On May 14, the SEC announced that it will require lenders to disclose capital and liquidity levels. What does this mean, exactly? That the “surprise” write-downs in bad debt that are coming around every few weeks from seemingly the same names are going to be coming to an end, sooner rather than later.
Don’t get me wrong — there are many names that kept themselves above water and are shining despite the subprime slime because they managed to avoid it. But what gets me fired up is the fact that investors got — and continue to get — duped by less-than-forthcoming institutions.
The week of May 5, Citigroup (C) announced massive asset sales of $400 billion-$500 billion to clean up its operations and balance sheet. The company is selling what it calls “legacy assets” — what everyone else calls much safer debt — and keeping other assets, including all its “alternative” assets — the stuff that is killing everyone.
This is on top of the billions it’s already written down during the past several months, when its investors were (prematurely) breathing a sigh of relief that the damage was supposedly overwith.
The long, drawn-out and certainly painful credit crisis that’s rocking the stock market and the economy has caused many of the “big boys” to buckle down and admit that they’d gotten hit.
The magnitude of their problems, however, has been kept largely concealed from their shareholders, although SEC chief Christopher Cox’s mandate to investment banks to come clean in the coming months is going to make for a “cruel summer” for those who thought they could quietly lick their wounds.
The SEC’s announcement deflated several financial stocks — and brought about the biggest declines in a couple of months in several names, notably Merrill Lynch (MER) and Lehman Bros. (LEH). And if you thought things were ugly for their friends over at Bear Stearns (BSC) when its wounds were exposed, you may want to cover your eyes when the entire industry’s bumps and bruises are brought under the SEC’s spotlight.
>
Speaking of things that are public knowledge, it’s no secret that I love to hate the financials stocks. But unlike many investors who have either been “hanging in there” with their long positions or trying to buy these breaking-down names “on the cheap,” I’ve been busy playing the “short side” of these names for more than a year now.
Investors have been victims of false hope and artificial rallies in the financials and other related sectors — and these names can, quite possibly, recover. Or, at least, there will probably come a time when it’s safe (or, at least, not excruciatingly painful) to go long these names again.
But it’s not going to be anytime soon, as there’s still a whole lot of de-leveraging in store.
Some serious players are now sitting back, evaluating $120 barrels of oil and $4-per-gallon gasoline and having serious heartburn about the economy. The attitude until very recently was, “It will turn around in the second half of the year as the credit crisis eases.”
The new attitude now developing is, “The panic is over, the credit crisis is not easing quickly, and I don’t see any catalysts that can move the economy upward in the next six months.”
If you combine this emerging attitude with the technical shift toward puts and bearishness, the market is on the verge of becoming a leading indicator — as it should be — of a disappointing second half of the year.
While I don’t expect to see the market go straight down from here, I do expect we will see many more 200-plus-point drops on the Dow (DJI) in the weeks and months ahead.
The number of put options changing hands not just in this sector, but in the overall market itself, has been increasing during the past few weeks. And if you’re ready to jump on board the put-option profits express, I invite you to join my subscribers and me at ChangeWave Shorts, where we’ve made gains like 88% in Merrill, 157% in Citi and 283% in Bear.
And that’s just by buying puts on some key financial names!
Imagine the profits that are in store for us as the economy continues to wind down and scrutiny in other “bad to the bone” names kicks into high gear. It’s going to be an exciting second half of the year for short-side investors. Click here to see what other stocks and sectors have slides — big ones — in store!
If you enjoyed this article, check out Michael Shulman’s “2 Types of Bullish Bets” and “Short-Selling With Put Options 101.”
