Jimmy Lathrop

Why I'm Committed to the UltraShort Financials ETF

WFC entire 10Q stated that they are retrenching to offer products to existing customers, which is bank talk for "we don't trust anyone who doesn't have an account with us. WFF, the near and subprime arm, posted losses and is getting out of the auto leasing business all together. Maybe they will get into the hot-air balloon leasing business which has higher profits. But most troubling is that in the last paragraph of the Non-Interest Income section, the bank mentions in passing that they are carrying a 2.1 unrealized loss in securities holdings, up from 500 million the year before. They don't mention what securities these are except that they hint that the unrealized losses come from increased yields on mortgaged-backed securities. Then it is not mentioned again at all.

2.1 b is a big number. What are these securities? Is there a market to sell them? Because if they are auction rate securities, guess what? Those are realized losses because those instruments are worthless. If they are CMOs, how are they valued? Marked to market? Marked to model? At cost? The silence is deafening. Is the bank waiting for the next quarter to "realize" these losses, by saying that they didn't "realize" they couldn't sell these securities, hoping we don't "realize" that these were actual losses, and that their net profit was actually a net loss? I don't know, you don't know, and I suspect the bank doesn't know either. For America's fifth largest bank with an conservative model to be so coy, that is a big red flag. I'm not trying to pull an Einhorn here but to be so vague when you are falling over your self to show the health of the other aspects of the company is not reassuring.

Why I'm Committed to the UltraShort Financials ETF

Today's rally underscores the sense of relief that WFF wasn't broken. When was the last time you drove a new car off of the lot and said "Thank God it didn't blow up when I turned the key!" The opaque nature of the banks means that a 23 percent loss in profits is good news? That is pretty pathetic. That is grasping at straws. There have been many comments directed at my article but no one has given the magic incantation which will erase the banking industry's ills.

Why I'm Committed to the UltraShort Financials ETF

The SEC's prohibition on naked short selling on certain financial institution has led to a rush to cover these positions before the rule takes effect on Friday. The index is reflecting the buying of actual shares needed to cover the short sells. This will continue up through Friday. As the stocks of those prohibited firms rise from increased buying, the index will reflect gains which have an inverse effect on the ETF. This is a trader driven event. It is not a systemic event. My fellow commuters were not whistling "Who's Afraid of the Big Bad Wolf" on the way to work this morning.

However, while I was reading the Wall Street Journal this morning, I did not see any announcements by any financial institution which suggests an immediate turnaround. On the contrary, things are as bleak as they were yesterday.

If anyone has any ideas how the financial sector will be able to rebound to its previous 52 week heights in the next 52 weeks, feel free to post them. I'm sure some bankers would like to hear them too, as they have their own mortgage payments to worry about.