OK… the list I told you about…

It’s the dozen highly indebted companies I shared with readers of my investment advisory in December. I call these companies "Debt Traps."

In every case, the firm’s debt exceeds the value of its equity. Many of them won’t earn enough money this year to pay the interest on their debt. Without additional credit at low interest rates (which, as I explained yesterday, they won’t get), these firms are heading toward a bankruptcy filing in 2009 or 2010.

Below, you’ll see the name of the company, the amount of income it made from operations in 2007, the amount of its 2007 interest costs, and the return since I published the list:

It isn’t normally this easy to make money (unleveraged) in any market. These 12 firms on average have fallen twice as far (-40%) as the S&P
500 (-18%) in the same time. Their collapse shows exactly how profound the problems in the credit market have become. These 12 stocks have lost nearly $6 billion in market cap, in only three months.

I picked these 12 companies from a list of nearly 400 firms in a similar predicament, whose total market capitalization is equal to nearly $400 billion. My list is by no means all-inclusive. In fact, I didn’t include General Electric, whose credit problems have seen the stock go from a market cap of nearly $500 billion all the way down to $100 billion.

GE’s poor investors have lost more money than the owners of the 400 other companies on my list, combined. Although I don’t have a firm number, I am confident the stock-market losses due to the poor availability of credit now exceed $1 trillion by a wide margin. And these are only the losses of public companies. The values of private companies have plunged, too. So has the value of all of these companies’ bonds. The total losses must be more than $10 trillion.

Meanwhile, in an environment of collapsing home prices, mortgages are still available for 30 years at fixed rates less than 5%! This is absolute madness. We are essentially betting the credit of our country on the housing market finding a bottom… something that’s very unlikely to happen for years, if not decades.

Does it make sense to save overleveraged homeowners at the expense of a huge swath of corporate America? Should we really invalidate centuries of law and tradition to save a bunch of deadbeat borrowers, who bought houses they couldn’t afford and traded the equity in the homes for flat-screen TVs and GM SUVs? Should we really back most of the mortgages in the United States with the full faith and credit of the U.S. government?

I hope you can see diverting our entire supply of capital into the mortgage market isn’t good economic policy, even if it’s nearly nirvana for relatively sophisticated equity investors. Shorting lousy balance sheets has been a one-way bet for months because the mortgage market has become a giant black hole of credit. And thanks to Obama, that’s very likely to continue for all of 2009 and probably 2010 as well.

While I don’t enjoy making a profit at the expense of someone else’s misery, it’s better than not making any profits at all. It’s better than going bankrupt.

So where should you look for opportunities to bet on the inevitable? First, read what I wrote on homebuilders back in January. Many of these companies are a lock to go broke in the next two years.

And make sure to check out airlines. Knowing that the airline industry has always been a loser for investors makes these stocks easy and safe to sell short in 2009. In fact, right now, you can easily find a half-dozen airlines that cannot afford the interest on their debts, suffer from plummeting revenues, and face huge losses related to commodity hedging.

Yes, there is madness in America right now… But as I’ve explained, it’s created dozens of one-way bets you can make to protect yourself.

Good investing,

Porter Stansberry
Daily Wealth