Spread Betting on Banking Sector
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Trading Features / Strategies from Simon Denham of Capital Spreads.
Banks took yet another battering yesterday even though the FTSE 100 rallied some 96 points and the steady selling seems to now be almost masochistic (yields on Barclays are almost 12%) and the feeling spreads that ‘somebody must know something’. Put option strategies written years ago are now triggering renewed selling as funds are forced to sell ever more stock to ‘delta neutral’ their positions. Perversely more traders are buying into protection for existing positions therefore, possibly in these thin days, creating the very effect they are trying to avoid.
The bottom line is that the big funds fear that holders will end up with massively diluted holdings as the investment and retail banks are forced into more and more rights issues at worse and worse levels.
Many cash calls were written at some 30-40% below the valuations pertaining at that time and what happened? The stock just sold off to the rights issue price. What happens if there is another call? Will the stocks halve again?
At some point this ‘elastic band effect’ will reach it nadir and prices will shoot off like a rocket but that day is probably not yet.
Looking back at the price action on Barclays since the start of the year we can see that even though the price has fallen some 42% we have actually had two 30% rallies, a 24%, a 22% and a 15% rally whilst this has all been going on as investors have continually tried to call a floor.
With the mortgage units on the slide in the UK, the treasury units virtually moribund due to the credit crunch and corporate lending not exactly rip roaring away it is tempting to assume that the worst has not yet been reached but at some point the big players will dip into the market (if only to pick up very cheap strategic positions). Citigroup, the worlds biggest bank by revenue, is now worth less than the amount that RBS, Fortis and Santander paid for ABN last year. No disrespect to ABN but they were never a major player and were forever playing catch up in the world investment bank league table so, with the benefit of a good dollop of hindsight, it becomes increasingly unclear as to what value the various banks ever saw in paying such a huge premium at the top of a four year bull market.
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On top of all the problems that the banks are facing is a big factor marked ‘credibility’. Nobody believes a word they say any more (even if it is true) and analyst poke through all data with a view to unearthing creepy crawlies under a rock rather than finding diamonds in the muck. Bradford and Bingley seem to have managed a new nadir in this respect with every pronouncement being seen to be ‘economical with the truth’ and every decision perceived as being self serving to the board in place and ‘sod the investors’.
Many esteemed economists are now expecting the current state of affairs to last for some years to come with economies verging on a state of recession for many quarters. In this scenario it will probably be a while before the banking sector manages to get off its knees (look at what happened in Japan) so the temptation to dip a toe into the banking waters should probably be resisted for the time being.
The above comments do not constitute investment advice and neither Capital Spreads nor Clean Financial accept any responsibility for any use that may be made of them.
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Risk Warning: Spread betting carries a high level of risk to your capital. You may lose more than your initial investment. It may not be suitable for all investors. Only speculate with money that you can afford to lose. Please ensure you fully understand the risks involved and seek independent financial advice where necessary.
Article provided / approved by Capital Spreads which is a trading name of London Capital Group Ltd which is authorised and regulated by the Financial Services Authority (FSA), FSA Register number 182110.
'Spread Betting on Banking Sector' edited by SD, updated 01-Jul-08
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