Trades

It's just a feeling, but I think this rally is unsustainable. Also, there's been no corporate bond rally along with stocks. This tells me that the smart money is just chasing the rally and will be out at the first sign of trouble. If they believed that the underlying fundamentals of the economy were getting better, someone would be bidding up bonds for the safety compared to stocks.

Longer term, we have two major problems in the U.S. economy. First, is the insolvency of the financial system. Even after this is fixed, however, we still have the problem of too much debt, which will cause a multi-year balance-sheet recession, a la Japan. We're moving towards fixing the banks, which may cause a nice rally, but even after that's done, we will still be a long way from recovery. Look at the Dot-com bust. The Dow peaked in early 2000, and didn't bottom until early 2003, before climbing 20%+. Today, we're only 1.5 years after the October '07 top.

So, in response to this short term ridiculousness, we have two trades:

Short a 10% position in COF @ $14.83.

COF is worthless in my humble opinion. Back of the envelope calculation tells me that their $178 billion in credit card assets will go from a 6% chargeoff rate to a 9% rate this year if this tracks the unemployment rate (10% is a low estimate, in my opinion). It's actually climbing faster. This will cause $5.3 billion in losses against a market cap of $6 billion. Sayonara!

Buy 5% of EUO (Euro Ultrashort) @ $21.78.

The E.U. is in serious trouble. Their banks are over leveraged, perhaps even more than U.S. banks. They have too much eastern Europe, Asian, and Latin American exposure. Their governments are prohibited by the Maastricht Treaty from having fiscal deficits greater than 3% of GDP. Germany will hit that level later this year or next year. Ireland, Greece, Italy, and Spain are way underwater. They have high debt, high deficits, imploding housing bubbles, and high unemployment. They can cheat on the numbers, but their bond spreads keep climbing. If they can't borrow, they will default, because there's no way out of the Euro.