Financial Weakness Creeping In

1,000 Banks to Fail?!

By Bryan Bottarelli
Friday, August 28, 2009 10:20 AM EDT
Fri, 28 Aug 2009 14:20:00 GMT

Dear Bottarelli Research Member,

Good morning. Although it’s not front-page news, we’re getting some very clear warning signs that the financial sector just might be running out of steam. For example, consider the comments from John Kanas (whose private equity firm bought Bank United of Florida in May). On a CNBC interview, he predicted that the U.S. banking system will lose 1,000 more institutions over the next two years. He said, “we’ve already lost 81 this year. The numbers are climbing every day. Government money has propped up the very large institutions as a result of the stimulus package. There’s really very little lifeline available for the small institutions that are suffering.”

This prediction sparks great concern for the viability of the FDIC. I’m sure you’ve heard about new “special fees” that the FDIC wants to place on banks. Don’t be fooled. From what I’m hearing, these special fees are getting implemented to avoid the FDIC going completely bankrupt. If Kanas’s prediction comes true, the situation in the financial sector could get very ugly. That’s why we’re seeing a clear rotation out of financials and into technology. To parlay this trend into a strong trading position, we might add downside exposure to the financial sector and upside exposure to the technology sector. If and when the time comes to make such a play, you’ll be the first to know.

It’s also important to note that we’re just about to flip the calendar over to September, which is historically the worst market month of the year. October is historically weak as well. Therefore, let’s maintain our downside positions of SHLD September 65 Puts (KTQ UM), SDS September 45 Calls (SSH IS), and WYNN September 55 Puts (UWY UK) — all of which will keep us positioned to capitalize on any downside moves. Looking specifically at SHLD, if the stock can penetrate the low of the last seven trading days, we could see a quick move down.

SHLD

As always, I’ll keep you fully informed on any new trading opportunities.

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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