• South Africa’s central bank cut a half-percentage point from its benchmark interest rate, marking the country’s first interest rate reduction in more than three years, Bloomberg reported. The growing global crisis, rising unemployment and falling commodity prices are hampering growth for the emerging economy.

• Asset manager BlackRock Inc. (BLK) cut 500 jobs, Chief Executive Laurence Fink said Thursday. Many of the job losses were part-time employees, Reuters reported. BlackRock is the largest publicly traded U.S. asset manager.

• Second-quarter profit rose 13% for Empire Co., owner of Canada’s second-largest supermarket chain. Net income rose $53.6 million and revenue increased 7% for the three months through Nov. 1, Bloomberg reported.

• KB Toys Inc. yesterday (Thursday) filed for bankruptcy protection for the second time in four years and plans to hold going-out-of business sales at its stores immediately. The 86-year-old company said in a filing that its debt is “directly attributable to a sudden and sharp decline in consumer sales,” an indication of how poor this holiday season has been for many retailers.

• Light, sweet crude for January delivery yesterday (Thursday) rose $4.46 to settle at $47.98 a barrel on the New York Mercantile Exchange. Oil spiked 12% earlier in the day approaching $49 a barrel.

• Citigroup Inc. (C) and UBS AG (UBS) yesterday (Thursday) agreed to buy back a total of nearly $30 billion in risky auction-rate securities that the Securities and Exchange Commission said the banks marketed to customers as safe. Tens of thousands of the customers bought the auction-rate securities before the $330 billion market froze in mid-February, the SEC said.

• Bank of America Corp. (BAC) said yesterday (Thursday) that it plans to cut up to 35,000 jobs over the next three years. The bank said the reductions are aimed at eliminating redundancies resulting from its merger with Merrill Lynch & Co. Inc. (MER), as well as the recessionary environment.

Source: Global Investing Roundups Friday, December 12th, 2008

This week is full of important reports, and unfortunately for us, few are expected to improve over last month. The calendar starts on Wednesday when the Core PPI and PPI figures for September are announced at 8:30 AM. Core PPI (which excludes food and energy costs) is expected to rise by 0.20 percent. PPI is expected to drop by 0.30 percent, most likely due to the recent plunge in energy costs.

Also on Tuesday, the Retail Sales report for September comes out, and is also expected to post a decline. Expectations are for a drop of 0.40 percent, which is even larger than the 0.30 percent drop in August. Even back-to-school sales couldn’t rescue this segment.

The Core CPI and CPI reports come out on Thursday, and I find the CPI report to be an oddity. The market anticipates that both reports will show an increase. While this can be expected for Core CPI since it excludes food and energy costs, I would have thought the CPI would have dropped for the same reason PPI is expected to drop. Energy costs have dropped significantly as of late, and I would have expected to see this reflected in the CPI.

Capacity Utilization and Industrial Production are both expected to post declines for last month, showing that the weakness in the manufacturing sector continues. The same can be said for the housing sector. The September reports for Building Permits and Housing Starts look like they will show contraction. As loans continue to get harder and harder for potential buyers to find, the housing sector will continue the slide.

As if this isn’t enough, this week also has the release of the Beige Book on Wednesday, the Philly Fed report on Thursday, the Preliminary Michigan Sentiment report on Friday, and a week full of earnings reports. If a majority of these reports come in worse than expected, and earnings consistently miss expectations, it could be a very grim week on Wall Street.

Earnings:
Tues: DNA, JNJ, PEP
Wed: EBAY, JPM, KO, WFC
Thurs: BAX, COF, C, GOOG, MER
Fri: HON

Source: This Week Provides No Relief, It Could Get Worse Before It Gets Better

After gaining nearly 670 points in little over a week, the Dow slumped more than 280 points. Financial stocks made up five of the six biggest decliners. Citigroup (C) dropped nearly 10 percent. American International Group (AIG), Bank of America (BAC), American Express (AXP) and JPMorgan Chase (JPM) all fell more than 6 percent.

This comes as little surprise to Taipan Daily editor Justice Litle. He says the latest rally in financial had no substance – except another shorting opportunity when the time is right. Wachovia (WB) is a case in point, says Justice… 

We saw this on Tuesday with Wachovia, another battered and beleaguered bank. Wachovia reported a whopping $8.86 billion loss — not chump change in anyone’s book — and yet the stock soared 27%.

If there’s any evidence that hope still springs eternal in the hearts of investors, this is it. Wachovia has a market cap of $36 billion as of this writing. It also has $62 billion worth of troublesome home equity loans on the books. What’s wrong with this picture?

Existing home sales fell to their lowest levels in a decade on Thursday. And yet, thanks to Fannie and Freddie trouble, mortgage costs are marching ever higher. JP Morgan reports that credit troubles are spreading to higher income earners. Bailing out the broken system could run anywhere from $25 billion to $100 billion. And this is the backdrop against which sad-sack lenders catch a bid?

You can’t fight city hall, and you can’t fight the emotions of the crowd. But you can wait patiently and profit with a timely strike once the frenzy wears off.

Your humble editor is skeptical that this latest financial rally will turn out to be anything of substance… except another shorting opportunity when the time is right.

When the financials really do turn the corner, chances are we’ll hear the sound of crickets, not the sound of cheers. True market bottoms tend to follow the form of T.S. Eliot’s “The Hollow Men.” They arrive not with a bang, but a whimper. And they’re almost never called by the likes of Barrons and The Wall Street Journal — this must be the turn, hooray! — on the very same day.

Source: Financials, Oil and Asia ETFs

US stocks are heading for weekly gains. This despite big quarterly losses results from financials Citigroup (C) and Merrill Lynch (MER) and missed estimates from tech giants Google (GOOG) and Microsoft (MSFT).

Think of it this way, says Penny Sleuth editor Wayne Mulligan: “If you want to know whether or not we’ve reached a bottom, then all you need to do is think about the consumer.”

Consumer spending is 70% of US GDP. And consumer spending is slack right now. So calling a bottom to the bear market would definitely be immature.

It’s pretty clear times are tough right now. With three quarters of the population thinking we’re already in a recession and the market sinking by the day, I don’t think there’s any more debating as to whether or not we’re in bear market territory.

So the question for many folks has become: Are we at the bottom of the market yet?

In fact, that’s what inspired this question on TickerHound (and in turn, inspired today’s article):

“In my humble opinion, if you want to know whether or not we’ve reached a bottom, then all you need to do is think about the consumer. In other words, think about yourself and the millions of other Americans out there who are:

1. Watching the values of their homes drop
2. Spending twice as much at the pump than they did a year ago
3. Watching their net worth shrink by the day

“And then ask yourself, has anything changed over the last couple of months? Have things gotten any better or have they gotten worse?”

Unless you don’t own a home, drive a car or do your own grocery shopping, then you might be tempted to say, “Things ain’t so bad.” But if you can relate to what I’m talking about, then you already know the answer this question.

Calling a bottom right now would definitely be premature. Consumer spending drives 70% of our GDP. You cut the consumers’ ability or desire to spend and you’ll watch this economy slow down pretty darn quick.

For more on this TickerHound question, click here…

Source: Is Calling a Bottom Premature?

Were, as The New York Times reports today, Fannie Mae (FNM) and Freddie Mac (FRE), which guarantee about $6 trillion dollars in US home loans, unduly “insulated” by Capitol Hill?

Did Congress make it implicit to the companies that any losses would be guarenteed with taxpayers’ hard-won cash?

The dominant role Fannie and Freddie play today is no accident. The companies, Wall Street, mortgage bankers, real estate agents and Washington lawmakers have built up an unusual and mutually beneficial co-dependency, helped along by robust lobbying efforts and campaign contributions.

In Washington, Fannie and Freddie’s sprawling lobbying machine hired family and friends of politicians in their efforts to quickly sideline any regulations that might slow their growth or invite greater oversight of their business practices. Indeed, their rapid expansion was, at least in part, the result of such artful lobbying over the years.

And as Fannie and Freddie grew, so did the fortunes of Wall Street, which reaped rich fees from issuing debt for the two companies, as well as the mortgage and housing industries, which banked billions of dollars as the housing market boomed.

Even after accounting scandals arose at the two companies a few years ago, attempts to push through stronger oversight were stymied because few politicians, particularly Democrats, wanted to be perceived as hindering the American dream of homeownership for the masses.

Lots of perks came with Fannie and Freddie’s charters and government backing: exemptions from state and federal taxes, relatively meager capital requirements, and an ability to borrow money at rock-bottom rates.

Lots of perks, indeed. One of them being a bailout if anything should go wrong. Reuters reports that “a possible intervention by the Bush administration to help the government-sponsored mortgage enterprises could happen as early as Monday morning. That is around the time Freddie Mac is due to sell $3 billion of short-term debt, in a barometer of market appetite for its securities.”

Last week, Dan Denning in The Daily Reckoning Australia saw the writing on the wall. He said “the whole credit crisis would look like mere child’s play should a genuine crisis unfold in the quality of the debt owned and guaranteed by Fannie Mae and Freddie Mac…”

Fannie and Freddie are surely doomed now. First, U.S. Fed Chairman Ben Bernanke told Congress both are well capitalized. Haven’t we heard this one before?

Isn’t this what Bear Stearns said before it collapsed? Didn’t Citigroup (C) say it was well capitalised, and then ask for more money? Why would anyone believe these investment bankers anymore when they tell the public they are well capitalised? It’s almost like the moment a CEO of a company says it’s “well capitalised” you should be prepared for a nasty shock.

We don’t mean to alarmist about the GSEs. But as we explained to a colleague over the weekend, our job here at the Old Hat Factory is not to tell you what you may already know, or can read in the papers. Our job is to tell you about the low-probability but high magnitude investment events that could affect your money. And just to be clear, the collapse of Bear Stearns and the whole credit crisis would look like mere child’s play should a genuine crisis unfold in the quality of the debt owned and guaranteed by Fannie Mae and Freddie Mac.

It would be the equivalent of that absurd scenario in that global warming movie a few years ago, where the Gulf Stream stops flowing and the entire Northern hemisphere enters a new ice age…in a matter of days. The insolvency of the GSEs is as close as you’re ever going to want to get to Financial Doomsday and live to tell about it.

And Dan, like Bill Bonner, says a government bailout of Fannie and Freddie could ruin the U.S. Treasury market…

The U.S. government can move to stabilise that market by guaranteeing the debt. But we believe that if it does so, it will lead directly to the popping of the other big remaining bubble in the credit markets: the U.S. Treasury market (bonds and notes).

In the sixty three years since the end of World War Two, there hasn’t been a much safer investment on the planet than U.S. Treasury bonds, at least according to conventional wisdom. But the credit rating agencies, for what they’re worth, would have to take a serious look at downgrading the credit quality of sovereign American debt if the U.S. government changed its implied backing of GSE debt to an explicit backing.

The consequences of a (much deserved) lower credit rating for the U.S. government are too long to go into here. Suffice it to say the bond market won’t wait. The trouble is, what do you do with your money if government bonds aren’t safe? Cash is one answer. Owning some form of your wealth in precious metals is another. Gold should regain ground against oil in the second half if the GSE story continues to unfold in nightmare fashion.

In any event, it hasn’t quite come to that. Congress, Obama, and McCain must all be hoping that the GSE problem just goes away, at least until after the election. But the market will not wait. It could be a brutal summer.

The cockroaches are starting to cover the floor.

Back in November, we ran a chart of the iShares Financial ETF (IYF). This basket of Wall Street banks was down from its peak around $120 a share to $100. A few cockroaches had crawled out of the mortgage mess and into mainstream headlines. I forecasted more would crawl out of the heap before it was all done.

Today’s chart confirms that forecast. This fund is loaded with the likes of Lehman Brothers (LEH), Citigroup (C), American Express (AMX), and all those on the hook for thousands upon thousands of silly loans. The cockroaches have arrived, and IYF’s chart resembles the last second of a javelin toss.

The IYF has been sliced in half in one year. There is a crisis in Big Finance right now… and crisis leads to fantastic asset bargains. But damage like this takes a long time to repair. My advice? Check back on Big Finance in a few years.

Source: As Predicted, the Cockroaches have Arrived

And, ominously, the price of contracts used to speculate on the creditworthiness of Fannie Mae and Freddie Mac and to protect against a default doubled in the past two months.

What about the government’s implied guarantee of the debt held by the companies? It seems investor confidence in short supply.

Stocks in Fannie Mae have shed 73 percent in the past year on the New York Stock Exchange. Meanwhile, Freddie Mac dumped 60 percent.

Yesterday currency expert Chuck Butler said the markets were smelling blood in the water. Chuck says the markets now  think Fannie and Freddie will need about $75 billion in new capital to remain viable companies. But a rumored bailout didn’t happen. More from Chuck:

Could these two be the next ‘risk events’ that I keep talking about in the U.S.? It’s all rumors and hearsay now.. But like the song goes… There’s no smoke without a fire…. There’s no heat without a flame…

Or… Could it be the news from Indy Mac, who agreed with regulators to halt new loans under an agreement with the regulators, and then announced that they would cut half its staff as mortgage losses mount? Again, folks, I’m not picking on these companies because I have some vendetta against them… I’m just reporting what’s on the news wires, as something that could affect the value of the dollar in the long run.

Jennifer Yousfi in Money Morning says the end of the housing slowdown is a long way off…

We might be getting closer to the bottom. In fact, existing home sales rose in February, the first such increase in the past seven months. But it’s probably too soon to get excited about a full housing recovery.

“It looks like this may be a temporary pause,” Nigel Gault, chief U.S. economist at Global Insight Inc. in Lexington, Mass., told Bloomberg News after the existing homes sales report was released. “The price declines have helped, and people are still getting financing, though not on the good terms they could before.”

“We’re still a long way from a recovery in housing,” Gault said.

Where to put your money as the credit crisis rollicks on? Invest abroad, says Jennifer. Anywhere but the US…

With foreign economies growing that briskly, there will be plenty of profitable investment opportunities available in the 12 months to come.

With growth sputtering and a recession still possible here at home, investors should turn their attention to such U.S.-based multinationals as McDonald’s Corp. (MCD) and Yum! Brands Inc. (YUM). Both firms derive substantial portions of their sales from overseas markets, where growth is likely to continue over the next 12 months, regardless of what happens to the U.S. economy.

And while these firms offer significant foreign-market exposure, the fact that they’re U.S. based means such corporations as McDonald’s, Yum! Brands and such others as The Coca-Cola Co. (KO) and PepsiCo Inc. (PEP) offer the transparency of U.S. financial reporting requirements and the relative protection of the U.S. investment-regulatory system.

But if you prefer to invest more directly in foreign growth, then Hutchinson – the Money Morning contributing editor – says to try South Korea’s largest wireless service provider, SK Telecom Co. Ltd. (SKM). SK is well positioned to capitalize on the growing Asian markets. Likewise, the Hsinchu, Taiwan-based Taiwan Semiconductor Mfg. Co. Ltd. (TSM) [commonly referred to as TMSC], the world’s largest dedicated semiconductor foundry, is another Asian tech company that is not currently overvalued and should do well in the New Year, Hutchinson says.

Traditional inflation-sensitive investments such as currencies and commodities are also good plays for 2008, investment gurus as Fitz-Gerald and “adventure-capitalist” Jim Rogers both say.

The PowerShares Agriculture Fund (DBA), operated by German giant Deutsche Bank AG (DB), is intended to reflect the performance of four commodities in the agriculture sector: Soybeans (31.13%), wheat (28.87%), corn (23.43%) and sugar (16.58%). These include some of the key agricultural commodity plays that Rogers advocates.

Another is Van Eck’s recently launched Market Vectors Agribusiness Exchange-Traded Fund (MOO). Like the PowerShares Fund, this reflects the agriculture industry but in a different way. Instead, the ETF’s holdings reflect returns seen from agriculture chemicals (34%), agriproduct operations (33.5%), agriculture equipment (24.3%), livestock operations (5.6%) and ethanol/biodiesel (2.3%).

For investors who have the constitution of a Contrarian investor – as well as some patience and a long time horizon – it may be well worth a look at some of the beaten-down financial-sector stocks that state-run sovereign wealth funds are buying into in a wholesale manner. Although many U.S. investors are preaching caution – if not total avoidance – when it comes to companies involved with the American financial-services sector, these government-run investment pools clearly view such stalwarts as Citigroup Inc. (C), UBS AG (UBS), Merrill Lynch & Co. Inc. (MER), and Morgan Stanley (MS), as bargain-basement investment opportunities.

More bad news from the US housing market: in the worst housing slump since the Great Depression, 67,967 homeowners with mortgage insurance fell at least 60 days behind on their loans, compared with 40,687 who got back on track.

Meanwhile, US financials continued their three-day slump on fears banks and bond insurers are running out of cash.

Citigroup (NYSE:C), Merrill Lynch (NYSE:MER), Lehman Brothers (NYSE:LEH) and JPMorgan Chase (NYSE:JPM) were all down at close of business yesterday. Shares in Goldman Sachs (NYSE:GS), however, rose in morning trade by just 0.50%.

Spooked by a Combination of ‘Flatations’

Bill Bonner

Over $140 and climbing…playing hell with all sorts of investments…Bond vigilantes emerging from the land of nod…no country for old men with money…Letting the undertakers decide when you are ready to die… no such place as ‘nowhere’…and more!

What not to do with your money now…

It has been the worst June in 77 years, says Bloomberg. In June of 1930, the Dow lost 18%. So far, it is down 9.4% this month. Since this is the last day of the month, we presume that is where it will stay.

The rest of the news is not much better. Oil closed over $140 a barrel on Friday. OPEC’s president says it could go to $170 by the end of the year.

And the New York Times says the number of people who can’t pay their mortgages continues to grow. There were 2.6 million of them six months ago. Now, the figure has risen to 3 million.

The combination of ’30s-style asset deflation and ’70s-style consumer price inflation has spooked investors everywhere.

“Falling prices grip stock markets around the world,” reports the Financial Times.

Where can you turn for relief, the paper asks? “Nowhere,” is the answer it gives.

Nowhere?

All the world’s stock markets have taken losses, most of them bigger losses than those on Wall Street. Property prices, too, are headed down in most places. So, don’t bother to diversify. It barely matters where you look – asset prices are sinking.

“Diversification no longer works,” writes Tony Jackson in the Financial Times. Mr. Jackson says rising inflation rates are playing hell with all sorts of investments. Bonds, equities, real estate – anything that produces a fairly steady stream of income – is vulnerable, because the money you receive, whether as dividends, rent or interest, becomes less and less valuable. Result: big drop in assets prices.

So, how do you protect yourself? You already know the answer, dear reader. But let’s look at the possibilities to make sure we haven’t missed something.

Let’s begin with real estate. Over the long run, property usually stays even with inflation. But the trouble now is that this bout with inflation begins when property prices are already high… and coming down. Real estate prices are adjusting downward after a record bull market. Inflation just makes the correction worse, since wherever prices end up in nominal terms, they’ll be even lower in real terms.

The same could be said of stocks, but with slightly less conviction. U.S. stocks fell heavily last week. But they’re still down less than 15% from their all-time high. You could even argue that they’re cheap; that is, if you take current super-low bond yields into account. But as inflation rates go up, so do bond yields – normally. Then, stocks go down with bond prices. Why? Because when bond prices go down, yields go up, making bonds more attractive than stocks.

Of course, not all stocks will do badly. If we are replaying the ’70s, we’ll find that oil stocks provide a return above inflation. Gold stocks too could produce spectacular rates of return for a few years. But most stocks will probably go down.

Bonds are always vulnerable to inflation. Remember the ‘bond vigilantes’? These were the guys who dumped bonds as soon as they caught a whiff of higher inflation in the air. These fellows went to sleep during the Reagan Era. Paul Volcker had inflation under control; bonds were in a long-term bull market; the vigilantes had nothing to do. Once in the land of nod, they stayed asleep for the next 20 years. Only recently have they begun to stretch and yawn.

But real yields are still so low; the vigilantes still have not completely wiped the sleep from their eyes. In the United States, for example, the real yield on a 10-year T-Note is MINUS 2%. And last week, the yield on the 10-year T-note fell below 4%. We don’t know what to make of it. But as inflation increases, that yield is going to rise – meaning, the value of bonds will go down.

No, dear reader, bonds are no country for old men, at least not for old men with money. Not when inflation is going up.

How about treasury bonds linked to inflation, or TIPS as they are called? Nope. Don’t even think about it. For one thing, when the bond market goes down, inflation-adjusted bonds go down too. Because there are two parts to the value of these bonds – there’s the regular part, which acts like any other bond, and there’s the inflation-adjusted part, designed to offset the loss from inflation. The inflation-adjustment only offsets inflation, not the loss from the bond market.

And even the inflation-adjustment is no sure thing. The people who decide how much inflation compensation you get are the same people who have to pay you for it. It is a bit like letting the undertakers decide when you are ready to die; the conflict of interest may be good for their business, but it might be bad for you. What is good from the government’s point of view is a low official inflation number. Billions and billions of dollars depend on the CPI calculation – everything from tax rate adjustments, Social Security payments, to monetary and fiscal policies. In a better world, perhaps we would have honest inflation numbers. But in a better world, we wouldn’t need them.

*** Stocks are out. Bonds are out. Real estate is out.

Commodities? That’s where the money has been made lately. Commodities have just had their best 6 months in 35 years. But our guess is that many are in bubble mode and will continue to rise as the U.S. Fed pumps more liquidity into the system. But betting on commodities is not a one-way wager. Tony Jackson tells us that in the 1970s, commodity prices, adjusted for inflation, were flat in the United States and down in the United Kingdom. Besides, remember that high prices cure high prices. As commodity inflation bubbles over to retail price inflation, consumers cut back. Demand falls. The economy slows. Commodity prices drop.

It may be true that commodity prices will continue to rise for a few years more. It may even be true that real commodity prices will be higher 10 years from now than they are today. But at today’s prices, looking for safety in the commodities market is like protecting your son from bicycle mishaps by buying him a motorcycle. You’re simply trading a slow risk for a fast one.

How about emerging markets? Same problem. They’re risky anyway. Inflation doesn’t make them safer. It just makes alternatives to them less safe too.

So, what does that leave? Nowhere? Nah… the FT is wrong. There’s no such place as “nowhere.”

More about where your money should be… tomorrow…

Until then,

Bill Bonner
The Daily Reckoning

Source: Spooked by a Combination of ‘Flations’

 This Sector Stinks… But Here’s How You Can Predict The Rebound

Some would say that this sector currently resembles animal waste. It’s certainly emitted an overpowering stench across Wall Street in the past year. And like animals fighting for survival, it appears the players have begun to turn on each other.

On Thursday, Goldman Sachs (NYSE: GS) downgraded one of its fellow financial sector members, Citigroup (NYSE: C), slapping the rare “Sell” sign on the company. But Goldman wasn’t done. It went a rather shocking step further and actually advocated shorting Citi as well, as it cut the target price on Citi from $20 to $16. The decision was part of a “pair” trade in which it suggested investors sell Citi and buy Morgan Stanley (NYSE: MS).

The news sent Citi shares tumbling to a 10-year low, hot on the heels of Goldman’s prediction that Citi will write off a further $8.9 billion in debt for the second quarter. It also projected a $0.75 per share loss for Citi during the current quarter, compared with its earlier forecast of $0.25 per share in profits. The full-year loss could total $1.20 per share, versus an earlier projection for a $0.30 per share profit. And in turn, that could force Citi into its second dividend cut this year.

That’s one heck of a downward revision.

Admiring the scrap from afar, Wachovia (NYSE: WB) then decided to jump in and issued a “Sell” on Goldman.

Like a farmer fertilizing his crops, the financial sector is spreading its muck far and wide. Other analysts, including Banc of America Securities also project a $3.5 billion second-quarter loss for Merrill Lynch (NYSE: MER).

Goldman, of course, goes a step further, pegging a $4.2 billion second-quarter write-down for the firm. So what is an investor to make of this?

Wanted: $65 Billion

One week ago, Goldman analysts declared that American banks need another $65 billion in capital to handle the fallout from the credit crunch that has inflicted a savage beating on the sector – and isn’t expected to peak until 2009.

William Tanona, the Goldman guy responsible for the Citi downgrade and short sell recommendation, has downgraded the entire brokerage sector from “attractive” to “neutral.” He states that the recovery will take a long time because fundamentals have been clobbered.

But if you look across the financial sector board, there’s a very interesting development occurring — one that is eerily familiar to the last big US sector blowup…

History Repeating… From Dotcom Dogfight To Financial Fracas

Towards the end of the dotcom collapse, all the big names that had been flying high and puffed themselves up at the beginning of the boom, then throughout the rise, started to issue downgrades and sell recommendations once the mess began to hit the fan.

It was the very definition of capitulation.

What’s odd, however, is that the very definers did not heed their own advice and turned on each other (and subsequently capitulated) at the wrong time.

And it’s happening again – except this time with the financial sector.

Most of the big financial firms are issuing “Hold” or “Neutral” recommendations on each other (in investment lingo, these verdicts are merely soft terms for a “sell”). In some cases, like we saw Goldman do on Thursday, they’re issuing full-on sell recommendations.

Bottom line: The current rout in financial sector shares might smell awful to the simple onlooker. But smart investors should know that it smells like the beginning of the end of their collapse, too.

I took a look at the beaten-down financials after Goldman issued its downgrade and “sell” recommendation on Citi and some of them actually rallied a little. What does that tell you?

Don’t look to the big name, attention-seeking analysts to tell you when to buy. Instead, turn to them when they tell you to sell. That’s when you’ll know that the bottom in financials is near.

Karim Rahemtulla

P.S. You’d have to be crazy to buy Citigroup now, right? Conventional wisdom might say so. But the Xcelerated Profits Report team are masters of the contrarian play. In keeping with its mission to show any investor “how the pros make money,” using the same sophisticated investment strategies that Wall Street’s top investors use every day to build wealth, the team recently issued a deep-in-the-money covered call play on Citi.

At the time, this gave investors a chance to own Citi for a 50% discount. In fact, we still have the opportunity to buy Citi at 30% below current levels. We like the fact that Citi has raised approximately $42 billion since last fall – and are confident that in greatly hedging our downside risk, we’ll be in an excellent position when the sector rebound kicks in. For more details on all our other “pro” recommendations – and many more to come – simply click this link.

Source: This Sector Stinks… But Here’s How You Can Predict The Rebound

Tanona downgraded US banks to “neutral” from “attractive” and added Citigroup to Goldman’s “Americas conviction sell” list, Reuters reported.

“We see multiple headwinds for Citigroup including additional write-downs, higher consumer provisions as a result of rapidly deteriorating consumer credit trends, and the potential for additional capital raises, dividend cuts, or asset sales,” Tanona wrote.

To little surprise, Citigroup’s shares sunk in morning trading, falling below their previous 52-week low of $17.99.

Citigroup has shed more than $46 billion in write-downs and credit losses since the subprime crisis began in mid-2007. Those losses have forced the struggling bank to raise $42 billion in emergency capital, primarily through cash infusions from foreign investors and sovereign wealth funds.

For the second quarter this year, Tanona expects the bank to post a loss of 75 cents per share, a full dollar down from his previous forecast of a 25-cent per share profit.

In January, Citigroup slashed its dividend by 41% to 32 cents, but Tanona said another cut may be necessary to preserve an annual $3.5 billion in capital in the face of dry earnings.

“Given the firm’s current level of earnings power, we do not believe the dividend is safe,” he wrote.

Merrill in the Crosshairs

Meanwhile, Merrill Lynch & Co. Inc. (MER), the world’s largest brokerage firm, may have to shed $4.2 billion in write-downs, Tanona wrote.

He expects Merrill to post a second-quarter loss of $2 a share, down significantly from his earlier forecast of a 25-cent-per-share profit. For the year, his previous forecast of an 8-cent-per-share profit is now a loss of $3.55 per share.

The latter is a strong signal that the downstream economic outlook in the second half isn’t as promising as forecast.

“The turnaround in business trends that we had been expecting in the second half of 2008 may not occur as quickly as we should have thought,” Tanoma wrote.

Despite the waist-deep troubles many financials are in, Money Morning Investment Director Keith Fitz-Gerald believes that some still represent a solid long-term investment.

And his favorite is Citigroup.

“Citi is trading for a pittance,” Fitz-Gerald said. “Value investors will recognize this as important because history shows that the lower P/E ratios are when you make an investment, the better your overall returns tend to be. Generally, large globally diversified companies are considered bargains at a P/E of 12, which makes Citi a screaming deal at 7 or 8.”

Source: Goldman’s Crystal Ball: Citigroup, Merrill are in Serious 2Q Trouble