The downturn in bank stocks has been accompanied by a wave of short- selling as investors bet that share prices will plunge further.
Short interest in "bank-related" companies traded on the New York Stock Exchange rose 13.6% in the four weeks through Sept. 15. That is more than four times the 2.9% rate for all NYSE stocks. (See tables on page 33.)
The short-sellers have concluded that banks would be especially vulnerable to a recession and that the impact of global trading losses has not been reflected in the share prices. The S&P bank index has continued to sink, losing 4.3% for the week despite a strong rally Friday afternoon.
Money-center banks, whose stocks have been beaten bloody since peaking in the summer, were among the most heavily shorted issues.
Short interest rose 53% in Bankers Trust Corp., whose stock has fallen 60% from its April high. J.P. Morgan & Co. shorts grew 22.8%. Shorts in Republic New York Corp. rose 23%.
Short interest measures the borrowings of short-sellers, who borrow stocks that they must replace at a later date. In the meantime they sell the stocks, planning to buy replacements more cheaply later and pocket the difference.
"The reason people are shorting these companies is no one knows what their exposures to emerging markets are entirely, and no one knows what their proprietary trading desks are up to," said Fran Scola, a portfolio manager at Touchstone Investments, a Larkspur, Calif., hedge fund that often takes short positions on financial services stocks.
Short-sellers also have targeted companies with steadier streams of earnings, such as Bank of New York Co. and National City Corp. Short- interest in those companies rose 79% and 69%, respectively.
Short-sellers, speaking on the condition on anonymity, said these companies are valued quite highly by the market but would run into trouble in a recession.
Some companies experienced a rise in short interest because they had recently announced that they would acquire another banking company. When that happens, arbitragers typically short the stock of the buyer, figuring its stock price will fall, and they bet that the shares of the seller will rise.
This might help explain the 59.6% increase in the short position in First Commonwealth Financial Corp., Indiana, Pa., which agreed July 16 to buy Southwest National Corp., Greensburg, Pa., for about $250 million, or a 46% premium over market price.
Short interest in Regions Financial Corp., a highly acquisitive banking company whose stock has stalled since the company agreed to buy First Commercial Corp. in February, was up 179.5%.
Thrifts have also been popular targets. Short interest in Dime Bancorp, New York rose 27%, and Astoria Financial Corp., which recently bought Long Island Bancorp for $1.2 billion, saw a 40.5% rise in short interest.
Astoria's rise in short interest could be attributed to the deal. The pressure on Dime, though, reflects flattening of the yield curve-that is, shrinkage in the difference between long- and short-term interest rates. That difference is the chief profit source for most thrifts.
Among bank-related issues, short players needed an average of four days, at the average daily trading volume of those stocks, to cover their short positions. By comparison, the average coverage time was 4.7 days for the New York Stock Exchange overall.
But days-to-cover varies greatly. The coverage time is just less than a day for Citicorp stock, whose the short position and coverage time were among the industry's most sizable when the company was retiring preferred stock issues.
Longer coverage ratios typically occur in stocks where companies are in the midst of such activities, or particularly with mergers pending.