Michael Shulman

The Top 3 Bailout Trades

by Michael Shulman   11/13/08

4. In mid-January, the big banks will all do the same.

5. Sometime in 2009 -- probably by mid-year -- the TARP will be amended, made bigger, and many big banks will get a massive and hopefully final injection of capital that will wipe out most of their existing equity.

3 Ways to Play the Bailout

1. Double-Short ETF

You can buy the UltraShort Financials ProShares (SKF) -- a double-short or double-inverse exchange-traded fund (ETF) on the financials. It is up more than 50% in the past few weeks but has a way to go.

And here's a bonus trade: Another way to play the financial sector is to buy puts on the bank ETF, the Financial Select Sector SPDR (XLF).

2. Puts on the Banks

You can buy puts on any big bank, Goldman (GS) or Morgan Stanley (MS).

The worst big bank by far is Citigroup (C), and if you are willing to bet against Buffett, the next in line, as measured by overvaluation, is Wells Fargo (WFC).

3. Puts on the Retail ETF

Wait to see if there will be another stimulus package, and once the retail bounce is over, buy puts on the retail ETF, the Retail HOLDRs (RTH).

I've painted a bleak picture here. However, I do believe that when this is over, due to the ability of the Fed and the Bank of England to print money -- something the European Central Bank cannot do and the Bank of Japan seems unable to do effectively -- the U.S. and British economies will emerge faster and with more worldwide strength than before.

But that day is a long, long, long way from where we are now. So, for now, this is the way to play this market.

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Michael Shulman is the editor of ChangeWave Shorts. To learn more about him, read his bio here.