When the world’s greatest investor actually deigns to do some charity work, my friends, it truly means we are living in interesting — and potentially dangerous — times.
In mid-February, investing mogul Warren Buffett offered to bail out the insurers of municipal bonds — on his terms, of course — which would have meant that a serious profit will likely accompany his seemingly no-strings-attached act of do-gooding.
But in early March, Buffett withdrew his offer to guarantee $800 billion of municipal bonds backed by the three largest bond insurers MBIA, Ambac Financial Group and FGIC.
News like that shows just how grave the situation in the credit markets truly is, and as this reality sinks in deeper, the question for those of us involved with options trading is how much overly optimistic or value money will prop up the financial sector in the meantime. From where I stand, there isn’t enough value money coming in to support the financials for anything longer than the short term.
As my friend Toby Smith said recently, “A few rate cuts and a scolding from the central bank is not going to end the unwinding of the Great Financial Mirage of the 21st century — trillions of dollars’ worth of investment bank and deposit-taken bank profits that turned out not to be profits at all.”
Everyone on Wall Street has been looking toward the Federal Open Market Committee to fix the lenders’ problems with interest rate cuts. And even though it’s not the FOMC’s job to clean up the mess on the Street, it stepped in to provide the much-anticipated cuts that investors wanted to see.
My theory on the financials is quite simple: If the banks aren’t making money, then let’s short ’em and make some profits of our own!
The credit squeeze is tightening, and all signs point to further pain on the horizon. We’ve had some great success with shorting the financials, although we stepped out for a while in January when the Fed made some emergency interest-rate cuts that served to give a short-term boost to the ailing financial stocks.
If you enjoyed this article, check out Michael Shulman’s “Homebuilders Helped Us Construct Profits” and “Declining Dollar Tree Turns Giving Tree.”
