Joshua Morgan Brown's  Instablog

Above is a quick comparison I’ve put together of some of the second/ third tier banks, the ones with more regional exposure to construction loans, commercial real estate debt, etc.

Looking at the percentage discount they are trading at from their 52 week highs, the knee-jerk reaction would be that these names could “have room” for further gains.

But that’s why I’ve also included the percentage these stocks have already gained from their 52 week lows…while BAC, GS, and WFC have gotten a lot of the attention, there have been face-melting gains in these lower quality banks already. 

Fifth Third (FITB) was probably the riskiest buy during the crisis, but the courageous have already been rewarded with a 900% return!

I haven’t done enough work on these five names yet to determine if any of them are worth the risk of a long position, but the action is definitely worth following, even if from the sidelines for now.

Full Disclosure:  I am not currently long or short any of the above mentioned stocks in either personal or customer accounts.  Nothing contained in this post should be considered investment advice, research or an invitation to buy or sell any securities.  All data contained herein is publicly available and reflects the closing values as of 8/18/2009.  Please see my Terms & Conditions page for a full disclaimer.

The ProShares Ultra Short Financial ETF, otherwise called SKF, has had one of the most spectacular flame-outs in market history.  One minute, SKF was a superstar, raking in millions of dollars on a daily basis and dominating the most actives list.  Then suddenly, the party was over.

This is the E! True Hollywood Story of SKF, Star of the Credit Crisis.

February 2007

Baby SKF is born on a wintry day at the ProShares HQ in Bethesda, MD.  Just like his inverse twin, UYG, SKF was born at $70 per share on the American Stock Exchange.

SKF: I started shorting banks like, immediately.  In fact, I was ultra shorting them, predominantly through the use of swaps contracts as opposed to outright short sales.  Bank of America, Citi, Goldman…you name ‘em, I was short ‘em.

July 2007

SKF was in the right place at the right time from day one.  In the midst of an overheating stock market, Bear Stearns came out in the middle of July with the admission that two of it’s internal sub prime hedge funds were in trouble.

SKF: This was my first big break.  Even though I wasn’t short a lot of Bear stock, I knew I was onto something big.  Every morning, my agents would email me clippings of mortgage-backed securities stories from the media.  The rest of the bank and broker stocks started getting jittery and I was getting hooked on the volatility, big time!

February 2008

SKF celebrated it’s first birthday amidst a Dow Jones that had already lost 2000 points from it’s peak.  SKF was flirting with $100 per share and the momentum traders had just started showing up at it’s party.

SKF: The scene was intense, man.  The StockTwits guys started tweeting about me like crazy and I was all they could talk about on the Yahoo Finance message boards.  People all over the market started to hear my name.  I ain’t gonna lie, it felt good.  Felt like I was important.  So what that Bear Stearns was about to be shuttered and that the foreclosures were starting to get rolling.  I was gonna be famous!

September 2008

The drizzle of financial distress has now become a tsunami as Lehman Brothers goes bankrupt and Merrill Lynch is rescued by BAC.  SKF breaks above $100 per share and looks like he’s finally bound for the big time.

SKF: “This is it,” I thought, “I’m the biggest star on Wall Street”.  Everyone wanted a piece of me!  Traders, hedge fund guys, brokers, Ameritrade cats…I was the most widely-followed, most in-demand vehicle out there, and man was I livin’ it up.  I remember being offered a table at Rao’s with Woody Allen that Saturday night after dining at Elaine’s with the cast of Wicked the night before.  I had finally arrived.

SRS: I gotta admit, I was a little jealous.  I mean, real estate investments were melting down way faster than banks…where was my invite to Rao’s?

November 2008

As the credit crisis extends beyond US banks and into the rest of the world’s industries, SKF ultimately takes out $300 per share, a quadruple from it’s initial price.  Drugs, booze and loose women are everywhere as the party feels like it will never end.

SKF: Dude, it’s all a blur.  I mean, Citigroup goes under a dollar…CITIGROUP!  Under a buck!  AIG to 40 cents?  Oh my gosh!  There are chicks everywhere, limos picking me up at the close of trading.  I would get VIP tables at The Box with my friends SRS (UltraShort Real Estate) and QID (UltraShort NASDAQ) and we would just pimp!  We thought we were unstoppable all winter.

March 2009

And that’s when it all came crashing down.  After months of relentless shorting and selling, Goldman and Morgan were able to become bank holding companies and access the TARP.  This combined with the Treasury and Fed backstopping Citi and orchestrating mergers put a floor under the banks that would ultimately hold.  The S&P 500 would run 20% from the March low, take a break and then run another 20% through the summer.

SRS: SKF became a total mess.  He kept on partying, but less and less people started showing up.  His name was off every guestlist and people wouldn’t even look at us when we walked into a room.

SKF: All the traders that I thought were my friends disappeared to hang out with FAS (3x banks) and TNA (3x small caps).  There were Triple Longs out there now and I was dropped like a hot potato.  The party was truly over, I guess.

August 2009

In the end, SKF lost about 90% from it’s highest point, now worth only $30 per share.  There’s been talk of a reverse split as the ravages of compounding eat away at his NAV each day.  After a brief stint in rehab, SKF came home to Bethesda to be reconciled with his long-lost brother UYG.  Many other leveraged former ETF stars have found themselves out of the limelight as brokerage firms across the country have banned them from client accounts and the VIX has dropped to the low 20’s.

SKF’s story was one of incredible rallies and horrific plunges, of wild success and soul-crushing failure.  It was the rise and fall of an ETF superstar.

Disclosure: No Positions Mentioned

It may be time to hold auditions to find a replacement for Russia in the BRIC countries.

The other day, the New York Times dropped this delightful little nugget on those believing that Russia is a suitable place to invest:

Very quietly, two developments occurred in India over the last week that could have major implications for the gold market.  Both of these developments could portend drastic changes in gold demand from a key market, just as the inflationistas believe they are at the threshold of a paradigm shift in the precious metal’s pricing.