Some current and former Goldman Sachs (GS) employees have a vexing problem right now - a Senate subcommittee panel. I tuned in yesterday and watched the investment bankers squirm and, for a moment, felt sorry for them, then remembered they are all multi-millionaires and get paid to take the heat. They were pretty cool customers, and I don't blame them. A slip of the lip and they could end up in stir somewhere down the road, especially when the SEC gets their mitts on them. One thing I got out of the grilling was that Goldman Sachs (GS) is probably not the only bank at fault, and there is plenty of blame to go around for other institutions too big to fail. These bankers will surely get cut down to size in other bare-knuckle brawls as the fraud unfolds. I also thought they should have put the senators on trial because the Senate is at fault also for repealing acts like Glass-Steagall and passing legislation that would allow people with no visible means of support to purchase homes.
The market sold off yesterday with a confluence of news in addition to the Goldman Sachs (GS) sideshow. Most notably is the ongoing story that some of the PIIGS (Portugal, Ireland, Italy, Greece, Spain) may default on their bonds. The main focus right now is on Greece, but Portugal may be the next to go causing a cascading of bad debts across Europe. I'd tell you that this will cause the correction I've been looking for, but my short theory has been shot full of holes so far. This market has got it going on, and although the shorts had a good day yesterday, it's been eight straight weeks up for the DOW and doesn't look like it is anywhere near winded. Although the DOW, NASDAQ and S&P 500 have had enormous gains since the lows of March 9th, 2009, it is the Russel 2,000 that has moved the highest on a percentage basis, more than doubling in 14 months, going from the low of 343 to reaching 741 last Friday.
I've got some skin in the game with the Russell 2,000 because I'm invested in the Direxion Small Cap Bear 3X Shares (TZA) which is leverages 300% to the downside of the Russell 2,000. If you have been following this blog, you are well aware my initial investment is down almost half since October of 2009. As foolish as it sounds, I'm still long this ETF because I firmly believe that we are in for more than a correction and the Direxion Small Cap Bear 3X Shares (TZA) will give me tongue wagging returns. This is because small cap stocks have a high beta and when the market goes up, you make a lot of money if you are long and lose a lot if you are short. The converse is true to the downside. When I say that I am long a short position, what I mean is that I am holding that stock or inverse ETF until I feel it is fully valued. Hopefully that will take longer than 12 months to take advantage of long-term capital gains. I lick my chops every time I look at the historical prices of the Direxion Small Cap Bear 3X Shares (TZA). At the market low on March 9th of 2009, the ETF was priced at $113.50. On April 23rd of this year, just a few days ago, it closed at $5.41. If we do get a double dip in the market, I can get close to a ten bagger if the market goes down in small increments.
The reason I need for the market to go down in smaller increments as opposed to crashing like we did in October of 1987 is because the ETF is priced on a daily basis and at roughly $5.50 a share, the Direxion Small Cap Bear 3X Shares (TZA) would only go up 100% to around $11/share if the Russell 2,000 would crater 33% in one day. A grinding correction, like the grinding rise we are currently experiencing, will give you a bigger bang for your buck. It's just plain old arithmetic. In the meantime while I'm waiting for the market to tank, I'll thank the SEC for putting Goldman Sachs (GS) in the spotlight. In the long run, this can't be good for stocks.