No-Trust Nation: Why Everyone Distrusts the Financial Industry

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Do you trust the United States financial system? If so, you'd be among the mere 23% -- a startling minority -- of Americans who still have faith. If not, you may also relate to the 62% of Americans who describe themselves as "angry" or "very angry" about the nation's economic system.

These numbers come from The Financial Trust Index, a joint project of the University of Chicago Booth School of Business and Northwestern University Kellogg School of Management, which has been tracking public sentiment toward the financial system for over three years.

The recent numbers, taken from their latest quarterly survey, should be unnerving to the powers that be (especially electoral candidates). Americans haven't been this angry since March 2009, a period of horrifically low gains.

Economists vs. Americans:
The survey also questioned a variety of Americans on a series of economic assertions and compared their responses against a panel of economists. Here are some of the "striking" results, as reported by the Wall Street Journal:

Question: "Permanently raising the federal tax rate by one percentage point for those in the top income tax bracket would increase federal tax revenue over the next 10 years."

Answers: 
Economists: 100% agree (regardless of their political orientation)
Americans overall: 66% agree (50% of Republicans; 80% of Democrats)

Question: "Mandates that Federal government purchases should be 'buy American' have a significant positive impact on U.S. manufacturing employment."

Answers: 
Economists: 10% agree
Americans overall: 75% agree

Question: "Very few investors, if any, can consistently make accurate predictions about whether the price of an individual stock will rise or fall on a given day."

Answers: 
Economists: 64% strongly agreed
Americans overall: 54% agreed. On this point, survey respondents who had at least a college degree answered more closely to economists -- 70% agreed. And among people who make more than $75,000 a year, 63% agreed.

Business section: Investing ideas
Main Street doesn't trust Wall Street. But it doesn't end there -- we've also found plenty of examples where sophisticated investors don't trust the viability of major financial institutions.

To illustrate this concept, we identified a list of financial stocks that have a very high short float (i.e., short-sellers think the share prices of these companies will decline).

This is significant, especially when you consider that short-sellers tend to be more sophisticated investors (due to the fact that they require strict credit approval to perform these trades). So if these investors are turning bearish on a stock, it's worth paying close attention.

In addition, all of these companies have seen significant institutional selling during the last three months.

Is this excessive pessimism justified? If you're a contrarian, you might be interested in this list.

List sorted by short ratio. (Click here to access free, interactive tools to analyze these ideas.)

1. iStar Financial (NYS: SFI) : Operates as a finance company focusing on the commercial real estate industry. Short float at 22.63%, which represents about 20.69 days of average trading volume. Net institutional sales in the current quarter at -4.6M shares, which represents about 7.55% of the company's float of 60.95M shares.

2. RAIT Financial Trust (NYS: RAS) : Operates as a self-managed and self-advised real estate investment trust (REIT). Short float at 15.19%, which represents about 8.79 days of average trading volume. Net institutional sales in the current quarter at -28.4M shares, which represents about 77.05% of the company's float of 36.86M shares.

3. MGIC Investment (NYS: MTG) : MGIC Investment Corporation, through its subsidiary, Mortgage Guaranty Insurance Corporation, provides private mortgage insurance to the home mortgage lending industry in the United States. Short float at 19.75%, which represents about 5.19 days of average trading volume. Net institutional sales in the current quarter at -23.7M shares, which represents about 12.02% of the company's float of 197.13M shares.

4. Radian Group (NYS: RDN) : Provides credit-related insurance coverage and financial services in the United States and internationally. Short float at 19.71%, which represents about 4.07 days of average trading volume. Net institutional sales in the current quarter at -15.1M shares, which represents about 11.44% of the company's float of 132.01M shares.

Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.


List compiled by Eben Esterhuizen, CFA. Kapitall's Eben Esterhuizen and Rebecca Lipman do not own any of the shares mentioned above. Short data sourced from Yahoo! Finance, institutional data from Fidelity.

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