Most of 19 short-protected stocks rise, for now

Protected stocks rise, helping market — for now

By Nick Godt, MarketWatch

Last Update: 7/21/2008 2:41:00 PM

NEW YORK (MarketWatch) — While most of the shares of the 19 financial
institutions protected from illegal short sales by the Securities and Exchange
Commission continued last week’s advance Monday, concerns about the rest of the
financial sector are still weighing on the market.

“Nineteen companies in the financial sector are protected from short-selling, but
there are no regional banks on that list,” according to Robert Pavlik, chief
investment officer at Oaktree Asset Management. “The regionals have been pushed
down the most and need the most protection.”

While the broad financial sector advanced, the KBW regional banking ETF (KRE) was
recently down 0.6%.

Shares or regional banks such as First Horizon National Corp. (FHN), State Street
Corp. (STT) and National City Corp. (NCC) were under pressure.

Others in the financial sector “are still facing challenges from credit-card
losses, prime loans going bad, as well as from commercial loans,” Pavlik said.
“Default rates are still increasing. If people are failing to make mortgage
payments, are they going to pay their credit-card bills?”

The share of ailing bond insurer MBIA Inc. (MBI) also were under pressure Monday,
along with those of credit-card firms such as Discover Financial Services (DFS)
and even blue-chip American Express Co. (AXP), which reports after the close of
trading.

Still, the broad financial sector of the market was recently slightly positive,
allowing the S&P 500 Index ($SPX) to rise 0.1%, also helped by better quarterly
results than expected from Bank of America Corp. (BAC), which helped ease
concerns about overall ailing financials.

SEC lends a hand

Monday is the first day of enforcement of an emergency order from the SEC
regarding short sales in the stock of 19 key financial-services firms. The move
was meant to curb selling pressure on these stocks, including those of giant
government-sponsored mortgage lenders Fannie Mae (FNM) and Freddie Mac (FRE).

“The fact that Bank of America did better, the fourth big [financial firm] in a
row [to do so] is helping, and we’re getting an exaggerated effect because of
that rule,” said Donald Selkin, chief market strategist at National Securities
Corp. “Near-term, that can provide a nice boost to the stocks, since it makes it
harder to short them.”

Financials already rallied last week after the announcement of the SEC mandate,
meant to curb so-called naked shorting, where traders short stocks without first
making necessary arrangements to borrow shares.

In a typical short sale, traders sell borrowed shares, hoping to buy them back at
a lower price and return them to the lender. The difference is kept as profit.

Last week, traders rushed to buy the stocks of firms which had the largest
amounts of bets their shares would fall, covering so-called short positions.

“Those that had the most short interest were those that did the best last week,”
according to Selkin.

With the rule kicking in Monday, some of the buying interest continued,
especially in the shares of Fannie Mae and Freddie Mac, whose stocks were up 13%
and 4% respectively.

Other firms under the rule whose stocks rose Monday included Bank of America,
which gained 7.4%, BNP Paribas (BNPQF), up 6.4%, Credit Suisse Group (CS), rising
2%, Citigroup Inc. (C), climbing 3.6%, Deutsche Bank AG (DB), adding 2%, Allianz
SE (AZ), advancing 0.3%, Royal Bank of Scotland (RBS), gaining 2%, HSBC Holdings
(HBC), up 3%, Merrill Lynch & Co. (MER), moving up 0.3% and UBS AG (UBS), adding
1.4%.

Those falling included Goldman Sachs Group (GS), J.P. Morgan Chase & Co. (JPM),
Lehman Brothers Holdings Inc. (LEH) and Mizuho Financial Group (MFG).

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