This short covering rally in the banks is simply incredible. It’s as if investors have completely lost their minds. Prior to every single individual bank earnings release there has been a massive 5%+ run-up followed by a sell the news type event. Do these people not understand that all of the banks are going to outperform their estimates due to AIG and the accounting rule changes? The estimates are simply absurd. BAC and MS report next week. If you know anyone who is still shorting the banks I’d like you to please have them contact me at TPC@PRAGCAP.COM so I can talk some sense into them.
A nice chart of the havoc wreaked on short sellers during the last 6 weeks. Astounding….
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
Wingo
I read somewhere that if you want to short banks stocks (when the time comes), its best to NOT buy stuff like FAZ or calls on FAZ but rather to buy puts on FAS since these things have decay which eventually drive the prices of these levered ETFs to zero. It makes sense as I still own SRS and this thing is going down regardless of the markets going up, down or sideways.
Cullen Roche
They don’t actually correlate to their underlying index. It’s like USO. The underlying index can go up 20% and you can find yourself sitting on a 10% loss. I don’t know what use these double and triple inverse ETF’s have besides extremely short-term trading. They just seem like a crap shoot to me.
CreditTrader
FYI – the Citi common-preferreds arb remains painful – dragging those Citi commons higher (and borrow is >100%). CDS for financials are marginally tighter today but certainly nothing like a bullish as equities…BAC -15bps, C -10bps, JPM -5bps, WFC +0.5bps, GS +1bps, MS +7.5bps – the equity market is nuts! CDX IG12 is at the day’s wides now…
Cullen Roche
I am beginning to get a bad feeling about all of this. I am now 100% convinced that the economy and the banks have not turned a real corner yet there seem to be an incredible number of suckers buying into the rally. Is this going to end in an epic sell-off?
CAP
I have a friend who is short various bank stocks. He says they are a joke and MUST fall back to earth at some point.
Cullen Roche
Tell him he might have another week or two of pain on his hands….
CAP
Trust me, he’s in plenty of pain already. 😉
prescient11
TPC, exactly. I have the feeling that is correct as well. Rumor is on major trading desks that a “huge meltdown” is on the way. Perhaps zero hedge and his intel is correct.
CAP
Perhaps this explains everything: https://zerohedge.blogspot.com/2009/04/visible-hand.html