Cushion established…lighten up leverage & do less

OK, let’s face it.  Paulson himself did not know more than I did about how the Citi deal would go down and how C shareholders would be rewarded….which is why I loaded up on the stock Friday afternoon.

How did I know this?  Simple…the SHORT trade was waaaaay too crowded with idiots. Reading through twitters and yahoo message boards, it was CLEAR to me that short-sellers were 100% convinced that there were only two options:

1.  No intervention by government, stock continues to slide to 0

2.  Intervention by government in the exact same way as AIG or FNM/FRE and stock opens significantly lower diluted.

So basically, the only possible results they were seeing BOTH went their way. Complete refusal to see alternate scenarios develop.  Anytime you see retail hacks speaking of a free-market trade as riskless, you can count on the exact opposite occuring.  EVERY TIME.

Quite frankly, the Government had to draw a line in the sand with respect to equity holders.  If C had been taken down in the same manner as AIG, etc….you could count on 3 more big banks being attacked by shorts and liquidated by fearful funds, essentially creating a self-fulfilling prophecy of failure and resulting in a banking system 100% owned by the US government.

Instead, the feds intelligently did the opposite and created a self-fulfilling prophecy of success.  By coming with such a HUGE backstop, they made it much less likely that a backstop would be needed AT ALL.  THAT is what the TARP was designed to do.

I’m still LEVERED long in financials (via SWIM, IBNK, C) and gold (via double-long DGP ) with significant cushions on each.  I will pull down my leverage to less glutonous levels on further pops.

My plan is to DO LESS and let these positions ride for quite a while. If I take any new position, it would have to be a short on GOOG, which is going out of its own way to pull a Buckner, letting a 10% market rally roll through its legs without so much as an uptick.

From this point forward, I will lighten up and raise cash on dow +200 or more days, and add to positions on DOW -300 days….at the end of the day for each scenario (late day extensions are more likely than reversals in this environment).