Last month's impressive rally in bank stocks also spurred a jump in short-selling of these stocks as many investors apparently hedged their bets against further increases in interest rates.
According to a monthly survey being introduced today in the American Banker, aggregate short interest in banking, thrift, and related stocks traded on the New York and American stock exchanges, as of March 15, was 124,917,829 shares, up 2.1% from a month earlier.
Short interest growth in other stocks was even greater, jumping 3.6% to a record level on the New York exchange and 3.5% on the American. But short-selling was especially active in several bank and financial issues, notably Fleet Financial Group and Lomas Financial Corp.
Short interest is the total amount of shares that have been sold short and have not yet been repurchased in order to close, or cover, a short position. Tables detailing the monthly activity appear on pages 22 and 24.
While the economy may be slowing, the slump of the dollar in international exchange in early March ruptured the Wall Street consensus that a period of flat rates, considered good for banks, was just ahead. And that change in sentiment likely added to the short-selling.
Industry consolidation was also a factor, with shares of Fleet tallying one of the biggest surges in short positioning on the New York Stock Exchange between mid-February and mid-March.
The Providence, R.I., banking company's plan to buy Shawmut National Corp. of Hartford, Conn., which was announced last month, prompted a 298% increase in short interest in its stock as arbitrageurs stepped up activity in the shares of both companies.
Short players sell borrowed stock on the prospect that a company's price will fall, allowing them to repay the loan with cheaper shares and pocket the difference as profit.
But the game is risky. If the price rises instead, short sellers must quickly cover their positions and trim their losses or face virtually unlimited exposure in what is known as a short squeeze.
However, investors can cope with periods of uncertainty in the financial markets and the economy by taking both long and short positions in stocks, an investment technique known as boxed short-playing.
That may have been partly what occurred last month as many bank stocks lifted off from oversold levels that enticed buyers, even as many analysts cautioned that a lasting upswing could probably not be supported until interest rates had clearly peaked.
"The banking group had performed very well. Add the interest rate uncertainties introduced by the weak dollar and you have a scenario for some short-selling," said Frank J. Barkocy of Advest Inc.
"In the case of Fleet, it is more reflective of the arbitrage considerations between the two stocks," he said, noting that Shawmut shares are selling at a 8% to 10% discount from the terms of the merger agreement.
The largest short interest position among bank issues was in Citicorp, at 20,075,824 shares. Fleet Financial, following its big increase, ranked second at 8,461,748.
On average it would have taken six days in the market to cover short positions in the banking-related stocks on March 15, based on normal trading volume. That was just under the 6.25 days for other stocks on the New York exchange.
The days-to-cover ratio is more commonly known as the short interest ratio. It is closely watched by some on Wall Street as a yardstick of negative leanings by investors and early indicator of future trends in the stock market.
In the banking-related sector, the highest short interest ratio by far, and the second highest of any stock, belonged to Lomas Financial Corp., Dallas, the mortgage banking company, where the short position would require 82.1 days to cover.
Despite the big jump in Fleet Financial's short position last month, its short interest ratio of seven days is not much higher than the average ratio for related stocks. The ratio for Citicorp is 12.3 days.
Among the companies with relatively high short interest ratios are National City Corp., Cleveland, at 33.2 days; First USA Inc., Dallas, the specialized credit card issuer, at 22.5 days; and Norwest Corp., Minneapolis, at 18 days.
The ratios for First USA may reflect both the anticipated impact of higher interest rates on the credit card business and investor concerns that the economy actually is beginning to slow down, led by a slump in consumer borrowing.
The ratio for Norwest, which runs one of the nation's largest consumer finance operations, may echo the same perceptions.
Bankers Trust New York Corp., which shocked Wall Street on March 10 by announcing it may lose $125 million in the first quarter on trading activities, has a short interest ratio of 17 days. However, the aggregate short interest position in its shares fell last month by 3.5%
Still, the coverage ratio for Bankers Trust is large in contrast with the major trading bank it is most often compared against, J.P. Morgan & Co. Morgan's ratio was only 3.6 days after short interest rose 11.6% last month.
Bankers Trust stock was up 37.5 cents to $53.375 in afternoon trading on Wednesday, following its announcement Tuesday that it will continue to pay its $1 quarterly dividend. That payout has created a yield of nearly 8% on the stock in the wake of its fall, twice what is available from most banks.
In general, short interest is not near the levels it was in many banks three to five years ago, when the industry was enduring its worst problems since the Great Depression.
And short interest declined in a number of major banks last month.
For instance, the short interest in Wells Fargo & Co., San Francisco, a onetime favorite of short players, totaled only 678,326 shares on March 15, down a sharp 13.6% from the previous month and leaving a five-day coverage ratio.