Fueled by stronger than expected earnings and a rising stock market the brokers have rallied by 15-20% since I mentioned that I was going to short them. However, my long-term view of the sector is unchanged. The economy will suffer a housing-led recession in 2007 that will hurt the brokers’ profits significantly. The current rise in their share prices could mean a greater fall once the stock market begins to decline.

Therefore, I am really attracted to the potential payoffs of shorting the brokers at current prices. I am currently short Lehman Brothers (NYSE:LEH) and Bear Stearns (NYSE:BSC). I will be doubling my short position in these stocks.