The “short energy” trade worked great for a while and then, as we first warned in late January, just as everyone jumped onboard leading to record WTI (and oil and gas equity) shorts, it very suddenly stopped working in early February when oil proceeded to soar by 50% in the month ahead, leading to the biggest short squeeze on record and crushing all those who had recently gotten on the short bandwagon (as well as most other shorts).
The result of this mega-squeeze has been a significant revulsion to shorting oil directly or indirectly, either by way of the underlying commodity or energy stocks, many of which have soared in tandem.
And yet the shorts remain, and continue to press their bets on the troubled energy sector. However, instead of directly shorting crude and various first-derivative oil and gas companies, short sellers – burned by the recent squeeze – have changed their strategy and shifted their sights to secondary exposure, namely those regional banks that do business with the industry. These are the same banks which, as we laid out previously, have the highest exposure to the very troubled energy sector, as laid out either by S&P:
… Or Raymond James:
It is these regional banks that Bloomberg finds are the object of shorts’ latest affection, as bearish bets have shot up 35% on average this year among the 10 most-shorted stocks in the KBW Regional Banking Index, and nowhere more so than at Cullen/Frost Bankers Inc. and Prosperity Bancshares Inc. in Texas, which have seen short interest surge about 60 percent.
The reason why shorts’ attention has been redirected to energy banks is well-known to our readers as we have been covering the banks’ exposure to energy since January: “as oil prices plunged, concern over energy companies’ ability to pay back loans drove investors to unload or bet against financial stocks judged to have the most at stake in the sector. So far, the rebound that pushed oil to around $40 a barrel has done little to dilute that speculation. Stubbornly low interest rates are also squeezing profits in a group that trades at a premium of almost 40 percent to their larger brethren.”
“It’s generally a very tough environment,” said Stephen Moss, a New York-based analyst at Evercore ISI. “Beyond oil and the yield curve, we have seen signs of credit softening overall. So going forward, it feels like you are going to have incrementally higher credit costs, which obviously will pressure earnings.”
The details are also mostly familiar, but here is a quick recap from Bloomberg:
Energy loans account for 15 percent of Cullen/Frost’s portfolio, while they make up 4 percent of Prosperity’s, according to Moss. Of the 10 most shorted regional banks, the majority do business in states like Texas, Oklahoma and Arkansas, centers of the drilling industry. Banks that have exposure higher than 4 percent to energy in their loan portfolios have slumped 22 percent since late 2014, Morgan Stanley’s Ken Zerbe wrote in a report earlier this month.
Bigger banks have also increasingly lured bears this year. Short interest makes up 6.2 percent of Zions Bancorporation’s shares outstanding and 4.5 percent percent of Comerica Inc. Seven percent of Zions’ loan portfolio is exposed to energy companies, and 6 percent of Comerica’s, according to Zerbe.
Being a smaller, regional bank instead of a TBTF, money-center bank means just that: “regional banks are more sensitive to the trajectory of interest rates, as a bigger proportion of their revenue stems from deposits and lending. The Federal Reserve scaled back its forecast for tighter policy on March 16, citing weaker global growth. That translates to lower-for-longer short-term rates, which crimp what local banks can charge on loans.”
But more so than the flat yield curve, the immediate catalyst are questions about the banks’ solvency if and when client O&G companies file bankruptcy, straddling the lenders with billions in bad debt.
Evercore ISI’s Moss said even if the Fed speeds up interest rates increases, a stronger dollar would hurt manufacturers, which in turns affects lenders. “You’ve seen hints from banks signaling that things are getting tough on that front,” he said. Alternatively, if the Fed remains dovish, it means yields on the long end will remain painfully low and make it next to impossible for energy companies to generate profits, leading to a lose-lose outcome, which is precisely what the shorts are betting on.
Not everyone is as concerned, however. While shorts are boosting bearish bets, other investors are taking the opposite view and loading up on shares. Gary Bradshaw, a Dallas-based fund manager for Hodges Capital Management said his firm recently increased its position in Cullen/Frost.
“I am looking at low price-to-book, good earnings and what I think will be a higher energy price,” said Bradshaw. “I don’t think interest rates are going to go up dramatically, and that will be the headwind for banks. But at the same time, some of the regional players will benefit more from higher energy prices.”
Still, with little updated information on bank exposure ahead of the spring borrowing base redetermination season, many would rather not risk it: “There is some uncertainty on how significant these oil credits are going to mean to the credit costs for these banks going forward,” said Daniel Werner, an analyst at Chicago-based Morningstar Inc. “Investors are right to be cautious with names in the Texas and Oklahoma area. That’s a fair assessment by investors until we figure out what’s going on with oil.”
What is going on is nothing good, and we expect fundamental impairments, charges and reserve increases to continue for the conceivable future. However, the right trade here is not to pile on in what is becoming the next bandwagon trade, but to think one step ahead, the same step which we said is inevitable in the oil trade in late January – the imminent, and massive, short covering squeeze, which has the added benefit that forced buyers are completely price indiscriminate when the market is ripping in their face, and will pay any price beyond the moment of max pain just to get out of a trades which, at least in theory, have unlimited downside.
As such we sit back and look forward to the inevitable regional bank “rip your face off” short squeeze, one which is inevitable especially since as Yellen showed today, the Fed will do anything and everything to reflate asset prices, consequences and most certainly credibility be damned.
Запись Crushed By The Record Oil Squeeze, This Is How Energy Bears Are Shorting Crude Now впервые появилась crude-oil.top.