Financials Are Having a Dead Cat Bounce

Yesterday financials had a big rally and obviously it was driven by shorts covering their positions after a new rule from SEC takes away the weapon. There is a saying that excess of everything is bad. And short sellers are paying the price of getting too greedy in the process. Lot of institutions were unfairly crushed when the stampede was on until Monday last week. To name a few: Lehman Brothers (LEH) getting crushed because of Fannie (FNM) and Freddie (FRE), and Wells Fargo (WFC). But what is happening now is also unjustified. Basically the US government is trying to artificially inflate the equities of its financial institutions.

Some of these institutions rightly deserved judgment for their practices in the "oh-so-long-ago but actually just few months back" booming mortgage markets. And this government manipulation does not require much proof to see Wachovia (WB) and Washington Mutual (WM) reporting losses that should have put them to shame.

Wachovia reports $8.7 billion loss, slashes dividend and its shares jump almost 30%. WaMu beats every estimate on the negative side by a huge amount, hovering near a junk rating and its shares are trying to swim in positive territory. It's totally illogical. And it would be interesting to see how long US government can artificially keep this situation and maintain the dollar value also.

Similar irresponsible decisions from our policy makers brought us into the current situation and they are still not mending their ways. To save one lie you have to tell hundred other lies. And our policy makers seems to be very inspired by band-aids to treat the cancer.

If they really want to start building a sound financial system (I think now we can call it from scratch) then they have to make some sound decisions themselves. And barring short sales is not a sound decision. First of all, equity price does not necessarily determine the financial health of a company. The bond ratings do, and WaMu is about to receive a junk rating.

So I would like our policy makers to make some good decisions like Federal Reserve to raise the interest rates in next meeting. Why? Because band-aids for financial companies do not cure the problems of main street. Oil prices coming down will not only jump start the flagging economy but will give a confidence boost to other companies as well. In the mean time some financial companies deserve to fail and they should very rightly do. WaMu tops that list right now.

Comments

[User 231428]

WaMu has more than 40 billions in available cash and more than 7 billions in excess capital!I think the author of this article shorted WaMu and now he is angry because lost a lot of $$$$$$!WaMu fair value is 20$,it is useless to invent bad news to send the stock price down!WaMu was over 40$ several months ago....how can you short now that is at 5.82$ and financial crises will be over soon?

[Serge]

Yes, clearly the market is irrational to be snapping up these equities at a cheap price. After all, these companies will lose money forever, just like they did in the past.

[user55]

This writer is really off the track regarding short selling!! Any large institution/hedge fund can destroy the share price of any company it chooses to if it doesn't actually have to borrow shares. In general, regulation of short selling is long overdue - my personal take is that the volume of short selling should be severely limited by SEC regulations.

[User 230527]

I agree with all the other post here, the author is clueless !! If the author looked at the volume and price gains over the last 4 trading days he would notice there is some serious money coming to the table, smart money!

I still do not know how some of these idiotic posts make it to yahoo finance. Would like to know what experience this author has and how much money he manages, but if he did short we won't need worry about his stupid statements much longer.

[jerrystroud]

The writer of this article clearly has an agenda. It is based on a lot of negative opinion and not on pure facts. I agree with the other posters. Naked shorting is already illegal and this guy is stating it is going to hurt the market to prevent naked shorting? Huh?!

[venividivici]

I agree with most of what you have to say but I have no time at all for the shorting of stocks. It should not be allowed in any form. It encourages manipulation because it is much easier to engineer a negative result than a positive one. If you think a stock is going to head down you should take your money out or not invest in the stock in the first place.

As for the above fans of WaMu, I suggest you put your money where your mouths are and I am sure you will get everything you deserve.

[richrdinbellingham]

I agree Freddie and Fannie and the 17 other financial organizations that were placed on the "unavailable to short sell list" should be allowed to fail; and that no Fed intervention be made.

Washington Mutual was up 6% on Tuesday. It a long list of other short sellers is available on the linked article. Yet I make a case for investing in gold as well.

[oldtrdr]

I can't/won't comment on the "abuse" issue, but see no problem for being selectively long and selectively short, within a given sector. If I were more of a "trader" than an "investor", I'd act on my feeling that while there's some REAL POS's in the financial sector...other firms, while bucking headwinds, have been unfairly tarred with the same brush, and represent value over a longer term.

[CrossProfit]

sopocistudio,

Previous comment wasn't meant to be critical of your trading strategy. All methods are good as long as you make money!
Previous comment was intended to point out to user55 and User 230527 the difference between an 'agenda' and a method. Apparently, both did not read your previous articles.

As previously stated, as far as we can tell, so far your in the black and wish you well and a long and prosperous trading career!

BTW, 'trader' is NOT a dirty word!

[CrossProfit]

Funny, SA editor(s) deleted first comment instead of reading it!

It would be helpful if the SA editor in charge of this author would enforce SA's disclosure policy.

If you agree, please click the 'report abuse' button at the bottom of this comment so that the editor will notice the comment.

The objective is to get a response from the editor - not delete the comment! Let's try it again. If you think this author should disclose position as required by SA guidelines, please click the 'report abuse' button below.
Thanks.

P.S. Nothing personal about author or article content, strictly procedure and community integrity.