Michael Shulman

The Top 3 Bailout Trades

by Michael Shulman   11/13/08

What Lies Ahead

So, what is going to happen?

1. A short-term stimulus bill may pass before New Year's.

There's a 50/50 chance this will happen and, if it does, it will contain a proviso that the banks must lend. They will grudgingly agree, and then do nothing.

If a short-term stimulus bill passes, retailers will go up for a few days.

2. The same bill, or a different one, will come to rescue the auto companies.

Some of the worst-managed companies on the planet, which have benefited from government regulations in imports for years, are now broke. But this industry employs, directly and indirectly, almost 3 million people, and there is a quarter of a trillion dollars in debt floating around, so you know something is going to happen.

I expect the functional, if not legal, equivalent of a pre-packaged bankruptcy to emerge, either in this package, or this one and another after Obama's inauguration.

Shareholders will be wiped, too, and debt rescheduled. But the big question is how much of a haircut the union and its retirees take. It better be a good one or Obama will have to offer the same -- these guys have a $5 co-pay for gold-plated health care -- for everyone.

It's impossible to tell what the market's reaction will be to this, as it depends on the bill.

3. In mid-December, Goldman Sachs (GS) and Morgan Stanley (MS) are going to "shock" many on Wall Street with worse-than-expected earnings and a revision downward for 2009.