If you are an avid short seller, the financial sector is of particular interest. I did some research on short interest levels for various financial-related industries and, as a whole, the sector's short interest level was down 3% (as of Jan 15th). The industries researched are the 1) broker-dealers, large banks, 2) securities processors, 3) regional banks, 4) online brokers, 5) specialty/mortgage finance, 6) life insurance, 7) asset management, 8) p&c insurance, and 9) reinsurance.
The largest increase in short interest came from the securities processors, up +42% (partially thanks to STT: +86%). The runners up were the broker-dealers and large banks, up 8%. Next came asset management with a +4% increase. Life insurance saw a 0% increase, and all other sub-sectors saw a decrease in short interest (regional banks: -3%, reinsurance: -3%, speciality/mortgage finance: -5%, p&c insurance: -6%, online brokers: -7%).
Interestingly, when analyzing the days to cover, the regional banks, clumped together as an aggregate, will take 7 days to cover. The next longest is the speciality/mortgage finance with 3.6 days to cover. The shortest time belongs to the broker-dealers and large banks with 0.9 days to cover. Short interest (as a % of the float) is 8.9% for both the regional banks and speciality/mortgage finance. All others came in between 1.6% to 3.9%.
Furthermore, looking at a 1-month price change, the regional banks lost -13%, the most of any sub-sector. The second largest losing sub-sector was specialty/mortgage finance (-6%). Looking at a 3-month price change, the broker-dealers and large banks lost -36% and the regional banks lost -32%. Looking at a 6-month price change, the regional banks are the top dogs with a +1%. I believe that the regional banks have a huge potential for profit on the short side. They still have more room to fall. A lot more.
I am more inclined to short the regional banks strictly because of the fact the regional, community banks with smaller asset sizes are not "too bit to fail". In fact, many of these banks near inevitable failure don't even make headlines in the news. It's obvious that size does matter in this huge bailout game. The only threat to short sellers is if a larger bank decides to acquire one of these banks, well then, your short position is screwed.
However, large institutions are in trouble themselves, struggling with capital and liquidity and digesting their previous acquisitions. These guys do not know what came with every deal. With BAC acquiring Tangelo's Countrywide and Mr. Commode's Merrill, and JPM acquiring Bear and WaMu, and other institutions going on acquisition binge in 2008, the interest and the ability to acquire more banks has become much more difficult.
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