Short interest in banking-related stocks traded on the Nasdaq market soared 22% during the month ended June 15, mostly because of arbitrage activity related to several big acquisitions.
Short players continued to concentrate on U.S. Bancorp, Portland, Ore., in the wake of its agreement to buy West One Bancorp, Boise, Idaho.
The short position in the Oregon superregional banking company's stock grew 221% in the 30 days through June 15, to five million shares, the largest position among Nasdaq bank stocks. That came on top of a 137% increase during the previous month.
There were also large increases last month in short playing in two large Nasdaq-traded thrift stocks - Charter One Financial, Cleveland, and Sovereign Bancorp, Wyomissing, Pa.
Shorting a stock involves selling shares that have been borrowed in the hope the stock price will fall so that the loan can be repaid in less expensive shares.
The short interest in a company's stock is the total of shares that have been shorted, meaning those shares borrowed but not yet repaid.
Typical short sellers hope to profit from a decline in a stock's price. But selling short is also part of investor strategies to hedge against losses or to lock in gains on preferred stock and other securities.
Some of the burgeoning short activity in shares of U.S. Bancorp. may be related to sharply reduced prospects that the Oregon bank itself will be bought out.
"You had quite a few disappointed investors who had been in (U.S.) Bancorp. expecting a takeover," said banking industry securities analyst Sally Pope Davis of Goldman, Sachs & Co., New York.
These investors' disenchantment likely dampens prospects for the stock to make gains relative to other bank issues. And that creates opportunities for short players.
"Some hedge funds may go long in one bank stock and then take a short position in another as part of their strategy," pointed out Ms. Davis.
"The tendency is to go short in a stock where you don't think a whole lot is going to be happening in the near term," she said. "Since Bancorp is probably not going to be taken over at this point, their stock is now a safe hedge.
"In arranging a hedge, the stocks involved don't have to go down in value. It's more that they just shouldn't go up very much," she explained.
Such safe hedges for short playing have been difficult to find among bank stocks this year because of their strong performance, both in absolute terms and relative to other stocks.
"Shorting banks this year has really been quite a dangerous thing to do," Ms. Davis said.
Short interest in shares of Charter One jumped more than 1,000%, to 1.6 million shares, putting it in second place behind U.S. Bancorp. at June 15.
The big increase was apparently in response to Charter's plan to buy Firstfed Michigan Corp., a deal valued at $1.1 billion. That would make Charter One the fifth-largest publicly traded thrift in the nation.
The third-largest short position, having grown more than 100% during the month, was in the shares of Sovereign, whose chairman, Frederick J. Jaindl, recently resigned.
Analysts said that could also be because a new wave of takeovers seems to be underway in the thrift industry. Sovereign has been among the most aggressive buyers of other thrifts in its market area radiating from Philadelphia toward New York.
The largest decline last month in short interest among Nasdaq bank- related stocks was in Washington Mutual Savings, Seattle. Short activity fell by 776,000 shares, or 42%, from the level of May 15.
