Sunday, February 1, 2009

SHORT INTEREST UPDATE

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 big 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. Acquisitions will be placed on hold until all of these so-called "smart" people figure out what's going on.

Let's break this down by sub-sector, individual firms, and so forth:

1) Broker-dealers and large banks. These are the pillars of a crumbling world of finance which include names such as C, JPM, GS, MS, etc. They also include smaller firms such as COWN, RJF, JEF, PJC. After MS, C had the largest increase in short interest (+14%). JPM and GS saw an increase of +1% and +2%, respectively. In the current 3-month period, MS has the largest increase in short interest, currently at +154% with a 5.8% short interest (as a % of float). Over 10% of RJF and JEF's float is short.

2) Securities processors. This group includes STT, NTRS, BK, among others. In a one-month period, this group saw the largest spike in short interest with +86% for STT, +42% for NTRS, and +35% for BK. Interestingly, only 2.1% of STT's float is short with 1.9 days to cover.

3) Regional banks. This is a huge group. The companies with the largest increase in short interest are STI (+21%), CBSH (+50%), CFR (+31%), VLY (+81%), MTB (+19%), and many more that are currently under enormous pressure. The small cap regional banks especially heavily shorted - around 50% of them with over 10 days to cover. Out of the large cap regionals, BBT has the largest % increase in short interest at +9%.

4) Online brokers. You might use one of the following: SCHW, ETFC, AMTD, OXPS. This group includes market structure such as CME, ICE, ITG, NDAQ, MKTX, NYX, MF, NITE, PNSN, GFIG, among others. Out of this sub-sector, AMTD and ITG saw the largest % increases in short interest with +51% and +52%, respectively. All others saw declines, except NITE (+6%) and SCHW (no change). ETFC currently has 14.4% of it's float shorted with 8.5 days to cover and MF has 14.8% of it's float shorted with 8.7 days to cover, the two largest of the sub-sector.

5) Specialty/Mortgage finance. This group includes ACF, AXP, MA, SLM, DFS, V, CSE, COF, CIT, FED, HCBK, GKK, KFN, NRF, SFI, CRE, NLY, CIM, etc. P.O.S. companies such as FRE and FNM can be ignored because they've become black holes sucking all of the money out of the system. CIT saw the largest decrease in short interest with a -30% change, however, 8.9% of their float is still short. CIM saw the largest increase with +129%, but only 1.8% of it's float is short. NLY is the second largest gainer with +32%. The largest short interest (as a % of float) belongs to FED with +28.1%.

6) Life insurance. Everyone needs it, but that doesn't mean buy their stocks, people! AIG is a good example of what not to buy. Also in this sub-sector: HIG, MET, PFG, PRU, TMK, CNO, GNW, AFL, AMP, SFG, PNX, RGA, LNC, PL, etc. The largest short increases go to LNC and PFG, both with a +21% increase. Looking at the 3-month % change, about half of these names saw a +100% increase or more in short interest.

7) Asset management. Names such as LM, TROW, FIG, BLK, CLMS, AMG, AB, IVZ, JNS, EV, WDR, OZM, BEN, and FII should come to mind. WDR saw an increase of +131%, followed by FII with +61%, and JNS with +42%. As an aggregate, this seb-sector's short interest increased by 3.7% or 90 bps. Even FII, a defensive stock in bear markets with 85% of their funds in MMs, is under pressure from reduced fees. Americans just don't want idiots managing their money anymore.

8) P&C insurance. There seems to be this perception that pricing has bottomed for property and casualty insurance, or that valuations for this sub-sector is extremely low. Hell, they could get even lower. This group includes ACE, AIZ, BRK.A, NAVG, CB, RLI, WRB, TRV, XL, ALL, PGR, etc. With the exception of AIZ (+88%) and p&c brokers (AOC, MMC, WSH), this sub-sector has seen decreases in short interest across the board with a -15% median decrease.

9) Reinsurance. This group includes ACGL, PTP, RNR, RE, PRE, MRH, ENH, AHL, etc. This group saw a -3% decline in short interest (As a whole), which is much better than a +45% increase looking at the 6-month change. This sector is actually up +6% (1-month % price change).

Compare this with the median 1-month % price change with p&c insurance (-2%), asset management (+2%), life insurance (+2%), specialty/mortgage finance (-6%), securities processors (+7%), online brokers (+2%), regionals (-13%), and the broker-dealers and large banks (-3%). The regionals are horrible.

I see shorting opportunities in the regionals. There are so many of them out there.

1 comment:

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