Thursday, August 14, 2008

Defying All Reason

A lot of people are ready to call a bottom in financial stocks. Too many, IMHO.

``It goes completely counter to what you read, that everybody is selling, everybody is bearish, everybody is shorting financial stocks,'' said Birinyi's Robert Leiphart, who helps manage $350 million in Westport, Connecticut. ``When people say, `It's the worst it's ever been,' it's usually the bottom and the time to start to buy.''
Problem is, too many investors (or their hedge funds) are betting on further declines.
Short interest in financial companies rose in June to 4.6 percent of shares outstanding, the highest on record, Deutsche Bank AG data show. Traders pared bets against banks and brokerages and investors pulled money from ETFs in July as the stocks advanced, data compiled by Birinyi and Bloomberg show.

With short interest remaining that high, the recent run-up in financial ETFs is IMHO merely short covering. Maybe a lot of the folks (hedge funds?) doing the covering haven't noticed that a lot of banks' Level III asset ratios are still ridiculously high, making them extremely risky bets to lead a new bull run.

Nota bene: Anthony J. Alfidi holds a long put and short call on XLF.