Arbitrage-related short interest continues to grow in shares of Cleveland's Charter One Financial.

As of Sept. 15, nearly 2.93 million shares of the thrift company had been sold short, an increase of more than 369,000 shares from a month earlier, according to data from the National Association of Securities Dealers.

Arbitragers keen to lock in a risk-free gain based on the share exchange ratio in Charter One's deal to buy Firstfed Michigan Corp. are the overwhelming reason for the increase, according to analysts.

"They look for a guaranteed return by going short in shares of the buyer and long in those of the seller,' said analyst Joseph A. Stieven of Stifel, Nicolaus & Co., St. Louis.

Shareholders of Firstfed Michigan, based in Detroit, are set to receive 1.2 shares of Charter One for each of their Firstfed shares when the acquisition is completed.

Mr. Stieven said that besides the deal, he could imagine no reason for shorting the shares of Charter One. The thrift has excellent fundamentals, he said, and added "we like their Firstfed deal."

The rise in Charter One short interest, which occurred through the summer, put it in third place in short activity among banking and thrift stocks traded on the Nasdaq market system.

In short-selling, investors borrow shares and then sell them with the prospect of profiting by repaying the lender with cheaper shares. Short interest is the total number of shares of a company's stock sold short.

Traditional short-selling is essentially a bet that a stock's price will fall or at least underperform the overall stock market, but short activity has also been increasingly employed as a part of investment ploys like merger-related arbitrage.

Both versions of short-selling are apparently at work in shares of U.S. Bancorp, where short interest jumped another million shares between mid- August and Sept. 15, to more than 8.1 million.

The Portland, Ore., banking company has by far the highest level of short interest among Nasdaq bank stocks.

U.S. Bancorp's deal to acquire Boise, Idaho-based West One Bancorp is the biggest reason for the increased short activity, but the transaction has also been sharply criticized by some analysts as too high priced for the benefits it will provide.

Indeed, shares of bank acquirers have been performed relatively less well than banks overall this year, making them candidates for short activity.

For a well-traded stock, U.S. Bancorp also carries an extremely high short-interest coverage ratio - 17.4 days. This means short-sellers of the stock would need that many days, at the stock's recent typical daily volume, to buy enough shares to repay lenders and thus "cover" their short positions.

As of Sept. 15, Charter One had the longest coverage ratio -24.5 days. In third place was First Commerce Corp., New Orleans, at 12.8 days.

There were also big decreases in short activity in some Nasdaq bank issues, notably Huntington Bancshares of Columbus, Ohio, whose shares sold short fell by over 244,000 in the month through Sept. 15.

In other bank stock news, Anthony R. Davis of Dean Witter Reynolds Inc. downgraded Wachovia Corp. to "neutral" from "accumulate." The analyst noted that stock had risen 19% in value this year.

Mr. Davis cut his 1995 earnings estimate for the North Carolina bank by 10 cents to $3.40 per share and his 1996 forecast by five cents to $3.75 per share. He noted the bank is planning large expenditures for new technology.

Analysts at Keefe, Bruyette & Woods Inc. upgraded both BankAmerica Corp., San Francisco, and Mellon Bank Corp., Pittsburgh, to "buy" from "attractive."

Analyst Francis X. Suozzo of S.G. Warburg & Co. upgraded shares of Household International to "buy" from "hold". He cited the finance company's strengthened balance sheet and said it can sustain earnings per share growth of 20% through 1997.

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