Monday, April 20, 2009

Going to be watching both indices over the next two days

I may take back my comments on liking a Dow short better than an S&P short. The S&P was down significantly more than the Dow today even with BAC and C both down heavily. I was thinking the companies were weighted by market cap (as is often the case with stock indices), and even with smaller market caps I was liking how Bank of America + Citigroup + GM was $100 billion that could potentially go to $0. But apparently the Dow is indexed by share price. This is a bizarre, ney ludicrous way to organize things. I guess something entirely artificial like a 10:1 stock split in Citi could crush the Dow? Sticking with the S&P 500 shorts (like shorting SSO) may be the way to stay.

6 comments:

Konrad said...

Explanation of funny business accounting by the banks.
http://www.cnbc.com/id/30308634
And confirmation of commercial prop. deteriorating (non-home builder portion of the mortgage portfolio.

Konrad said...

When the gov. is talking about converting their loan to banks into common shares, so they don't have to go back to congress for TARP money, would lead me to believe that the banking sector is worse off than what Wall Street and the Gov. is making public. Gov has practically given the banks the ability to print money (borrow at next to nothing and loan it out at higher rates), and they are still having trouble, as the housing market goes down and the commercial real estate getting sour.

Rick said...

Would be a bad situation, Konrad. The banks would end up with a huge ownership position but with no meaningful control. What could possibly go wrong with that? ;)

Konrad said...

Ya, companies like IBM and 3M have a bigger impact on the Dow than C and BAC, because of higher share price. For most common folk, the Dow 30 is viewed as among the best companies of the day. The Dow moved to 30 stocks in 1928. The unusual fact that most people don't understand is that most of the original companies that comprised the Dow are no longer around or no longer part of the Dow. I think only 3 or 4 of the original Dow 30 members are still members of the Dow.

Konrad said...

The other thing that would cause me concern with the government holding a lot of common stock is if the banks do decide to go into bankruptcy, the shares become worthless and the taxpayer never gets paid back for bailing out the banks.

Rick said...

So the shareholders and the taxpayers both win! Oh wait, no...the opposite of that. ;)

To me it doesn't really matter much that the government's shares would be worthless. The government will already be on the hook for all of those losses no matter what happens. Whether we keep bailing them out, nationalize them immediately, or take a huge equity stake which becomes worthless, in all three of those scenarios the taxpayer eats the banks toxic assets and its losses. At least in two of those we soak the stockholders too, though.