I think it’s time to revisit the concept of hedging for disaster, something I advocated during another “recovery,” in October of 2008, where we made our cover plays to carry us through a worrisome holiday season and into Q1 earnings – “just in case.”  The idea of disaster hedges high return ETFs that will give you 3-5x returns in a major downturn.  That way, 10% allocated of your portfolio to protection can turn into 30-50% on a dip, giving you some much-needed cash right when there is a buying opportunity

At the time, I advocated SKF Jan $100s at $19.  SKF hit $300 around Thanksgiving and those calls made a profit of over $280 (1,400%), so putting just 5% of your portfolio into that financial hedge would give you back 90% of your portfolio when you cash out.  Keep in mind these are INSURANCE plays – you expect to LOSE, not win but if you need to ride out a lot of bullish positions through an uncertain period, this is a pretty good way to go. 

Seven banks were seized on Friday, the most in one week since October, including Advanta Bank of Draper, Utah with $1.6Bn in assets and the FDIC could find NO ONE to take over their operations and took a hit of $636M on that bank alone.  Think about that for a moment – here is a banks that is supposed to have $1.6Bn in assets but, when the governent finally has to step in – it turns out they are $600M short (40%).  Gosh I hope our entire banking system isn’t 40% short – don’t you?

Maybe it’s just and extreme example.   Three of Friday night’s bank failures are in Georgia: Century Security Bank of Duluth. Appalachian Community Bank of Elijay, and Bank of Hiawassee.  They had respective assets: $96.5M, $1.01B and $377.8M and ALL are being acquired at a cost to the Deposit Insurance Fund of $586.9M.  Ooops, that’s 40% too.  Maybe there’s a pattern here and the FDIC steps in when banks are going past that 40% threshold.  That’s good news because we can assume C, with their $2Tn in reported assets probably REALLY has $1.2Tn so yay, I guess…

Are we at the above point of “maximum financial risk” or are we only just now getting optimistic (after a 70% market rally)? 

I would urge you to read the original Disaster Hedge post to get an idea of our mindset at the time, where I said:

As far as hedging goes, if you are 50% invested…
continue reading