Shorting the banks

brianwh · 25 May 2011

There is plenty of commentary at the moment that the weakness in the bank stocks is very much the result of hedge funds shorting them. And no doubt this commentary has a solid foundation. But is there anyone with insight into how this might work for them. Are they banking on jittery market sentiment to get punters on board and send the price even lower still so that when they have to cover their shorts, they can do so at bargain prices. Do they really think our banks are over-valued? Is it a currency play?

I remember when things started to look bad in 2008 for Lehman Bros, a big hedge was very publicly shorting them and no doubt played a role in their ultimate demise. But surely no-one thinks our banks are this vulnerable.

skc · 25 May 2011

brianwh said:
There is plenty of commentary at the moment that the weakness in the bank stocks is very much the result of hedge funds shorting them. And no doubt this commentary has a solid foundation. But is there anyone with insight into how this might work for them. Are they banking on jittery market sentiment to get punters on board and send the price even lower still so that when they have to cover their shorts, they can do so at bargain prices. Do they really think our banks are over-valued? Is it a currency play?

The theory is that EU debt defalts => EU banks need to take writedowns => EU banks gets tight in international lending => Aussie banks pay higher margin => Aussie banks profits and dividends reduced => lower bank share price.

However, hedge fund in most cases would make 'hedged' positions... a naked short on Aussie banks would not be a hedged position. So what is the hedged long play? EU banks? Greek debt?

brianwh said:
I remember when things started to look bad in 2008 for Lehman Bros, a big hedge was very publicly shorting them and no doubt played a role in their ultimate demise. But surely no-one thinks our banks are this vulnerable.

A hedge fund's short has no role in Lehman's demise. They collapsed because they made wrong bets...

satanoperca · 25 May 2011

They are shorting the banks as they are heavily weighted in the Australian residential mortgagee market and many international players are expecting that RE is Oz is about to take a dive. I'm am shorting them because I cannot see them being able to write loans at the same rate as previous years, as well seeing the RE market taking a correction over the next 12 months.

Cheers

Got to love the banks, why deposit your money with them for 6% return, when you can short them for even greater returns.

But do not, as the momentum of their falls builds it will become difficult to find brokers that have the shares or are willing to loan out for shorting, as more and more people jump on the bandwagon.

brianwh · 25 May 2011

skc said:
The theory is that EU debt defalts => EU banks need to take writedowns => EU banks gets tight in international lending => Aussie banks pay higher margin => Aussie banks profits and dividends reduced => lower bank share price.

However, hedge fund in most cases would make 'hedged' positions... a naked short on Aussie banks would not be a hedged position. So what is the hedged long play? EU banks? Greek debt?

A hedge fund's short has no role in Lehman's demise. They collapsed because they made wrong bets...

Don't imagine they would be using naked shorts - isn't that illegal? But I've been waiting for a pullback in the banks and I'm trying to assess whether this is a good time to buy. Or whether this shorting (along with the general nervousness) still has a way to go.

Re Lehman Bros - a relation was working for them at the time and I well remember his commentary during the lead up to the collapse. The Hedge fund manager's name was David Einhorn and he was making huge bets against their survival. This of course, as you say, didn't cause the collapse but was said to be a factor in the timing.

brianwh · 25 May 2011

satanoperca said:
But do not, as the momentum of their falls builds it will become difficult to find brokers that have the shares or are willing to loan out for shorting, as more and more people jump on the bandwagon.

But the music will stop eventually - they won't go down forever. And you would need to get in and cover your shorts pretty smartly

sammy84 · 25 May 2011

Wow. Threads like this make me wonder what sort of short squeeze would happen if banks were to recover.

Tanaka · 25 May 2011

sammy84 said:
Wow. Threads like this make me wonder what sort of short squeeze would happen if banks were to recover.

Noticed quite a lot of ‘shorting’ threads open up around the net. Makes me think if the amateurs are screaming short the professionals are probably thinking easy long entry.

I'm still a bear though

I'm gonna sit on cash until we now what the Feds next move is, QE3? and see what happens to the PIGS, we should know by late June,

nulla nulla · 25 May 2011

brianwh said:
But the music will stop eventually - they won't go down forever. And you would need to get in and cover your shorts pretty smartly

sammy84 said:
Wow. Threads like this make me wonder what sort of short squeeze would happen if banks were to recover.

From the look of the action in the last hour today on Westpac (wbc) it looked like a lot of "shorters" were in a hurry to close out their positions. The price spiked from the low of the day to $21.78 before settling back in the auction to close on $21.72. Interestingly their was a huge buyer at $21.70 in the auction that didn't get a look in.

Tomorrow should be interesting. Through buying and selling, you can rotate the borrowed shares as you push the price down but the risk is other buyers are diluting your pool. Watching your moving average sale price you need to buy back in below this figure with enough gap to make the "short" profitable.

Then of course you can buy back in and reverse the action driving the price up. Ultimately you have to hold the same number of shares you borrowed and return same.
Hopefully, for the shorters sake, after all this they made a profit.

IFocus · 25 May 2011

Chart of the XFJ last candle looking down but with no volume buyers are keeping their hands in their pockets while the nervous sell out, I do sense some unease around about Europe but as of now we are still sideways

.

sinner · 26 May 2011

skc said:
However, hedge fund in most cases would make 'hedged' positions... a naked short on Aussie banks would not be a hedged position. So what is the hedged long play? EU banks? Greek debt?

They can be hedged in the same instrument and make money from being long volatility, no need to buy other fins. Buy the underlying and long puts (synthetic straddle) or buying a straddle/strangle/guts leaves you delta neutral and long volatility. As long as there is enough vol (up or down) they will get paid. Fins have been pretty quiet this year so a long term straddle before the end of QE2 might not be the worst trade.

nulla nulla · 26 May 2011

Banks well and truly bounced today. Michael Pascoe had an article in the Sydney Morning Herald (Business Day) pointing out the strength and consistancy of the Australian big 4 and made a point of the yield for Westpac, on the basis of the price at $21.50, being just under 10% when you include the franking credits.

Looks like the market agreed with him. All the banks jumped to day. Westpac by over 2% was the best and while CBA bounced it trailed the other three.

Looks like the shorters well and truly got squeezed and elected to close out quickly rather than get caught. Volumes were up and I expect the recovery to continue tomorrow, though probably a little bit slower than today.

3aq1e · 3 June 2011

Market taking a tumble, Which bank is the best value on the market at the moment??? (need to stock uP)

NAB - 24.300
ANZ - 21.370
CBA - 49.510
WBC - 21.350

nulla nulla · 4 June 2011

nulla nulla said:
Banks well and truly bounced today. Michael Pascoe had an article in the Sydney Morning Herald (Business Day) pointing out the strength and consistancy of the Australian big 4 and made a point of the yield for Westpac, on the basis of the price at $21.50, being just under 10% when you include the franking credits.

Looks like the market agreed with him. All the banks jumped to day. Westpac by over 2% was the best and while CBA bounced it trailed the other three.

Looks like the shorters well and truly got squeezed and elected to close out quickly rather than get caught. Volumes were up and I expect the recovery to continue tomorrow, though probably a little bit slower than today.

Geez nulla, when you get it wrong you really get it wrong. After a little rally the slide continued with wbc finishing the week at $21.35. All the banks are getting squeezed atm. Seems their are buyers snapping up the sells but not clamouring to get in to push the prices up. Have to wonder how low it will get pushed?

stickman · 4 June 2011

Hi- cba gave me a short signal on thursday will take a taste on monday

cheers

ginar · 4 June 2011

stickman said:
Hi- cba gave me a short signal on thursday will take a taste on monday

cheers

CBA report inside 9 weeks , historically this isnt a great time , by my statistical analysis , for a high probability short , i suppose it depends on your time frame but fwiw im looking to buy in the near future considering a 10% decline in recent history and a likely run into what will be likely be record result , call me crazy ....................

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