The Pros and Cons of an IPS

I am looking into an ETF which shorts financial stocks. Over the past 30 days its NAV has risen from $110 to $150! Am I too late? Have financials bottomed? I don’t think so. My reason, you ask? About 60 days ago, I heard Jamie Dimon, CEO of JP Morgan, say he thought we were about 80% through the credit crisis. I remember thinking, “He’s a smart guy and probably has more of the inside scoop than I do.” I also remember thinking how I didn’t believe his statement either. I think we have a great deal more to work through as companies continue to deleverage their balance sheets. In other words, I think there’s much more bad news to come.

Consider this. If you were a CEO of a large publicly traded company making millions each year and you had a lot of bad debt on your company’s balance sheet (or off-balance sheet), would you come right out and admit to all of it? Absolutely not! No, you would let it out a little at a time so it wouldn’t shock the markets all at once. You would also be very interested in keeping your job.

You see, CEOs have a strong self interest and we have to keep this in mind when listening to them. Merrill Lynch is another example of this. Their CEO, John Thain, said a few months ago they would not need to raise additional capital. Today he’s saying they might have to sell their ownership in BlackRock. Yes, the financials are in trouble. All of the money flows through them and when they are in trouble, the entire economy is in trouble.