Panicked Short Selling Causes Financials Rally

Posted August 23, 2008

“You know, you saw subprime go first, and then, on a slight lag, you saw home equity, and now in the lag, you’re seeing prime go. And it’s exactly the same loss factors. But remember, the components of where we are in the states…[are] very different. And we started doing more jumbos in ‘07, so a lot of that is — part of that is ‘07 vintage, which I think I told you at the time we were going to do and grow our balance sheet and gain share. And we were wrong. You know, we, obviously, wish we hadn’t done it.
So when you adjust for all of those things — vintages, CLTV, stated income, where it’s done — that’s what we’re seeing. You know, it’s very early in the loss curves…

Prime looks terrible, and we’re sorry.” — J.P. Morgan CEO Jamie Dimon

by Dan Amoss

Baltimore — (TFN): The recent financial stock rally has all the signs of panicked short covering, rather than typical buying. Consider how the depository institutions most likely to eventually join IndyMac in federal custody — including Washington Mutual, Downey, and Huntington Bancshares — are rallying the most. So many shares had been sold short that a violent rally was inevitable.

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Eventually, though, this rally should prompt two things:

1. Mutual funds selling financial stocks into strength. We’ve finally seen a shift in psychology away from buying financials on the dips. Many managers are preparing for an extended bear market in the sector. Read on to learn more.

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