Tautology of the Skeptical Sinner

First off, let me open by saying “I told you so“.

Financial whizz, Kenneth Rogoff, stated in an interview today that he anticipates “The worst is yet to come in the U.S.,” (source) He expects a major bank to go bust in the next few months.

As we’ve seen (July 15th, anyone?) any time even a small bank goes pop, financials get hammered.

“The degree and depth of what’s happening in the financial industry is beyond anything we’ve seen in decades and it takes time to get your arms around the severity of what’s happening and what the long-term and short-term ramifications are,” - said John Merrill, chief investment officer at Tanglewood Wealth Management. (source)

Never mind Freddie and Fannie getting hit hard by the potential government bailout… there’s more to come…

If anyone is still under the illusion that we aren’t in a bear market at this point, move along, you’re not going to be any further convinced here. But for those of you who realize that important factoid can appreciate the short rallies we see are really false ones and that there is going to be a big drop coming, no matter which bank gets hit with bad news.

As a result, I’m holding aggressive shorts on Bank of America (NYSE:BAC) - the one bank thats trying to convince us that everythings okay. The one bank that kept its dividend the same. And the one bank that happened to buy Countrywide earlier this year.

Yes, I know, I know… they’re saying that all of CWD bonds and liabilities are contractually excluded from affecting them because of the way the buyout was engineered, but you can’t buy a lemon without ending up smelling a little citrusy. My money’s on investors finding out the hard way that they’re not as protected as they’re saying they are.

I’m counting on a strike price of $17.50 sometime between now and November 22nd, and with a put position of  $22.50 currently at $1.72 that’s going to yield an almost 300% return. (I got in at $1.15 during a nice little delusional rally).

Given the drop BAC took during the failure of IndyMac.. (Down to $18.44) I don’t consider this unrealistic.

If you’re still hoping the Fed may magic up engineer a miracle rally and want a little more time to save your position, go for a Jan 09 short position.

As always, remember, any option trading can be considered a high risk position, so be sure to allow for that risk to be part of a balanced trading strategy unless you want to end up like the financials are now.