Monday, May 4, 2009

The Debts of the Spenders: Short Sellers Return to Banks

Are there still any shorts left after a nearly 2 month long stock market rally?

Yes. Apparently.

Shorts are getting positioned for the upcoming preferred to common stock dilution. The effect is to increase their tangible common equity or TCE which is both a regulatory and analytical measure of how well capitalized these banks are.

Even though this data is 2 weeks old (short squeeze or short float info is released bi-weekly), it is still relevant for pointing out the facts that the markets remains very overbought - from a lot of bearish covering not bullish optimism.

An alternate analysis is to examine the currency and bond movements which are forecasting a greater return to risk. As for grains, which I have been covering a bit in the past few weeks, they are overshadowed by wider movements in equities and forex.


The financial yardstick strips out intangible assets, goodwill -- the premium above net assets paid for acquisitions -- and preferred stock, including shares issued to the U.S. Treasury.

Regulators want TCE to equal about 4 percent of assets, up from an earlier target of 3 percent, people with knowledge of the situation said last week. Seven of the banks under review have ratios of less than 4 percent, company reports show.

“Banks are going to need more capital,” Jacoby said. “Treasury doesn’t care about dilution. All they care about is financial mass and loss-absorption ability to offset what could be more nonperforming loans and writedowns in the future.”

***************************************************************************The The increase in short selling occurred as the S&P 500 Financials Index posted its best two months since 1989, when Standard & Poor’s started keeping records. The 80-member index has surged 41 percent since Feb. 27.

Stephen Wood, who helps manage $151 billion as senior strategist at Russell Investments in New York, said the stress tests will narrow the breadth of the rally.

“It will end up resulting in a differentiation of the shares,” Wood said. “It will be a vicious cycle for the companies that are not doing well. The share price will go down in anticipation of dilution with the issuance of new shares.”


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