Trade #1—The Investment Banks:

The Democrats are going to create new regulatory requirements for derivatives and new capital and “behavior” or “reporting” requirements for investment banks. This will reduce operating profits for these outfits, already hit by the disappearance of the IPO market, the mortgage bond market, mergers and so on. There will be no meaningful opposition so the question is how far the Democrats will go, and they are raring to go far.

Can you blame them? I mean, the bozos running Morgan Stanley (MS) and Goldman Sachs (GS) just told the world they are giving out many billions -- with a B, my friends -- in bonuses this year. That will really help them with Barney Frank.  No one on Capitol Hill will be able to stand up to a new, overly tight regulatory regime and this is one area Obama might oblige the left wing of his party.

Recommendation:  I would buy longer-term puts on either Morgan Stanley or Goldman Sachs -- and even without a partial meltdown due to regulatory fears, the company is grossly overvalued based on their earnings power going forward. 

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