I can’t say I blame them. After all, the company did make a foolish foray into the real estate lending business. And it did so at precisely the wrong time – the top of the market. In turn, like many banks, it got sacked as loan losses mounted.

At that point, forget a takeover. Bankruptcy appeared more imminent. And the stock quickly reflected this widely held belief, plunging by 95% from its 2007 high to trade below $1.

Unsurprisingly, many investors sprinted away from the company. But here’s what most of them don’t understand: Beneath the muck of E*Trade’s real estate operations, it possesses a valuable asset – its brokerage business…

For example, even during aterrible year for stocks in 2008, E*Trade (NASDAQ:ETFC) still managed to grow its account base by 6% and added $6.4 billion in customer assets.

It wasn’t a fluke either. E*Trade has continued to grow its brokerage business in 2009.

CEO, Donald Layton, sums it up: “Our online brokerage business is thriving… volumes are up versus last quarter, our average commission per trade is higher, and interest spreads are much improved.”

If it weren’t for the company’s real estate operations, shares would be soaring based on such comments. But therein lies the opportunity.

A Risk Worth Taking for E*Trade’s Rivals

With real estate operations weighing down its share price, suitors like TD Ameritrade (Nasdaq: AMTD) and Charles Schwab (Nasdaq: SCHW) can scoop up E*Trade’s most valuable asset at a steep discount. Both companies certainly possess the stability and financial resources to pull off a deal.

So what’s the holdup? Nothing… anymore.

I’m convinced that the only thing holding up a takeover is the uncertainty surrounding E*Trade’s real-estate loan portfolio. But that obstacle is quickly disappearing.

On Monday, E*Trade revealed that delinquencies continue to drop. In fact, over the past two months, delinquencies for its home-equity portfolio (its largest exposure) fell by another 7%, having fallen by 10% in the prior period.

Meanwhile, overall delinquencies remained flat, clearly indicating that E*Trade’s real-estate portfolio is stabilizing.

When we factor in all the capital the company raised to insulate itself from further losses, the risk to potential suitors appears manageable. And if suitors don’t act quickly, they’ll miss out on the opportunity to buy E*Trade’s brokerage assets at a discount. Shares have already tacked on 11% this week.

Here’s why I’m believe the situation is even more urgent for us…

Why You Should Buy E*Trade Today

A few weeks ago, E*Trade’s largest shareholder, Citadel Investment Group, scrapped plans to start unwinding its position. The move suggests a deal is in the works. Why else would the firm have such a sudden change of heart?

The rumor mill continues to heat up about the possibility of deal. And a strong uptick in call options trading adds credibility to the rumors. In fact, a Yale University study confirms that heavy spikes in options trading precede takeover announcements.

Most compelling of all, TD Ameritrade CEO, Fredric J. Tomczyk, said on Monday that he expects more consolidation to come in the industry.

Since his company is one of the most obvious buyers, he could be foreshadowing a deal. And at such an attractive price, E*Trade represents a risk worth taking for him… and us.

Bottom line: With the real estate risks subsiding, a takeover offer could come any day now for E*Trade. And if you don’t buy shares today, you might not get another chance.

Good investing,

Louis Basenese

Source: E*Trade (Nasdaq: ETFC): Why You Should Buy This Stock Before It’s Too Late

In fact, some stock market mavens are even starting to bandy about the “E” word – exuberance – and say it’s time to adopt a highly defensive position, or to even take some money off the table.

“Awhile back, I said that fair value on the Dow Jones Industrial Average was 7,800 – and that was if the economy was operating efficiently,” said Money Morning Contributing Editor Martin Hutchinson, a former international investment banker who now operates the Permanent Wealth Investor trading service – and who was recently cited by Slate magazine for having called the stock-market bottom. “But the economy isn’t operating efficiently. We’re rolling up huge deficits, and are rolling out huge stimulus packages. Those will both be highly inflationary. I’d say that – right now – fair value on the Dow was about 6,500 to 7,000, though it could easily bottom out at around 5,500.”

The closely watched Dow zoomed 214 points, or 2.6%, on Monday to close at 8,426, although it dropped modest 16.09 points to close at 8,410.65 yesterday (Tuesday).

U.S. stock prices have been on a two-month roll. On Monday, the Standard & Poor’s 500 Index gained 29 points, or 3.4%, to close at 907, a four-month high. That broad index, used by investing professionals to benchmark the market, opened the year at 903.25. It closed yesterday at 903.8, meaning it’s actually in positive territory for the year.

The tech-heavy Nasdaq Composite Index jumped 44 points, or 2.6% Monday, to close at 1,763. Even with yesterday’s 0.54% decline, the Nasdaq is up 11.0% for the year.

It’s not just the fact that the market has bounced back that has Hutchinson and some other investors concerned – it’s the forcefulness with which stock prices have escalated. After closing at a 12-year low on March 9, the S&P 500 index has rallied about 34%.

Investors have become increasingly optimistic that the U.S. government finally has a handle on the credit crunch and the financial crisis that’s grown out of that nightmare of bad debt and parsimonious lending. There’s a belief that the U.S. housing crisis has reached bottom. Even Money Morning’s Hutchinson says that the rate of decline in the U.S. economy has almost certainly slowed substantially, meaning a bottom may not be far away.

But a bottoming out in the economy doesn’t necessarily mean the U.S. economy’s many problems are at an end, Hutchinson says. With all the stimulus money flowing through the economy, inflation is certain to be a problem, meaning interest rates have to increase, Hutchinson says.

For instance, during the 1990s, inflation averaged 2.9% and the 10-year Treasury bond averaged 6.67%. The gross domestic product (GDP) deflator inflation index was at 2.9% for the first quarter of this year, and yet the 10-yearTreasury was trading at 3.15%, Hutchinson says. That means interest rates have to increase – a lot, a process that’s certain to blunt an economic recovery, he believes.

And if that happens, U.S. stock prices – ahead of themselves already – will drop back, as well.

It was back in mid-October when Hutchinson said the fair-value level of the Dow was 7,800. To drop back to that fair-weather/fair-value target of 7,800 from its current level, the 30-stock, blue-chip index would need to fall 7.0%

That’s more than just a modest decline, and would clearly be painful in its own right. But the Dow would have to drop an alarming 17% to 23% to reach Hutchinson’s foul-weather/fair-value range of 6,500 to 7,000, and a downright sickening 35% to hit his possible market bottom of 5,500.

And Hutchinson isn’t the only investment expert preaching caution.

Take Pacific Investment Management Company LLC’s (PIMCO) fixed-income guru Bill Gross, who says investors are far too optimistic about the U.S. economy’s near-term prospects.

“Do not be deceived by the euphoric sightings of ‘green shoots’ and the claims for new bull markets in a multitude of asset classes,” Gross wrote in PIMCO’s May outlook. “Stable and secure income is still the order of the day.”

In theory, the stock market is forward-looking, meaning stock prices reflect a future – three to six months down the road – that is obviously unknown to investors. The hard-charging rally of U.S. stocks in recent weeks has prompted an even stronger belief that the economic rebound is at hand, and that the recession that started in December 2007 may soon be over – if it isn’t already.

That doesn’t mean there are no profit opportunities available. Plenty remain. But it does mean investors need to invest cautiously, and may need to make some profit plays more suitable for bear-market environment – just in case.

Some “smart-money” strategists say that it’s time to take money off of the table, MarketWatch.com reported. In a recent research call, for instance, Raymond James Financial Inc. (NYSE: RJF) market strategist Jeffrey Saut says he has put his trading account all into cash, and has taken defensive positions (typically those that are designed to rise in price if the market falls) in case of a correction in stock prices.

“We have made a lot of money over the last eight weeks and continue to think the trick from here will be to keep that money,” Saut wrote in that research call.

Converting your profits to cash is one way to play this uncertain stretch, Hutchinson says. But there are several other strategies that will position you to continue generating profits, while also hedging against potential market unpleasantness. In his Permanent Wealth Investor trading service, Hutchinson says to:

• Buy high-yielding stocks for both income and capital gains.
• Buy gold both to profit, and to hedge against the inflation that’s certain to arise from the big government spending programs.
• And buy so-called “inverse funds,” to hedge and to profit. One such suggestion is the ProShares UltraShort 20+ Year Treasury Fund (NYSE: TBT), which seeks investment results that correspond to twice the inverse daily performance of the Barclays Capital 20+ Year U.S. Treasury Index.

A new bear market isn’t a foregone conclusion, either. U.S. Federal Reserve Chairman Ben S. Bernanke says the U.S. recession could end this year, and says that economic activity could pick up substantially in the year’s second half.

And there’s also an interesting wildcard at play. It’s a bit of anecdotal evidence that has proven bothersome to some investing professionals because it doesn’t fit with the way market rallies typically play out.

In most stock-market rallies, the initial catalyst comes from the big institutional players, who ignite the upturn. As the media drumbeat of the rally grows stronger and louder, retail investors start to join in – a little at a time at first, but then in growing intensity. By the time the main group of retail investors make the move, however, it’s usually almost time for the institutional players to cash out, since the trend they invested to profit from is typically almost played out, MarketWatch reported.

That’s pretty much what happened during the dot-com bubble, and is why individual investors took it on the chin.

This time around, however, it’s been different.

But this time around, anecdotal evidence – such as trading data from online brokers E *Trade Financial Corp. (Nasdaq: ETFC) trade and TD Ameritrade Holding Corp. (Nasdaq: AMTD) seems to suggest that it’s been the retail-investing crowd that’s driven this rally from the very beginning, while institutions have stayed on sidelines, cash in hand, Barry Ritholtz, chief executive officer and the director of equity research at Fusion IQ, told MarketWatch.

“The ‘dumb’ retail money is leading the gains,” Ritholtz said.

That could end up being good news for the stock market: Institutional investors, afraid to have missed the rally, might step in more forcefully, fueling a new-and-longer leg of the current bull market for U.S. stock prices.

If it turns out that this is just a “bear-market rally,” however, bad economic news will halt the rally and cause investors to punt.

The bottom line: Over the long haul, economic reality will guide stock prices, Ritholtz says.

“In this type of environment, the market is guilty until proven innocent,” he said. “We have to assume this remains a bear market until we see a more normalized economy, a recovery in some employment measures, and real estate to actually start improving – not just to stop free falling.”

Source: Is the Stock Market Rally For Real?

• With Morgan Stanley’s (MS) $2.2 billion loss in the third quarter, the carnage from the credit crisis passed the $1 trillion mark. About 67% of that came from U.S. financial firms, and about 30% from European firms, Bloomberg reported.

• A day after the U.S. Federal Reserve’s deepest rate cut in history, the dollar fell hit fresh lows against other currencies. It fell toward a 13-year low against the yen and a two-and-a-half-month low against the euro, Reuters reported.

• Gold and silver prices rallied yesterday (Wednesday) as the dollar declined. February gold futures climbed 4% to $872.90, while silver for March delivery climbed 7% to $11.45 an ounce on Globex, MarketWatch reported.

• A strengthening yen and plummeting car sales forced Honda Motor Co. (ADR: HMC) to slash its full-year profit forecast by 62%. Japan’s second-largest automaker may also post its first half-year loss in 11 years, Bloomberg reported.

• Trying to cut costs, troubled cell-phone maker Motorola Inc. (MOT) will suspend 401(k) contributions to worker retirement plans, freeze its pension plan, stop some raises and skim the salaries of two top executives.  “It’s a small step in the right direction, but it’s not going to save them either,” Nomura Securities technology specialist Richard Windsor told Reuters. “If you look at the degree the market has deteriorated since they last spoke to the Street, you could conclude that they will need more aggressive actions.”

• Europe auto parts supplier Valeo SA said it will cut 5,000 jobs, 9.3% of its workforce, in face of slowing demand for cars, Bloomberg reported. “For 2009, Valeo anticipates no improvement in production levels compared with the fourth quarter of 2008,” the company said in a statement.

• British retailer Woolworths will close its doors Jan. 5, leaving 27,000 people without jobs unless it finds a buyer. The 99-year-old retail company will close its 807 stores in tranches of 200 starting Dec. 27, Reuters reported.

• Online brokerage E-Trade Financial Corp. (ETFC) said it added a net of about 26,000 new accounts in November. However, total customer assets fell 42% since November 2007, and 8% from October, the Associated Press reported.

Global Investing Roundups Thursday, December 18th, 2008