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Playing The Bank Bounce

Thursday, 28 May 2009 | 5:44 PM ET

Investors are beside themselves over the best way to play banks. Do they still have room to run or is it time to game banks from the short side?

Big Banks

Most of the larger banks have already made sizable gains since March.

Just take a look at the SPDR KBW Bank Index made up of Bank of America, JP Morgan, Wells Fargo and other banking goliaths. It’s up a whopping 48% over the past three months. Of course that begs the question, can the big boys continue to climb?

Regionals

Then there are the regional banks. The SPDR KBW Regional Bank Index , made up of First Horizon, Associated Banc-Corp and other regional banks is only 7% higher over the same period.

Investors are far more cautious here, because of regional banks' exposure to commercial real estate.

Why is commercial real estate is particularly problematic for regional banks – as opposed to the big banks?

According to the LA Times, it’s because “smaller banks stepped up lending to local developers and businesses as a way to stay afloat after the national institutions grabbed big-ticket consumer businesses such as home loans, credit cards and checking accounts.”

Other Financials

Of course you could look at other financials such as the publicly traded private equity firms or the insurance guys.

Isurance firms that didn’t take TARP money a few weeks back seemed to make a move higher. But insurance is tied to the bond market. And the Wall Street Journal says, “if bond markets collapse - where insurers invest the bulk of their premium income - insurance firms may face a liquidity crunch and have more difficulty raising funds.”

Taking Bets Off Banks
Why it's time to short the financials, with Steve Cortes, Veracruz founder and the Fast Money team.

Argghhhh!

With so much uncertainty, how should you play the banks. For insights we turned to Steve Cortes of Veracruz.

Banks have had an incredible run off the March lows, says Cortes, but they’re now facing terrible headwinds. And those headwinds are the mortgage situation and government intervention.

Going forward it seems likely the government is going to continue to intervene in the affairs of banks, in areas such as executive pay, speculates Cortes. They won’t want to surrender their influence over the sector. After all you can’t get a little bit pregnant, he chuckles.

As a result I recommend shorting the KBE, he says. In other words Cortes is making a bet that banks go lower.

And in case you're wondering, Cortes is putting his money where his mouth is. Cortes Is Short The SPDR Bank ETF (KBE)



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Trader disclosure: On May 28th, 2009, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Finerman Owns (RIG); Finerman;s Firm Owns (RIG), (PBR), (TBT); Finerman's Firm Owns (BAC) Preferred, (WFC) Prefereed; Adami Owns (AGU), (C), (GS), (INTC), (MSFT), (NUE), (BTU); Terranova Owns (ABT), (TER), (HES), (JPM), (JOYG), (XBI), (RIMM); Terranova Is Short (XOM) Call Spread; Terranova Owns (DIS) Call Spread; Terranova Owns July Nat Gas Futures; Najarian Owns (ISIS); Najarian Owns (AMAT) Calls; Najarian Owns (FCX) Call Spread; Najarian Owns (BX) Call Spread; Najarian Owns (INTC) Call Spread; Najarian Owns (MOS) Call Spread; Najarian Owns (XHB) Call Spread; Najarian Owns (XLB) Call Spread; Najarian Owns (XLU) Call Spread

Cortes Is Short The SPDR Bank ETF (KBE)

  Price   Change %Change
ASBC
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BAC
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FHN
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JPM MLP ETN
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KBE
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KRE
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WFC
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