Because it's the very basis of accounting. An accounting book must always reflect the value of the assets and liabilities of a company, should it be liquidated today. The rule protects creditors and the rest of the society from irreconcilable bankruptcies gone too  far.

Submitted by Ian Rayner on Thu, 2008-11-06 14:26.

I guess it's been a while since we discussed leveraged ETFs.

The "fear" regarding leverage in ETFs is a product of a failure to understand risk control in trading and a failure to understand the math of leveraged ETFs.

1) If something is leveraged all one needs to do to control risk is adjust position size and stops in direct proportion. That is, if you want to take the equivalent of $100,000 unleveraged position then take a $50,000 position in a 200% ETF or a $33,333 position in a 300% ETF. To limit losses you would size your stop in direct proportion to leverage: a $10 stop in the unleveraged instrument gives you the same protection as a $20 stop for a 200% and a $30 stop for a 300% instrument (provided your position is sized in accordance with the above). So via position sizing and stop selection we can always achieve the EXACT SAME risk as when using unleveraged instruments. The argument that leveraged ETFs are more risky than unleveraged ones is a canard.

2) Using a leveraged fund is a much better way of taking any position than using an unleveraged one. It is actually a lower risk option with better returns due to compounding (or reverse compounding in the case of an inverse fund).

Let's look at the math for a 300% inverse ETF.

First, let's say things go well (from a short's point of view) ... Over a 30 day period the market goes down 1% every other day and rises 0.5% the days in between. An index starting at $1,000 drops to $922.26 over 30 days. So as a short you are up 7.8% for a profit of $77.74. Using a 300% inverse fund, we bought $333.33 to ensure our initial risk is the same as shorting the index. We made 26.1% profit, or $86.95. We beat shorting the index directly by 10.6% FOR THE SAME INITIAL RISK.

Let's say, instead that we made a bum trade ... Over a 30 day period the market rises 1% every other day and falls 0.5% the days in between. An index starting at $1,000 rises to 1,082.29 over 30 days. So as a short you are down 8.2% for a loss of $82.29. Buying the same $333.33 as before we lost 22.0%, or $73.33. We lost 10.9% less than shorting the index directly.

So whether the trade was a good one or a bad one, the leveraged inverse ETF was better than taking a position directly in the index, for the same level of initial risk.

Bottom line ... don't bother reading anything a financial journalist writes. These people are ignorant.
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An additional point to note:
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Submitted by Ian Rayner on Thu, 2008-11-06 16:26.

An additional point to note: the numbers above illustrate that shorting a leveraged ETF is a stupid move - you will lose more if the market moves against you and make less if it goes your way than if you had gone long the opposite fund.

Let's say the market trends up according to the pattern suggested above (+1%, -.5%, +1%, etc) for 30 days.

If you went long the 300% long fund you would make $86.95 (26.1%). If, instead, you went short the 300% inverse fund you would make $73.33 (22%). i.e. An 18.6% greater profit going long the leveraged fund vs shorting the opposite.

If you bet wrong, and you had gone long the 300% inverse fund you would have lost $73.33 (22%). If, instead, you had shorted the 300% long fund you would have lost $86.95 (26.1%). i.e. A 15.7% smaller loss going long the leveraged fund vs. shorting the opposite fund.

"Submitted by Gerald Clifton on Mon, 2008-12-22 23:03.

During the reporting period, gold traded from a low of 789.10 to a high (intraday) of 842, closing out the week at 841.70. As I noted last week, the rally came on fresh buying, not short covering. Open interest jumped from 382,946 contracts (total, a sum of all the futures contracts traded at the Comex) to 418,216 contracts. This number, unlike the numbers I have been taking off of the daily Comex price summaries, includes both futures contracts and options. The fact that new buying came in on top of an overly-liquidated market, in itself, is very bullish.

The registered speculators (that is, the large speculators -- those trading 200 or more contracts) created much of the move. Currently, 118 large speculators (up 11 from the last reporting period) are long 136,916 contracts (up 25,912 contracts from the prior week), for an average position of 1,160 contracts per bull. 51 large speculators (unchanged from the prior report) are now short 17,661 contracts (down 4,336 contracts), for an average position of 346 contracts per bear. Nothing has changed since 2002 -- the large speculator bulls are still running the market. Amid mysteries, ambiguities, and wild scenarios on both sides of this market, one fact is abundantly clear -- the big money has been long for 7+ years, and this group continues to dominate the bidding. Whatever bullshit about Central Bank (or World Bank, or any other bank...) selling or serious deflationary influences that will weigh downward on gold demand circulates about, the numbers don't lie.

Could this change? Of course. We live with change. But the shorts will somehow have to take control of these markets. 'Til now, they have done a piss-poor job of it. The numbers do not lie. Remember, this is not a blow-off top. Nor was 1030 earlier this year -- that was a steady climb.

For now, I am also keeping daily tallies of the changes in open interest, as I noted last week. Friday's sell-off was accompanied by a drop of 3,103 contracts from the prior day's action (futures contracts only). Perfect. This is exactly what a $20 drop during a long-term bull market is supposed to look like."