Financial Shorts Trends: Risk for Regionals, Citi and BofA?
The S&P Financials Sector is now down over 35% YTD and ~70% in the past 12 months. Given this continued drop, here is a look at how the short interest in these beaten companies has changed over time.
So far this year, the regional banks have taken it on the chin the most with Huntington Bancshares , Fifth Third Bancorp and Suntrust all down over 75% YTD. With their fall, the regional banks currently have higher short interest as a
percent of shares outstanding than their bigger and more diversified banking colleagues.
The chart on the right shows how these numbers compare to where they were one year ago and six months ago, right before the market plummetted. While, most of the short interest is still lower than where it was in late August, only Citigroup and JP Morgan actually have higher short interests today than they did back then. Also of note, is how high the short interest in now defunct Washington Mutual, Wachovia and Lehman was before collapsing or being acquired.
Keep in mind that some of the levels in short interest have been kept in check by the dilution of shares outstanding. Bank of America , for example, now has 96 million short shares compared to 62 million one year ago, an increase of 54%. However, the company also has 44% more shares outstanding today than it did one year ago so its shorts as a percent of shares outstanding has only increased by a net 7% from one year ago. Accounting for these changes, Fifth Third and Citigroup actually have the highest increase in short positions from 1 year ago. Regions Financial has the biggest drop in short positions from 6 months ago.
When I shared this analysis with our "Market Insider", Patti Domm, she suggested that I also take a look at how this parallels the Credit Default Swap (CDS) market. Based on 5-year CDS data from CMA DataVision, the chart below shows the relative shift in basis points paid for various bank CDS'. An increase depicts an increase in perceived default risk. Goldman Sachs' perceived risk surged in September while the risk on Citigroup and Bank of America issues have increased more rapidly than their peers in the past few months, consistent with the short data above.
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