It's Too Late To Short The Financial Sector

The second punitive phase in the financial sector is unfolding here, with too many Johnny-Come-Latelies trying to put on last minute shorts on banks and insurers they don't know how to value. It's likely to lead to unpleasant surprises for many piling on at the last moment.

There were two significant opportunities to short: (1) earlier in the year, when the red light was flashing on credit and leverage, and the broker dealers like GS and LEH were discounting 25% to 30% ROEs as far as the eye could see and spreads were as tight as ever; and (2) a week or so ago, after vicious rally pushed up the group toward the first layer of resistance that may hold for months to come.

Is it too late to short during this swoon? Absolutely. With the broker dealer stocks down some 30%, bank stocks off some 10% to 15% and yielding 4.5% to 5%, and insurers now as close to book value as they have been in several years (with some down as much as 30% to 40% in mid cap space at their August lows), investors ought to find new profitable themes else where, and wait for possibly better short opportunities in late 2007 and 2008.

The chance of a second major positive liquidity event is rising and will likely send the shorts scampering toward the same exit at the same time, attempting to cover ill-advised positions. Given the relative under-performance of the sector over the last two months, even bad "market news" would likely make the group a relative outperformer for the next few months.

Comments

[Uncle Bill:]

I notice that, in hindsight, you say there were two significant opportunities to short the financials. Why are you telling us now? Why didn't you post and tell us then? Right now, you say not to short the sector. Should we go long? You claim the group will outperform. Shouldn't that be the headline? Come on, take a stand.

2007 Aug 29 08:30 AM

[FIG trader_:]

read what i wrote july 10th

2007 Aug 29 10:04 AM

[FIG trader_:]

read what i wrote July 10th

2007 Aug 29 10:03 AM

[User 104353:]

Mate, I like the topic but you give no evidence for your oppinion, just stating the obvious facts.

2007 Aug 29 12:22 PM

[FIG trader_:]

Well except for isolated cases (balance sheets where they find "waldo" this quarter) and where technically the stocks look unusually vulnerable, based on multi-month/year support levels at risk of high volume breaks, where is the opportunity in shorting? Clearly, you nor I nor the market, which was valuing BSC, GS 30% higher months ago, know where "waldo" is (see bill gross's sept commentary at pimco.com), though I probably have better idea what is being discounted at current valuations. I would hazard a guess that you you are short (based on a misguided technical approach). If you were short based on fundamentals (weeks/months ago), than congrats, but why not cover now???

2007 Aug 29 12:51 PM

[FIG trader_:]

maybe someone is covering....

2007 Aug 29 04:03 PM