The nationalization trade is still working
The near nationalization of Citibank has produced the result we predicted, namely that the shorts would move on to target other financials and industrials with substantial finance operations. GE, rare possessor of a AAA rating, is now trading at $6.50 or so, even though it says its capital is fine.
The objectives of the shorts include taking the stock below $5, where many institutions will be forced to sell, and to use a vicious, self-reinforcing and simple strategy to wipe out the company’s AAA rating and take the company down to zero if possible. The US government has already demonstrated that when that happens it will “rescue” the institution in a manner that will more-or-less wipe out the shareholders. The shorts can then move on to the next target, and so on.
In our view the traders looking to profit on such a strategy likely not only include your typical hedge fund low-lifes, but also enemies of the US (Russian mafia? Iran’s bankers?). Tim Geithner should step down. We’ve never seen such incompetence (or worse?) on such a grand scale displayed in such a short time.
March 4th, 2009 at 11:19 am
1. This post argues that GE is objectively overvalued. The video clip suggests that maybe Jack Welch was canonized too hastily.
2. I don’t question that there are unscrupulous short sellers just as there are unscrupulous buy-side touts. However, I wonder how much of what might be ascribed to vicious collusion is in fact nonmalicious emergent collective behavior. (Or legitimate price discovery, however unpalatable it might be.)
3. I wonder how much of the finance-stock shorting is really, by design or in effect, the kind of portfolio insurance that was a prime suspect in the 1987 crash. Are we having a similar, more relentless crash in slow motion? If you hold illiquid toxic crud and the entire financial system is at risk, you could try to short liquid financial stocks to offset your potential losses in the i.t.c. The zinger: I fear that the amount of illiquid toxic crud out there dwarfs the market value of the financial system.
March 5th, 2009 at 8:02 am
I tend to agree with gs on # 2, ‘nonmalicious emergent collective behavior’. I would describe it as being like a school of fish swimming about as one. The fish aren’t aping each other. They are all reacting the same way to a given stimulus. Something untoward must known or suspected of GE. It is hard for me to believe that the market would let a robust, sound company’s stock get pounded to the ground. At some point, the stock would just get too cheap and would be snapped up. At least that is my thinking.
March 6th, 2009 at 11:32 am
Friday morning links…
Strange how many people are reconsidering joining Obama’s cabinet. The acclaimed Dr. Gupta just changed his mind, and two Treasury folks did too. What’s that all about? It’s possible that they aren’t sure they can get with the program. See Nobody w…