Why I’d Get Short Financial Stocks As Soon As Possible

I’m sure by now, you’ve heard that September is the worst month for stocks.

October gets the press, with its biggest, single-day calamities, but September still stands as the clear Biggest Loser. And mark my words: That matters.

Simply put, this September is shaping up like a bloodbath:

• Sentiment has been extremely bullish in the lead-up, even in the face of bad stats.
• Yet when good stats come out, the markets remain flat.
• We’ve already seen a few sharp down days.
• Insider selling stayed extremely high in this month’s run-up.
• And the savviest contrarian investors have warned us about overbought conditions for a couple months now.

If 2 + 2 = 4, Then The FDIC Is Broke

But that’s not the worst of it. This is… 416. That’s the number of “bad” banks - banks on the FDIC’s “troubled banks” list.

Equal to 5% of the nation’s banks, that number is much higher than it was back in the heat of the credit crisis. In fact, that’s the highest number of troubled banks since 1994.

In the first quarter, banks were profitable - taking full advantage of earlier write-offs and one-time stimulus checks. But during the second quarter, banks went right back to losing, shaving $3.7 billion off the bottom line.

And that number ignores a multitude of sins, including the $332 billion in loans that are more than 90 days overdue, which the FDIC banks are sitting on.

You can expect them to keep that information to themselves for a while though, not because they think they might recover that money but because they don’t want to take another hit to their bottom line.

Sure, the FDIC has about $10.4 billion left to cover any banks that go under… for over $6.4 trillion in assets. And that was before Guaranty Bank - worth $13 billion - crashed, or the number of smaller banks that followed suit.

In other words, the FDIC is out of cash.

While the Fed has promised a $500 billion credit line of emergency funds should the FDIC need it, it really doesn’t want to tap that cash. So look for another ’special assessment’ to knock a few more billion off the bottom line of the banks remaining, both healthy and sick.

Bank Failures Relatively Mild in Current Crisis

Considering the depth of the crisis, bank failures appear relatively mild so far. For instance, we haven’t lost nearly as many banks as during the S&L crisis.

But while some people look at that as proof that our situation is improving, I foresee a lot of drama left to come.

Yes, in a normal recession, bank profits are traditionally lagging indicators. But this is a credit crisis, and that changes the game drastically.

• Don’t forget that credit card defaults are at an all-time high… just a hair under 10%.
• That’s nearly in line with homes in default, which tallies in at a whopping one in eight houses and condos in America today.
• And of course, the American consumer continues to struggle mightily, creating an ugly loop back to the banks that started the crisis in the first place.

So get ready… If you’re buying into the “green shoots” theory, think again. We’ve got another correction in the works, and banks will lead the way.

It’s hard to know just when we’ll see the next big move down, but given the nature of the season and its inauspicious start, now’s as good a time as any.

Why You Want To Be A Short-Seller

Banks started the problem and in a very real way, they are the problem. Until they get better, the recession can only deepen.

That’s why I’d get short financials as soon as possible. Specifically, I’d enter the ProShares UltraShort Financials (SKF) with both feet.

Keep your trailing stop discipline of course - especially when dealing with an ultrashort, which doubles the volatility of the underlying issue - but you won’t find better protection when more banks fail and credit starts seizing up again.

And if you have any moral qualms betting against a quick recovery, just remember this: You can either lose money as these moves happen, or make it.

Personally, I’d rather make money.

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