Fox-Pitt recommends closing their March 11 trade — a long/short strategy of long Banks and short P&C Insurance and Insurance Brokers.
At that time, their analysis was based on: 1) the depressed values of financials, and especially the Banks sector, since the Inauguration; 2) the potential run-up in Banks as short-covering, changes in Mark-to-Market rules, and plans for distressed assets benefited the stock prices over the short term; and, 3) the movement wherein banks had become strongly negatively correlated with the P&C Insurance and Insurance Brokers sector.
In their March 11 note, they also suggested unwinding the trade before April as the market braces for another bad quarter for the Banks sector. After the recent run-up, the firm believes that unwinding the trade is appropriate at this time. Short covering has probably run its course, the latest plan from Secretary Geithner has provided a substantial boost, and they believe that the next catalyst on the Banks sector is likely to be earnings reports, which should be more negative.
The results of the trade, from the close on March 10 to the close on March 23:
Banks: +43%
P/C Insurance: +28%
Insurance Brokers: +13%
A combination of long Banks/short P&C Insurance would have yielded a +15% return, while shorting Insurance Brokers instead would have yielded a +30% return. Removing HIG ($9.30- In Line) and XL ($5.69-In Line) from the P&C basket (as they are moving on the same credit and asset fundamentals as Banks) would have lowered the P&C return and boosted the long/short by an additional 6%.
Fox-Pitt's long-term sector ratings based on fundamentals continue to be:
Banks: Underweight
P&C Insurance: Marketweight
Insurance Brokers: Overweight
The P&C Insurance and Insurance Brokers continue to be negatively correlated with Banks, much more than in the past, although the correlation between Banks and P&C Insurance has become slightly less negative.
Notablecalls: Just to let you know what the analysts are telling their clients. I noticed Merrill/BAM was out with a similar call yesterday.
At that time, their analysis was based on: 1) the depressed values of financials, and especially the Banks sector, since the Inauguration; 2) the potential run-up in Banks as short-covering, changes in Mark-to-Market rules, and plans for distressed assets benefited the stock prices over the short term; and, 3) the movement wherein banks had become strongly negatively correlated with the P&C Insurance and Insurance Brokers sector.
In their March 11 note, they also suggested unwinding the trade before April as the market braces for another bad quarter for the Banks sector. After the recent run-up, the firm believes that unwinding the trade is appropriate at this time. Short covering has probably run its course, the latest plan from Secretary Geithner has provided a substantial boost, and they believe that the next catalyst on the Banks sector is likely to be earnings reports, which should be more negative.
The results of the trade, from the close on March 10 to the close on March 23:
Banks: +43%
P/C Insurance: +28%
Insurance Brokers: +13%
A combination of long Banks/short P&C Insurance would have yielded a +15% return, while shorting Insurance Brokers instead would have yielded a +30% return. Removing HIG ($9.30- In Line) and XL ($5.69-In Line) from the P&C basket (as they are moving on the same credit and asset fundamentals as Banks) would have lowered the P&C return and boosted the long/short by an additional 6%.
Fox-Pitt's long-term sector ratings based on fundamentals continue to be:
Banks: Underweight
P&C Insurance: Marketweight
Insurance Brokers: Overweight
The P&C Insurance and Insurance Brokers continue to be negatively correlated with Banks, much more than in the past, although the correlation between Banks and P&C Insurance has become slightly less negative.
Notablecalls: Just to let you know what the analysts are telling their clients. I noticed Merrill/BAM was out with a similar call yesterday.
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