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RGL Daily Thinking

|Includes: AAL, SPDR S&P 500 Trust ETF (SPY)
October 4, 2011

Stocks of two reputable companies are facing serious losses caused by rumours of AMR potential bankruptcy and Dexia debt restructuring.
Both are relatively big market players (as of end of September AMR Market Cap: USD 1 bn.; Dexia Market Cap EUR 3bln) with recognisable brand names and large franchises. Their price performance was really disappointing throughout the year; posting huge losses in the recent days (Falling from its September highs AMR: -44%, Dexia: - 33%).
Although the companies represent two different industries, consumer services (NASDAQ:AMR) and financials (Dexia), both industries were struggling during 2011. Stocks for the entire U.S. airline industry have fallen 40% for the year and a major airline trade group said on Monday that the industry may be headed for a downturn. And as for the banking industry in Europe, it plunged by 31% (MSCI Europe Financial Sector) for the year. The funding problem remains the most common now for European banks, and it is particularly acute at Dexia. These themes seem to be united by negative market expectations due to bad legacy assets for Dexia and debt burden for AMR.
To me this is anecdotal evidence that we are entering a meaningful slowdown at best and recession at worst. There will be more of those “big names” coming down. We recommend staying short the stock market for now. Due to high market correlation around 80-90% we prefer short in the market  future or ETF (NYSEARCA:SPY) as the best way to participate in the current downturn.