The shorts hammer the banking industry

A look at the August short interest for stocks traded on the NYSE shows that traders bet hard against big banks and mortgage companies. The short interest in CountryWide Financial (NYSE: CFC) rose 32.2 million shares to 83.6 million between July 13 and August 15. Short interest in JP Morgan Chase (NYSE: JPM) went up 11.6 million shares to 45.2 million. At Wells Fargo (NYSE: WFC), it rose 9.3 million to 63 million and at Wachovia (NYSE: WB) it went up 9.9 million to 49.9 million.

It would appear that the shorts made out on most of these investments. Mortgage lenders have been damaged; shares in Countrywide are down 35% over the last month.

At money center banks there is real concern that load for LBOs and private equity deals cannot be sold and that the banks are having to hang onto this high-yield and often risky debt.

But, for those who think all large financial services shares will fall in the current environment, the gamble is not paying off. Well Fargo, one of the stronger banks, is trading at $37.37, very near its 52-week high. JP Morgan's shares have recovered almost 6% over the last five days. Wachovia's shares are up over 6% over the same period.

CFC may have been a good way to make money predicting that the market would take financial institution shares down, but the better banks are recovering, perhaps faster than the shorts would like.

Douglas A. McIntyre is a partner at 24/7 Wall St.

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