The Fiasco in Financials Comes to a Head

After a brief, one-day rally in the financial sector following the Fannie Mae (FNM) and Freddie Mac (FRE) bailout on Sunday, companies such as Lehman Brothers (LEH) and Washington Mutual (WM) have lost over 47% and 57% of their market value, respectively, compared to a 5% loss in the Financial Sector SPDR (XLF) over the last five trading days. In contrast, the UltraShort Financials ProShares ETF (SKF) is up 6% in this time frame and offers traders who are bearish on the sector an alternative to shorting individual stocks.

The below tables present an overview of a U.S. Regional Bank Short Index of 102 companies between market caps of $500 million to $20 billion. The two worst-performing stocks were both down over 80% in the past year, including Washington Mutual (WM) and National City (NCC). The 40 lowest-rated companies in the index posted a loss of 47.6% over the past year, which outpaces the losses of benchmark funds such as the KBW Regional Bank ETF (KRE) and the Regional Bank HOLDRs (RKH).

As an inverse/short index, the 40 lowest rated stocks performed even better than the leveraged/inverse UltraShort Financial ProShares (SKF), which posted a gain of 32.7% over the past year. Regional banks are likely to continue struggling given the continued housing recession, rising unemployment, and other uncertainties facing the domestic economy and consumers.

Comments

[Ishortyou:]

the thing that conerns me the most is the 'run on the bank' gets triggered specially for those that hold more than 100,000 dollars on deposits, kind of like IndyMac who was well capitalized and had the Fed discount window open before this happened.

2008 Sep 11 10:16 AM