force to meet its objectives is a key task for a leading finance function.

3) Value to the Force

The drive for development over the last decade or so, has moved decision making to the Divisions and has led to an increase in costs in the finance function. Through utilizing a number of initiatives in a program of transformation, a Force can leverage up to 40% of savings on the cost of finance together with improving the responsiveness of finance teams and the quality of financial information. These initiatives include:

Centralization

By centralizing the finance function, a Police Force can create centers of excellence where industry best practice can be developed and shared. This will not only re-empower the department, creating greater independence and objectivity in assessing projects and performance, but also lead to more consistent management information and a higher degree of control. A Police Force can also develop a business partner group to act as strategic liaisons to departments and divisions. The business partners would, for example, advise on how the departmental and divisional commanders can meet the budget in future months instead of merely advising that the budget has been missed for the previous month.

With the mundane number crunching being performed in a shared service center, finance professionals will find they now have time to act as business partners to divisions and departments and focus on the strategic issues.

The cultural impact on the departments and divisional commanders should not be underestimated. Commanders will be concerned that:

o Their budgets will be centralized
o Workloads would increase
o There will be limited access to finance individuals
o There will not be on site support

However, if the centralized shared service center is designed appropriately none of the above should apply. In fact from centralization under a best practice model, leaders should accrue the following benefits:

o Strategic advice provided by business partners
o Increased flexibility
o Improved management information
o Faster transactions
o Reduced number of unresolved queries
o Greater clarity on service and cost of provision
o Forum for finance to be strategically aligned to the needs of the Force

A Force that moves from a de-centralized to a centralized system should try and ensure that the finance function does not lose touch with the Chief Constable and Divisional Commanders. Forces need to have a robust business case for finance transformation combined with a governance structure that spans operational, tactical and strategic requirements. There is a risk that potential benefits of implementing such a change may not be realized if the program is not carefully managed. Investment is needed to create a successful centralized finance function. Typically the future potential benefits of greater visibility and control, consistent processes, standardized management information, economies of scale, long-term cost savings and an empowered group of proud finance professionals, should outweigh those initial costs.

To reduce the commercial, operational and capability risks, the finance functions can be completely outsourced or partially outsourced to third parties. This will provide guaranteed cost benefits and may provide the opportunity to leverage relationships with vendors that provide best practice processes.

Process Efficiencies

Typically for Police Forces the focus on development has developed a silo based culture with disparate processes. As a result significant opportunities exist for standardization and simplification of processes which provide scalability, reduce manual effort and deliver business benefit. From simply rationalizing processes, a force can typically accrue a 40% reduction in the number of processes. An example of this is the use of electronic bank statements instead of using the manual bank statement for bank reconciliation and accounts receivable processes. This would save considerable effort that is involved in analyzing the data, moving the data onto different spreadsheet and inputting the data into the financial systems.

Organizations that possess a silo operating model tend to have significant inefficiencies and duplication in their processes, for example in HR and Payroll. This is largely due to the teams involved meeting their own goals but not aligning to the corporate objectives of an organization. Police Forces have a number of independent teams that are reliant on one another for data with finance in departments, divisions and headquarters sending and receiving information from each other as well as from the rest of the Force. The silo model leads to ineffective data being received by the teams that then have to carry out additional work to obtain the information required.

Whilst the argument for development has been well made in the context of moving decision making closer to operational service delivery, the added cost in terms of resources, duplication and misaligned processes has rarely featured in the debate. In the current financial climate these costs need to be recognized.

Culture

Within transactional processes, a leading finance function will set up targets for staff members on a daily basis. This target setting is an element of the metric based culture that leading finance functions develop. If the appropriate metrics of productivity and quality are applied and when these targets are challenging but not impossible, this is proven to result in improvements to productivity and quality.

A ‘Best in Class’ finance function in Police Forces will have a service focused culture, with the primary objectives of providing a high level of satisfaction for its customers (departments, divisions, employees & suppliers). A ‘Best in Class’ finance function will measure customer satisfaction on a timely basis through a metric based approach. This will be combined with a team wide focus on process improvement, with process owners, that will not necessarily be the team leads, owning force-wide improvement to each of the finance processes.

Organizational Improvements

Organizational structures within Police Forces are typically made up of supervisors leading teams of one to four team members. Through centralizing and consolidating the finance function, an opportunity exists to increase the span of control to best practice levels of 6 to 8 team members to one team lead / supervisor. By adjusting the organizational structure and increasing the span of control, Police Forces can accrue significant cashable benefit from a reduction in the number of team leads and team leads can accrue better management experience from managing larger teams.

Technology Enabled Improvements

There are a significant number of technology improvements that a Police Force could implement to help develop a ‘Best in Class’ finance function.

These include:

A) Scanning and workflow

Through adopting a scanning and workflow solution to replace manual processes, improved visibility, transparency and efficiencies can be reaped.

B) Call logging, tracking and workflow tool

Police Forces generally have a number of individuals responding to internal and supplier queries. These queries are neither logged nor tracked. The consequence of this is dual:

o Queries consume considerable effort within a particular finance team. There is a high risk of duplicated effort from the lack of logging of queries. For example, a query could be responded to for 30 minutes by person A in the finance team. Due to this query not being logged, if the individual that raised the query called up again and spoke to a different person then just for one additional question, this could take up to 20 minutes to ensure that the background was appropriately explained.

o Queries can have numerous interfaces with the business. An unresolved query can be responded against by up to four separate teams with considerable delay in providing a clear answer for the supplier.

The implementation of a call logging, tracking and workflow tool to document, measure and close internal and supplier queries combined with the set up of a central queries team, would significantly reduce the effort involved in responding to queries within the finance departments and divisions, as well as within the actual divisions and departments, and procurement.

C) Database solution

Throughout finance departments there are a significant number of spreadsheets utilized prior to input into the financial system. There is a tendency to transfer information manually from one spreadsheet to another to meet the needs of different teams.

Replacing the spreadsheets with a database solution would rationalize the number of inputs and lead to effort savings for the front line Police Officers as well as Police Staff.

D) Customize reports

In obtaining management information from the financial systems, police staff run a series of reports, import these into excel, use lookups to match the data and implement pivots to illustrate the data as required. There is significant manual effort that is involved in carrying out this work. Through customizing reports the outputs from the financial system can be set up to provide the data in the formats required through the click of a button. This would have the benefit of reduced effort and improved motivation for team members that previously carried out these mundane tasks.

In designing, procuring and implementing new technology enabling tools, a Police Force will face a number of challenges including investment approval; IT capacity; capability; and procurement.

These challenges can be mitigated through partnering with a third party service company with whom the investment can be shared, the skills can be provided and the procurement cycle can be minimized.

Conclusion

It is clear that cultural, process and technology change is required if police forces are to deliver both sustainable efficiencies and high quality services. In an environment where for the first time forces face real cash deficits and face having to reduce police officer and support staff numbers whilst maintaining current performance levels the current finance delivery models requires new thinking.

While there a number of barriers to be overcome in achieving a best in class finance function, it won’t be long before such a decision becomes mandatory. Those who are ahead of the curve will inevitably find themselves in a stronger position.