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Is it Time to Dump Bank Stocks?
1/14/2013 8:30:00 AM
By: David Sterman
Since the second half of 2012, bankstocks have really found their footing.Shares of Citigroup (NYSE: C ) and Bank of America (NYSE: BAC ) have rallied more than 50% in the past six months, adding tens of billions to theirmarket valuations.
To be sure, these two banks were so sharply undervalued when 2012 began -- at least in relation tobook value -- that they were bound to rise. Yet even stronger banks such as JP Morgan (NYSE: JPM ) and Goldman Sachs (NYSE: GS ) have seen their shares rise more than 30% in the past twoquarters .
"The price moves reflect increasing confidence in the housing recovery and optimism around the economic outlook for 2013 in general," noted UBS' Brennan Hawken. In a hopeful sign for continued gains, these banking stocks are off to a solid start in 2013 as well.
Yet investors in this sector need to takenote of an ominous development. Short sellers have begun to pile into a leading bankstock and a leading bankexchange-traded fund ( ETF ) -- at a fairly aggressive pace. Here's a quick snapshot of the latest short interest data, which was released on Dec. 26, 2012.
Short sellers are clearly targeting the Financial Select SectorSPDR (NYSE: XLF ) . Wells Fargo (NYSE: WFC ) , JP Morgan and Berkshire Hathaway (NYSE: BRK ) are the top-three positions, each representing roughly 8% of thefund , while Bank of America (NYSE: BAC ) , Citigroup (NYSE: C ) and U.S. Bancorp (NYSE: USB ) each account for more than 5% as well.
What the short sellers are focusing on
Citigroup's Keith Horowitz says the Federal Reservewill stick with a policy of low rates for quite a while to come -- certainly beyond the end of 2013. "2014 estimates assume NIM compression slows down, which we see as unlikely in a low-rate scenario, putting 2014EPS estimates at risk," Horowitz said. He suspects regional banks US Bancorp, Keycorp. (NYSE: KEY ) and First Horizon National (NYSE: FHN ) are at the greatest risk of 2014earnings per share ( EPS ) reductions.
Why shorts might be targeting the banks
There is perhaps another more prosaic reason why short sellers may be targeting XLF. The U.S.economy remains vulnerable to another downdraft, especially at the corporate level. Even as bright spots in the economy such as housing emerge, key gauges of corporate confidence, such as the monthly reading of the National Federation of Independent Businesses (NFIB) have been increasingly glum. Bank stocks would likely give up much of their 2012 gains if the economy stumbled anew.
Risks to Consider: As anupside risk, the housing market could get yet stronger in coming months, leading analysts to boost their forecasts formortgage underwriting activity at banks.
Action to Take --> The upcomingearnings season is likely to hold few surprises for bank stocks. Quarterly results are likely to be roughly in line with analysts' forecasts, as has been the case for a number of quarters. Instead, it is the looming government budget talks that could create real noise for this group. Many suspect we'll get alot of stomach-churning headlines in February, as the March 1 debt ceiling deadline approaches. And bank stocks won't be a safe haven if the seas get rough. At least that's what the short sellers seem to be anticipating.
David Sterman does not personally hold positions in any securities mentioned in this article. StreetAuthority LLC does not hold positions in any securities mentioned in this article.