Time to Short the Banks: Pros, Cons and Ramifications

Oct. 19, 2010 6:24 AM ETBAC, C, WFC, XLF, SKF, MS, JPM54 Comments
Cliff Wachtel profile picture
Cliff Wachtel

And maybe every other risk asset, like stocks, commodities, and risk currencies? Am I missing something? I must be. But what?
It’s remarkable how calm markets remain about the big banks.
Given that we’ve seen:
  • An ~ 8% plunge on high volume of Bank of America (BAC), Citigroup (C), and Wells Fargo (WFC) last week and growing popular realization of the extent and risks in the budding bank foreclosure fraud scandal (aka “foreclosuregate”, “robo-signing“ scandal). Estimates of the damage vary widely but, as shown below, are potentially very significant.
  • The banking sector as a whole has not been behaving well recently, failing to participate in the rally of the past weeks. XLF, the financial sector ETF, is in blue, the S&P 500 is in red. Note how even before the dive bank share prices took late last week, the sector was underperforming.

Daily chart for the past month of XLF (Financial Select Sector ETF)
I assumed that ETFs that short the banks would have spiked. Wrong. Check out the chart of the Proshares Ultrashort Finanicals ETF (SKF). It is currently just a few dollars off its multi-year lows, down to just under $19 from late 2008 highs of close to $300.

SKF daily 2-year chart
The chart seems to scream, ‘crisis, what crisis?’ Amazing, not even a small spike in bank shorts? Huh?
True, JPMorganChase (JPM) and Citigroup had decent earnings, though again there is the contribution from a drop in loan loss reserves. Am I the only one who finds that odd at this time given the above mentioned latest scandal?
So, here’s a very short summary of why and why not to short the big banks.

Why Not To Short Banks

  • Essentially, TBTF (too big to fail): If things get nasty, Washington has to bail them out.

This article was written by

Cliff Wachtel profile picture
Cliff Wachtel, CPA, MBA, former Chief Global Markets Analyst, Director of Market Research, New Media and Training for a number of leading online Forex and CFD brokerages. His focus includes global market drivers, forex, currency hedged and diversified income investing, and related topics like MLPs, REITS, BDCs, etc. He is also the author of The Sensible Guide To Forex , [https://www.amazon.com/Sensible-Guide-Forex-Smarter-Survive/dp/1118158075 ] a book dedicated to providing safer, simpler ways for active traders and passive long term income investors to use forex markets to limit risk of your currency being debased by central bank policies. Since the Great Financial Crisis began in 2007, Cliff was among the first financial writers to focus on stocks that provide steady, high yields currency diversification for insurance against currencies being steadily devalued. Articles focus on both top income stocks for exposure to multiple quality currencies, and safer, simpler less demanding types of longer term forex trades than commonly covered on other forex sites. He also posts a variety of articles on topics ranging from weekly strategic global market analysis, conservative forex trading, assorted special reports, currency diversified income investing, binary options, and trader training articles via multiple websites. His home sites include: globalmarkets.anyoption.com, thesensibleguidetoforex.com, caesartrade.com, globalmarkets.com, and others. Most can also be found at leading financial websites like seekingalpha.com, businessinsider.com, and forex sites like forexfactory.com and fxstreet.com. His work is regularly translated into numerous languages, including Spanish, French, Italian, Turkish and Russian, Arabic, German, and Chinese, often with his express knowledge and permission! He has appeared in a variety of offline publications including Forex Journal, and John Nyaradi’s book, Super Sectors, in which he was interviewed along with other market experts like Jim Rodgers, Dr.Marc Faber, John Mauldin, Robert Prechter, and Tom Lydon. Prior to his current positions, he was Chief Analyst at avafx.com, and a 30+ year financial market veteran as investor, trader, writer, analyst and advisor to private clients and institutions. He attended Vassar College and Cornell University, and is a certified public accountant. He’s married with 5 children and lives in Jerusalem, Israel, where he can follow Asian markets in the early morning, Europe through the workday, and the Americas at night.

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