Saturday, April 18, 2009

I like shorting the Dow better than the S&P 500

In the past, I had advocated shorting the S&P500. I found this preferable to shorting individual, large financial companies who have lobbyist in Washington because of bailout risk, and preferable to shorting the Dow because Wal-Mart, McDonald's, and GM (which I always assumed would get massive bailouts) make up 30% of the companies in the Dow.

Today, I actually like shorting the Dow (by shorting DDM) better. Today, 30% of the companies in the Dow are finally at serious risk of bankruptcy. Specifically, Citigroup, Bank of America, and General Motors could all very well wipeout out shareholders. That is, of course, the right thing to do since those investors took the risk and got to keep the profits, but the Treasury is still in the pockets of large financial firms so I am not holding my breath. My predicition is that Citi does end up being seized as a lesson and took look like the Administration is on the right side of history. Bank of America will probably be in some sort of pathetic half-seizure on less onerous terms, and GM probably wipes out the bondholders and dumps their union debt on taxpayers but somehow makes the shares still worth money. Don't ask me how they do it, but watch.

It wouldn't surprise me at all to see all three receive endless bailouts, but Congress is getting bailout fatigue. In most circumstances this doesn't really matter much because the Fed and Treasury have grown so powerful that they can keep giving handouts without asking Congress for permission anymore. But Citi will prove to be such a massive black hole that even Larry Summers, Tim "too much regulation caused this mess" Geithner, and all of Goldman Sachs' other friends will say there is no point to feeding Citi.

This latest sucker's rally got way out of hand. Financials shot up well over 50% in just a few weeks. It will correct.

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