Short Sellers See a Rebound Coming for Big Bank Stocks

Short Sellers See a Rebound Coming for Big Bank StocksInvestors have generally taken a negative position on the prospects of big banks lately. The major financial institutions face new capital requirements pushed by the FDIC, a decrease in revenue from credit card fees, and serious mortgage woes due to their questionable foreclosure and record-keeping practices. Many have also had to sell or spin off their proprietary trading desks due to provisions of the Dodd-Frank Financial Reform Act -- operations that have often been highly profitable.

However, some of Wall Street's most carefully watched investors -- short sellers -- have begun to withdraw their bets against big banks. It appears, based on their new positions, that they expect shares in the financial companies to rally. Data from the NYSE on short interest for the period that ended May 27 shows that the short position in Citigroup (C) fell by 13% to 42 million. Shares sold short in Bank of America (BAC) dropped 12% to 84.8 million. The short interest in J.P. Morgan Chase (JPM) shrank 16% to 29.6 million.

The impetus for this trend away from betting that bank shares will drop further may not be a belief that bank earnings will rise or that their troubles will evaporate. The issue may simply be that their shares have already fallen so far so fast.

Citigroup shares are off 14% in just the last month and trade at $37.77 near their 52-week low of $36.20. A reverse split meant to lure more institutional investors into the stock hasn't worked. Bank of America shares are down 13% over the last month to $10.65, very near their 52-week low.

J.P. Morgan's shares are off 9% over the last month. The bank's well-known CEO, Jamie Dimon, recently complained aggressively and publicly to Fed Chairman Ben Bernanke that new regulations would hurt bank earnings, and thus reduce their willingness to loan money in a choppy economy.

And the Treasury Department is punishing Bank of America, J.P. Morgan and Wells Fargo (WFC) for failures to follow the implementation rules for the government's Home Affordable Modification Program, intended to encourage banks to modify mortgages and keep distressed homeowners in their houses.

If short sellers are right, bank stocks will rise soon. But shorts rarely make long-term bets, so even if they are right, the share price gains could be temporary.

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June 11 2011 at 5:16 AM Report abuse rate up rate down Reply

Cow-tyeing the big banks so severely may score a few points for congress and the fed in the eyes of the average American voter, to whom the big banks, and big business, are the 'bad guys', which, of course, is not the case. These supposed 'bad guys' are the big money, the main drivers of our economic success or failure as a nation, i.e., the nations economy. Unfortunately, the worst enemy of big business is our big, and powerful, federal government, the Big Bank Regulator. Well, it looks like we need someone to 'regulate The Regulator', since they don't have enough sense to realize that they, The Regulators, by stifling the banks and big business, are killing our economy and our hopes of a successful economic recovery.
Oh yeah, we all know that we direly need more jobs, more successful small businesses to make more jobs. But in the meantime, 'The Regulators' have locked big banks in a big closet, and thrown away the key. Short sellers have made a fortune from all this, but they are not the drivers of economic growth; quite the opposite, they thrive on economic misfortune, whether it be big banks, any business, big or small, where they see an opportunity to profit from, and even add to, anothers misfortune, at the expense of the affected business's value, and reputation, and cost to share holders. I wonder how much of the markets' losses on 6/10 was actually the result of naked short
You see, the government's hard line with the banks not only hurts the banks with creating even more negarive public opinion, but it hurts us all, since the banks are reluctant to conduct normal business because of all this interference, loans are not made, big business is getting hurt as well with the lack of economic growth, less or no hiring, with a 'wait and see' attitude on the economy, economic growth, or lack thereof, as well as the national debt crisis. It appears that our elected representatives are too stubborn, and TOO STUPID to realize the distress the average intelligent American feels over the uncertainty surrounding the debt ceilng crisis. They are too busy playing politics. But I feel all better about it now, though, that Boehner and Obama are going to work things out over a round of golf.
I guess it's just not as important to them as it is to you and me, and to the fiscal reputation of the US in the eyes of the rest of the world. The Regulators are playing golf, while Rome (America actually) burns, and the shorts get to make even more money, at the expense of the banks, businesses of all types, and the average American, who has no idea all this is going on. America sleeps, and when we wake up, there may be no more America as we used to know it.

June 11 2011 at 12:07 AM Report abuse +1 rate up rate down Reply
1 reply to ddrake97's comment

One of the straws that broke the camel's back as it relates to the financial crisis was mark-to-market accounting, adopted in 2007 shortly before the financial crisis began to unfold. Seeing the folloy of their ways, regulators repealed mark-to-market in 2009, shortly before a rebound began. Of course, by then the damage had been done.Or as Thomas Jefferson observed in his first Inaugural Adress, "Sometimes it is said that man cannot be trusted with the government of himself. Can he then be trusted with the government of others? Or have we found angels, in the form of kings, to govern him? Let history answer this question".

June 12 2011 at 12:00 PM Report abuse rate up rate down Reply

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June 10 2011 at 11:37 PM Report abuse rate up rate down Reply

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June 10 2011 at 11:16 PM Report abuse rate up rate down Reply
L R Adams

If the banks want to improve their image of being responsible upright institutions they need to make decisions that reflect their loyalty. The smart way to do this would be to buy back* as they can afford* some of our debit that was sold to China.
This would affirm their trustworthiness to the American public and give them leverage in the political arena.

June 10 2011 at 8:08 PM Report abuse rate up rate down Reply
1 reply to L R Adams's comment

US banks have long been are huge holders of federal debt, just as they continue to be today. Of course, holding federal debt simply means they have loaned the money of their depositors to the Foggy Bottom goons. And the more money they loan the goons, the less of depositors money is left to loan to businesses or consumers who seek to borrow.

June 12 2011 at 12:04 PM Report abuse rate up rate down Reply
David Shelton

forget about short sellers today gone tommorrow....the stocks are about maniplation... whwre does that get the avaridge joe ...swat

June 10 2011 at 6:59 PM Report abuse +1 rate up rate down Reply

BS people are on to big banks and they are moving to local banks. Who ever posted local banks will go first is also BS. Big banks have went from all about customer service to sell sell sell, and if you don't hit the qouta they give you it's three strikes and your out . Time will tell.

June 10 2011 at 5:39 PM Report abuse rate up rate down Reply

My money is making more in bank stocks than in the bank.

June 10 2011 at 3:17 PM Report abuse rate up rate down Reply

And I hope the short sellers get burned big

June 10 2011 at 2:49 PM Report abuse +1 rate up rate down Reply

banks continue to make record profits in spite of these "horrible regulations". imagine trying to reign in these blood suckers, a GOP wet dream. As QE2 winds down and kicks in the stock market will rebound, invest my little grasshoppers and you will be glad you did.

June 10 2011 at 2:21 PM Report abuse rate up rate down Reply
1 reply to TheTruth33's comment
LEE Resolution

and yet more liberal melodrama.....

June 10 2011 at 5:22 PM Report abuse rate up rate down Reply