More interesting commentary, this has been a good thread. What would you say are your top short picks nowadays? A lot of the low-hanging fruit has gone, and it would be useful to try to forecast 2009's versions of FNM, BSC, WM, LEH, MBI etc. If we're right on the macroeconomy then XLF is an easy long-term short (or put position), but like you said, it would be better to focus on the lamest of the lame.
I'm shorting stuff like JPM, ACC, GS, MET, C(as a hedge and fnm type play), and even though this stock has been squeezing me like hell in this great debt garbage rally CAL on a bk play. I bought some leaps there and covered some for protection few weeks back There are some others but the short interest is already too high for me to mention But this rally has been surprising, just goes to show how the most important relevant events people usually cant forecast(Oct worst week ever and the great garbage rally of 2009)
Yeah, I hear you on that. This is the biggest 6 week rally since the 1930s so shorting it too early is understandable, I did that myself. Just avoid losing a truckload if it continues to the point of maximum pain (S&P 950-1000), leap puts prove their value as it's better to lose a few % premium than be short into a 25%+ bounce. In 1929-32 there was one 50% sucker rally, we haven't seen that yet and I suspect we may be in the middle of it now. How do you think the prospects for financials stack up, compared to other vulnerable groups like retail, homebuilders, luxury goods, autos etc? We've seen plenty of financials fail, and the government is actively trying to prop them up, so could it be that it's not as easy a target as companies that don't pose systemic risk? No one is going to spend $100 billion bailing out Tiffany's or Crocs. I don't think financials have finished their bear market, but they are certainly more advanced in it than almost any other sector. We have not seen multiple major homebuilders go bust, or major retailers, even GM is still alive (probably not for long). If this is truly a secular bear market, then there should be high profile bankruptcies in each of these sectors before it's over. One thing appears sure - IF the bearish fundamental view is right, and the balance sheets and macro view seem to support that, then puts, or "deep pocket" shorts at current prices should eventually score big. There can be more pain like in every other bear market rally so far, but if risk is limited to what you can tolerate, it will eventually work out as long as you are right.
I would just point out that although short interest seems to increase the volatility and thus the chance of massive short-term rallies, I've seen many stocks that eventually go <$1 have high short-interest too. In 2000-2002 there were loads of them like this - Enron, WCOM, lots of junk techs etc. Short interest is correlated both with large sucker rallies and with 95%+ stock price declines. Most short-sellers are pros and they can read company accounts like anyone else. Basically a high short-interest doesn't make something a bad candidate for total collapse.
The short interest thing is because I want to avoid encouraging others to short stocks I'm targeting then having to face borrowing charges, this could happen since it seems that everyone on ET uses IB. It would also fuel the squeezes I would agree with other sectors being good for shorting, I will be probably done with financial shorting at the next washout I'm actually contemplating not shorting stocks at all and playing this bust through certain illiquid futures out there but I havent made up my mind
C and BAC might need new capital. BAC is at $7 and a change in pre-market, just goes to show how can be pointless to try to time the market, BAC was at $11 a while ago C at $4.5, those who covered because of fear of the rally are now panicking to get back in having missed a big chunk of the move If I knew what these stocks would do in the short-run like 'they will continue to rally' then I would forget all the fundamentals and just short-term trade them, it would be irrational for me to claim to have some insight on short-term moves and not risk money on it. But of course I dont have any clue what they will do in the short-run except in very oversold situations and this market is a war camp with bombs coming from all over the place, so I'm better off just sticking with the fundamentals and let others play the fools game
Says FBR: FBR believes that BAC will need at least $60 billion to $70 billion to maintain a tangible common equity ratio above 3% at the end of 2010. We are basing our results on FBR's stress test under a 12% unemployment rate scenario. Most major banks will find it very difficult to raise that kind of capital in today's environment, and we believe the first line of defense would be to convert both private and TARP preferred to common equity. FBR encourages BAC to convert the $27 billion of private preferreds as soon as possible, as this will boost the tangible common equity ratio to roughly 4.3% today, reduce the preferred dividend expense, and bring much-needed capital stability to Bank of America. This is consistent with our Underperform rating on BAC and $5 price target, equal to 0.5x tangible book value of $10.88. We expect that the shares will continue to trade at a discount to book until its capital structure is more stable and the risk of dilution is reduced.
Citigroup scrambles to raise capital By Francesco Guerrera in New York Published: April 28 2009 19:20 | Last updated: April 29 2009 00:29 Citigroup has told US regulators it could fill the capital shortfall identified in the governmentâs âstress testâ by selling large businesses, asking more investors to convert their preferred shares into common stock and reducing its balance sheet. Executives are trying to persuade the government Citi does not need more capital beyond its recent plans to bolster its battered balance sheet and cut costs. However, with days to go before the results of the tests are announced, Citi, which has been bailed out three times by the authorities, is looking for ways to avoid receiving more government help if the authorities insist on an increase in capital. Bank of America, another lender whose test has highlighted the need for funds, is in talks with regulators over its needs and the possibility of converting the governmentâs preferred shares into common stock, bankers said. Analysts have estimated BofA could require up to $70bn in extra capital. Citi executives argue that divestitures, such as the planned $5.2bn sale of Japanâs Nikko Cordial to Sumitomo Mitsui, the possible expansion of an existing conversion offer, and cost-cutting would ensure it has enough capital to withstand the crisis. People close to the situation said Citi could sell several units in Citi Holdings, the division that holds its non-core activities. Citi executives do not rule out shedding businesses deemed as core but argue that, if the company has to raise capital, the first option is to accelerate plans to sell unwanted businesses. Citi has also looked at adding to its planned conversion of $52bn of preferred shares held by the government and other investors by including trust-preferred shares, although that idea was losing ground last night. Some insiders argue it could be difficult to persuade holders of such shares â a hybrid of debt and equity â to exchange them for common stock because they rank as debt and pay interest. People close to the situation said both Citi and BofA were contesting some of the conclusions made in the stress tests. Citi executives, led by finance chief Ned Kelly, are believed to have told regulators the estimates for losses on credit cards â based on rising unemployment â are too high. Citi is also asking regulators to take into account the capital boost it will receive from the expected sale of a majority stake in its brokerage unit Smith Barney to Morgan Stanley as well as the likely disposal of Nikko. That deal is expected to generate an accounting loss, because Citiâs acquisition price for the business is higher than the likely sale price but it would still result in a cash boost for Citi. People close to the situation cautioned that discussions between Citi, Treasury and the Federal Reserve were fluid and details of the plans could change ahead of the release of the results of the stress tests next week. Some Citi executives believe the government may still have to convert more of its preferred shares into common stock, raising its holding above the 36 per cent it is due to take following the latest bail-out in February. Citi shares closed down 5.9 per cent. BofA shares closed down 8.6 per cent at $8.15. BofA declined to comment. Citi said its capital base was âstrongâ.
Heh, good to know everything is fine Bloomberg is saying 6 banks need money http://www.bloomberg.com/apps/news?pid=20601068&sid=aweHgQbc9BFI&refer=economy FBR had run the numbers using government assumptions and said the stress test would show no need for capital, and now its leaking that they need, maybe the government raised the minimum TCE ratio requirements? Regardless I dont expect the government to deliver the really bad news, it might turn out to be modest amounts Wolf has an interesting article why this global problem will take time http://www.ft.com/cms/s/0/94f9640e-3436-11de-9eea-00144feabdc0.html
"The real change in private inventories subtracted 2.79 percentage points from the first-quarter" "Real nonresidential fixed investment decreased 37.9 percent in the first quarter, compared with a decrease of 21.7 percent in the fourth" Looks like the corporate sector is not betting on a economic rebound, consumer spending held up by going up 2.2% that was driven by a rise in disposable income which was driven by a decreased in taxes paid 'Personal current taxes decreased $193.5 billion in the first quarter, in contrast to an increase of $19.7 billion in the fourth. Disposable personal income increased $133.6 billion (5.1 percent) in the first quarter, in contrast to a decrease of $62.6 billion (2.3 percent) in the fourth. Real disposable personal income increased 6.2 percent, compared with an increase of 2.7 percent.' Looks like this was the effect of the stimulus package. The savings rate rose but consumer spending also rose, effectively the government is helping people to pay off consumer debt