Time To Bet Against Bad Banks--Now That The Bank Term Funding Program Has Expired And Fed Rate Cuts Are On Hold


Why Bet Against Banks Now?

Two main reasons. First, the Federal Reserve’s new, post Silicon Valley Bank collapse assistance program, The Bank Term Funding Program (BTFP), has expired. And second, the Fed’s first rate cut—initially expected in the first quarter of this year—has been pushed off indefinitely due to persistent inflation. So banks still have to compete for depositors with higher yielding money market funds.

A Simpler And Cheaper Approach

Last year around this time, I used a banking expert’s approach to try to figure out which regional banks were most likely to go bust. I made money betting against Bank of Hawaii Corporation BOH and First Foundation, Inc. FFWM, and added more bearish positions after the crashes of PacWest Bancorp (now Banc of California) PACW and Western Alliance Bancorporation WAL

Betting Against More Regional Banks 🏦 In the wake of the $PACW and $WAL crashes, And after exiting bets against $BOH and $FFWM for gains of 80% and 200%, respectively. https://t.co/IVYBvKF31s pic.twitter.com/UCdAoq8Kfv

— Portfolio Armor (@PortfolioArmor) May 4, 2023


I was going to pay the same analyst I used to update the spreadsheet we came up with with the latest data, but before doing so, I looked at the half dozen or so names that were ranked as the “worst” banks according to the banking expert’s methodology, and checked how their share prices did over the last 12 months.

A couple had gone bust, but those were ones that were already in obvious trouble when we put the spreadsheet together. The others were all up significantly over the last 12 months. Apparently, they hadn’t exhausted the BTFP after all.

So here’s what I did instead. I went to Chartmill and ran this screen:

  • GICS: Financial.

  • Has options

  • U.S. only.

  • Health Rating: < 2 (on a scale from 0-10).

  • Piotroski F-Score: 2 or less (on a scale from 0-9).

  • Technical Rating: 4 or less (on a scale of 0-10).

Then I did a bit of research on the names that came up, to see if there were any potential bullish indicators on these banks that the screens missed.

An Ill-Fated Insider Purchase

There was a $25k insider purchase on one of these banks in March, but:

  • The shares are down ~28% since then.

  • And the bank missed its earnings in April.

So this insider doesn’t appear to know much. And we’ve got two banks that look like real dogs for us to bet against.

Read the rest here


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