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.
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 & Co. (NYSE:WFC) 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 Sachs Group Inc. (NYSE:GS) 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.
