Four banks dominate August market in 'dash for trash'

Citigroup (C.N), Bank of America (BAC.N), Freddie Mac (FRE.N) and Fannie Mae (FNM.N) have dominated trading recently as each has more than doubled in price from 2009 lows.

On Monday and on Tuesday morning, the four accounted for more than 40 percent of composite volume on the NYSE. Some attributed this to bets on hoped-for economic improvement and ongoing government support, but others said the volume was due to speculation in popular names with low share prices.

"We've been referring to the heavy volume on these as the 'dash for trash,'" said Jon Najarian, the co-founder of Optionmonster.com in Chicago. "No one is buying them based on their fundamentals, they're buying based on what the government might do to keep them alive."

All four companies were hit hard during Wall Street's meltdown in late 2008. Fannie and Freddie were essentially nationalized by the government to prevent them from going under last fall.

Citigroup fell 1.9 percent to $4.73 on Tuesday, while Dow component Bank of America was up 1.5 percent to $17.61. Freddie Mac was up 0.5 percent to $2.06 while Fannie Mae surged 7.7 percent to $1.83.

The recent action may be indicative of a short squeeze, as all four companies are prime targets of short sellers, who borrow shares and sell them in a bet that share prices will go down.

When momentum starts to turn, however, short-sellers are forced to cover their bets, increasing the buying pressure on those names. But that may not last forever, and some believe the stocks are poised to fall once this flurry of activity dissipates.

"Intraday buyers are moving it, and if they decide to stop, and the buyers go away, the stocks are going to drop down like they did in March," said Joe Saluzzi, comanager of trading at Themis Trading in Chatham, New Jersey.

BIG VOLUME

Tuesday, Citigroup was the volume leader on the NYSE with about 681.7 million shares, as of 1:15 p.m. Citigroup was followed by Fannie with 557.2 million shares, Freddie with 188.4 million and Bank of America with 148.9 million.

To compare, the fifth most-traded stock was General Electric (GE.N) with 42.4 million shares traded.

The total listed volume for the NYSE was 3.858 billion, meaning that combined volume for the four represented more than 41 percent of the total day's volume. On Monday, those four companies also accounted for 43 percent of the volume.

The surge in volume among these names started around August 10. This was just after troubled insurer American International Group (AIG.N) reported better-than-expected earnings, and amid signs of U.S. economic improvement.

Bank of America would seem to be the outlier in this group. The other three are all in single digits, and therefore targets of daytraders looking for quick trading profits.
"The volume in B of A is based on institutional ownership," Najarian said. "An institution can't trade Freddie or Fannie because they're too cheap. All you see in them is hedge funds and money players."

Najarian said institutions were buying into Bank of America in an attempt to play into the recovery thesis.

"People are having a hard time finding cheap stocks," Najarian said. "They're looking for the cheapest of the decent stocks. Clearly, in the institutional investor's mind, Bank of America is one of the stocks they're choosing." (Editing by Kenneth Barry)