Today the “simple and powerful” way to bet against the government for a potential tenfold return – by way of future bank meltdown – is revealed.
Last time I promised a simple, yet powerful way to earn a potential tenfold return betting against the government. In today’s piece I’ll give you the goods.
Just to clarify, this is not a sure thing (and nor does this count as any kind of any official recommendation). It’s more of a high-probability bet, or, at the very least, a great reward-to-risk bet... and a way to profit substantially if you think the banks could still have serious trouble ahead.
Have you heard about the “Sun Wafer Trade”?
A decimated market sector… a fascinating backstory that will blow your mind... and a simple, specific play that could hand you 524% in the next 23 days. Read on for all the details...
Not so Rosy for Wells Fargo
Just to reiterate, I continue to suspect the last leg of this big financials rally was driven by unsustainable factors – elements like forced short covering, over-rosy expectations for fast economic turnaround, and quant-driven hedge funds adjusting their trading books in a low-volume market.
Take the big Wells Fargo news of last week, for example – the surprise announcement of a larger-than-expected $3 billion profit. (And the very same news that prompted TIME to idiotically declare the banking crisis “over.”)
As I wrote to Macro Trader members last Friday, “Wells Fargo's $3 billion earnings number might have some legitimacy to it, that I grant, but even so, those gains came from taking massive write-offs on the Wachovia purchase not long after taking $25 billion (more than eight times as much) from the government.”
On Monday, banking analyst Frederick Cannon with Keefe, Bruyette & Woods expressed similar doubts about Wells Fargo’s rosy future. Cannon and his firm expect the bank to ultimately incur $120 billion worth of “stress” related losses over the next year, Bloomberg reports – a whopping forty times the amount of preannounced profit.
Cannon further notes that, not only is Wells Fargo far from paying back the government its first $25 billion in rescue funds, the bank may actually need to raise another $25 billion on top of what it already owes Uncle Sam.
And as for the $3 billion goose that sent all the financials flying last Thursday? “Details were scarce,” Cannon says, “and we believe that much of the positive news in [Wells Fargo’s] preliminary results had to do with merger accounting, revised accounting standards and mortgage default moratoriums, rather than underlying trends.”
Well “Surprise, surprise, surprise!” as Gomer Pyle liked to say.
Goldman Gets a Leg Up
The other market-goosing news this week, also preannounced to juice the market, came from Washington’s favorite talent pool, Government Sachs. Excuse me, I mean Goldman Sachs. (It’s just so easy to slip!)
Goldman surprised Wall Street with a tidy $1.7 billion dollar profit... a profit paid for by taxpayers, by the way, courtesy of your favorite black hole and mine, AIG.
From this vantage point, it looks like Goldman rested confidently in the knowledge that its huge slug of AIG-sponsored contracts would be federally guaranteed – one of the perks of having an ex-Goldman CEO serve as Treasury Secretary. As icing on the cake (crème for the brûlée?), Goldman further had the chance to profit by shorting the hell out of AIG stock as its share price spiraled down to the depths.
As ticked-off blogger Karl Denninger writes,
The fact that they (like so many others) are being paid by the taxpayer through AIG’s “conduit” for losses that didn’t (yet) happen at 100 cents on the dollar might be the basic math.
And further (and potentially much worse) there is the repeated statement by Goldman executives that they were “fully hedged” against a potential counterparty default by AIG. One wonders – was that “hedge” to be short the equity on AIG itself, perhaps?
Why is this important?
Because if that’s how Goldman hedged they got paid twice and the taxpayer literally got robbed. Someone in Congress needs to look into this now; there are already rumblings of investigation. Those rumblings need to get a lot louder and turn into subpoenas, not “polite inquiries.”
It’s awful stuff, but this is the basic thrust of the Geithner/Obama game plan.
The idea is to make the banks profitable again as fast as humanly possible, in the hope that a build-up of short-term profits will be enough to absorb the still-looming titanic losses left over from a collective multitrillion-dollar wrong way bet on the entire U.S. housing market.
And that government mandate of “profitability posthaste” means by any means necessary, including measures that are tantamount to outright theft, designed in dark and murky fashion so as to make a blatant end run around Congress. Which, as much as we are sick of the dopes in Congress who do such a crappy job of representing us, means making an end run around you and me, the taxpayers.
This is flat out subversion of democracy – and property rights too for that matter – perpetrated by a host of connected jerks for the supposed good of the country.
And for those Taipan Daily readers who reside outside the United States: If your government is scrambling to prop up the remnants of a failed elite at the head of a rapidly failing financial system, chances are they are working from much the same playbook.
But anyway, I digress... main point being, Wells Fargo and Goldman Sachs have been two big drivers of the new financial optimism, thus far, and both those examples are quite sketchy in their own way.
We’ll know more about the true state of Wells Fargo’s books when they give a fuller accounting on April 22. And as for the mighty Goldman Sachs, it’s instructive to note two things. First, that 70% of first quarter revenue came from trading in “fixed-income, currencies and commodities,” or FICC as Goldman calls it... and second that Goldman immediately touted a $5 billion stock offering on the good earnings news.
The Goldman guys have always been sharp traders. Their ability to make a killing on the trading side, then, doesn’t say a whole lot about economic recovery or the general state of biz on the Street. Goldman’s haste to sell $5 billion worth of their own stock carries a trading message too – that GS is more interested in selling itself (and Wall Street) short versus getting further long at this point.
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The Way to Play It
So that’s the basic gist. Analysts and investors have gotten way ahead of themselves in their blue sky projections, fueled by the euphoria of an overhyped rally and an overbought market. If it turns out we’re not out of the woods economically – that more pain is still to come – then the whole financial sector could yet do another belly flop.
In one sense betting against Leviathan (the government) is a risky move, but in another sense the bigger they are, the harder they fall. Government intervention has a long and illustrious history of failure, and I think there is a good shot the present administration will taste that failure. None of the measures taken so far, and I mean none of them, have truly gotten at the core of the problem... which means the rottenness remains to be dealt with in time.
So, finally... drumroll please... what’s the simple, powerful way to play a potential financial sector meltdown for a possible tenfold return?
It’s a new ETF, the Financial Bear 3x Shares (FAZ:NYSE).
Don’t go rushing off to buy this thing right away though! Hear me out first...
The first thing you have to understand is, the volatility in FAZ is absolutely nuts.
It was intentionally designed this way, to make it an attractive vehicle for day traders. That’s where the 3x leverage comes in – the ETF is designed to take the ups and downs of the financial sector and triple the volatility.
The idea really took off, too. In recent days FAZ has seen average daily volume of more than 125 million shares. That’s bigger trading volume than Microsoft, Intel, Exxon and IBM combined, thanks to all those traders piling in and out.
So am I suggesting you day-trade FAZ? Oh heck no. Not for a second. I’d sooner advise you to play in traffic. But here’s the interesting thing about FAZ... the downside is sharply limited (for now) by the share price.
The chart above is current as of Tuesday afternoon. I mention that because this sucker moves fast. By the time you read this, FAZ could be $5 per share lower... or $15 per share higher... or anywhere in between.
So here is why I consider FAZ a “simple and powerful” way to bet against the government. This super-volatile, super-liquid instrument, designed as a playground for day traders, takes on the characteristics of a perpetual call option on financial meltdown at current share price levels.
A month or so ago, FAZ was above $100 per share – roughly 10 times where it trades now. In the dark days of November 2008, it was above $200 per share – twenty times where it’s trading now. If the financials go to hell in a handbasket... that is to say, if the euphoria evaporates and the big banks wind up back on life support... who’s to say FAZ couldn’t head back to triple-digit levels.
In the meantime, buying FAZ anywhere below, say, $10 to $20 per share offers the limited risk profile of a call option. This is so because, if the banks blow up again, you could see a tenfold return on your FAZ shares. But at the same time, your risk is wholly limited to the downside – FAZ can never trade below zero.
The other interesting thing about the call-option profile of FAZ is the avoidance of time premium. If you bought shares of FAZ around $10 or $15 and threw them in a drawer, you wouldn’t have to worry about time decay. It wouldn’t matter if the banks blew up in two weeks, two months or even six months.
Of course, the option-like profile only exists because FAZ is currently trading so close to zero. It’s the combination of low share price and wide open upside potential – coupled with the non-trivial likelihood of bank meltdown redux – that makes the magic. Once FAZ moves to, say, $50 or $60 per share, the logic falls apart, and then it becomes just another wild ETF.
But down here it’s possible to pick up as few as 10 shares – for total risk around a hundred bucks or so – and just wait, knowing the max risk all the while. Or, because FAZ is so insanely liquid as mentioned – trading over 100 million shares a day as of late – it’s possible to build a reasonable-sized position and see FAZ as low-cost insurance against risk of meltdown in other areas of the portfolio.
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