Tilson says there will be “a headwind of continued losses for the better part of five years.” That’s because banks are facing more losses on residential and commercial real estate.

Tilson and Tongue expect additional losses at banks of more than $1 trillion. They also say US home-price drops could overshoot fair value of about 40%, to a decline of 50%.

T2 is selling selected bank stocks. Despite the “green shoots,” we advice readers invested in banks to consider doing the same.

Speaking to Reuters, Tilson said he really liked his bets that will profit when stocks drop, especially MBIA Inc (NYSE:MBI), which he says is so under reserved for losses that it will be seized and placed in runoff this year.

This from Mike:

If the global financial crisis has taught investors one thing, it’s that now is not the time to gamble with your money or your prosperity.

More companies have been bought, bailed out or bankrupted since this financial crisis began than most of us have seen in our lifetimes. And even as Wall Street’s dominoes keep falling, no one can be sure if the worst is over.

From here on – recession or not – targeting dividend stocks is one of the few strategies that will deliver income safely and efficiently.

In theory, dividends should prop up an investor’s portfolio during uncertain periods, or in market downturns. That’s because even if a company’s stock price falls, executives do all they can to maintain the firm’s dividend payout. That’s part of the reason that, over time, dividends have accounted for a major portion of investors’ total returns.

“Dividends are a nice anchor in a turbulent market,” said Judith Saryan, manager of Eaton Vance Dividend Builder Fund (EVTMX), FoxBusiness last year.

Or anytime. In fact, over the last 100 years, 40% of a stock’s total return is from dividends. That’s not surprising. According to a study by Ned Davis Research Inc.,  dividend-paying Standard & Poor’s 500 stocks rose by an average of 9.4% a year between 1972 and June of last year, well ahead of non-dividend-paying stocks, which rose by only 1.8% annually during the same period.

“Dividends are a sign of quality,” said Todd Ahlsten, manager of Parnassus Equity Income (PRBLX), said in an interview last year. “They force management to look at cash flow and how it invests in its business.”

But not all dividends are created equal. As losses mount, Standard & Poor’s 500 heavyweights have been putting their dividends on the chopping block, cutting or outright eliminating them for an indefinite time period.

And these aren’t fringe companies and chump change we’re talking about…

General Motors Corp. (GM), Ford Motor Corp. (F), Sprint Nextel Corp. (S), MBIA Inc. (MBI) – their dividends are gone.

And Citigroup Inc. (C), Bank of America Corp. (BAC), Fifth Third Bancorp (FITB) reduced their dividends to a mere penny. Fannie Mae (FNM) lowered its to 5 cents in August and hasn’t paid one since.

Nor does the list end there.

Just yesterday (Thursday), in fact, motorcycle icon Harley Davidson Inc. (HOG) slashed its dividend 70%, the first such reduction since 1993. The move was aimed at conserving cash, but sent Harley’s shares down 8%. in a move that was aimed at conserving cash. And the Dow Chemical Co. (DOW)– facing credit-market uncertainty, lower product demand and legal problems related to a failed joint venture – yesterday cut its dividend 64%, the first such move in the company’s 112-year history.

But there are still hundreds of companies holding their ground in the global financial crisis.

These firms understand that continued growth and success depends on a large body of investors. And to keep them on board the companies must maintain – and hopefully increase – their dividend payouts.

DRIPS Aren’t Dropping

With the stock market’s wrenching decline, many company’s shares are trading at bargain levels. A company that’s been able to maintain its dividend usually represents a better value to its shareholders.

In the reverse situation, where stock values soar, dividend yields fall, meaning income investors have to settle for lower returns.

So, with stocks down and yields high, income investors should consider starting or stepping up dividend reinvestment plans (DRIPS).

In DRIPS, the dividends investors would normally receive as cash are reinvested back into the stock under their name. To start, investors often don’t even need as much as the price of a full company share.

For example, if you invest $20 in a stock that trades for $100 per share, the DRIP will buy you one-fifth of a share of that stock. The dividend is reinvested accordingly, as well.

Over time, money is reinvested back into the stock, giving you more shares. And with more shares, the more dividend income you’ll receive.

Among other advantages, although there is usually a nominal transaction cost involved, the DRIPS’ automatic reinvestments allow investors to skip full-blown brokerage fees, which aren’t conducive to such small purchases.

Among the cons, most DRIPs require investors to be registered shareholders, which entails a little more paperwork than being a regular, or beneficial, shareholder. To enroll in a DRIP plan, investors must buy shares through a transfer agent. The process can take up to eight weeks before your account is opened and fully registered.

Some DRIP companies also have maximum amounts you can invest and hold in their stock. And they vary by time periods – monthly, quarterly, annually and lifetime.

For the public companies that offer the dividend plans, DRIPs provide a stable base of long-term shareholders. And often, these value-minded investors tend to buy more when share prices are down, as opposed to short-term traders, who are apt to bail out on a price decline.

For example, 71% of chemical company RPM Inc.’s (RPM) shareholders are enrolled in its DRIP. And more than 64% of Aflac Inc.’s (AFL) shareholders are enrolled in its DRIP, according to DRIP Central.

More than 1,600 public companies and American Depository Receipts (ADRs) have DRIPs, offering a wide choice of industry and market preference to potential investors.

But with so many to choose from, targeting the best ones can be a challenge without a broker helping you.

The Best DRIPs are…

The best DRIPs are from companies that have a high-yield and a track record of increasing their dividends.

In addition to RPM and Aflac, here are a few DRIP companies to keep your eye on. Not only have they hung onto their dividends in the worst financial crisis since the Great Depression, some have increased their payouts.

• Coca-Cola Co. (KO): There’s a reason “Coke” is the second most recognizable word in the world. The world’s biggest beverage-maker recently beat fourth-quarter earnings expectations, largely due to its ability to cut costs and promote demand with a rotating file of products. The company kicks out a 38-cent dividend every quarter. At its current share price of around $44.30, that’s a 3.45% yield. If that’s not enough, know that Warren Buffet owns 8.6% of the company.

• Intel Corp. (INTL): Intel is the market leader among chipmakers, dominating its competition by continually being the first to the market with the best product. It pays a 14-cent dividend every quarter, which at its current stock price represents a 4.07% yield.

• The Hershey Co. (HSY): The Pennsylvania-based candy and food maker has been a recession stalwart. It began paying dividends in 1930 – meaning it’s been making the quarterly payouts longer than most companies have even been around – and has been increasing them for 32 consecutive years, according to The Money Paper. Right now, its 30-cent quarterly dividend represents a yield of 3.32%. With its stock hovering a few dollars above its 52-week low, many of its DRIP investors are probably loaded up on Hershey shares like Halloween candy.

• Microsoft Corp. (MSFT): Microsoft is the largest software producer in the world, and has a firm grip on that title. The slowing demand for computers and computer software has taken a toll on Microsoft, but the projection of the industry and Microsoft’s dominance makes it one of the most stable tech stocks out there. Its current dividend yield is 2.72% on its shares, which kick out a 13-cent dividend every quarter.

• Exxon Mobil Corp. (XOM): Like the above companies, Exxon doesn’t need much of an introduction. The oil giant is one of the world’s largest companies, having paid investors dividends since 1882. Its 2.13% yield isn’t the highest in this small group of companies, but Exxon’s share price is one of the most stable.

If that’s not enough, here’s an extensive list of DRIP companies, and their minimum and maximum investment requirement.

It also details how much dividend income a company pays, how often, how long its paid dividends and whether it increased its dividend over time.

Editor’s Note: This is the latest installment of a new series that will explore ways for investors to recover from the U.S. financial crisis.

Source: For Dividend-Seekers, Financial Crisis Means it’s Time to Dip Into DRIPs

• Lukoil (OTC ADR: LUKOY), Russia’s second-largest oil producer said its new Artic oilfield would allow it to match last year’s production, Reuters reported. Oil output from Russia fell in the first six months of the year for the first time in a decade, due to aging infrastructure, maturing fields and heavy taxes.

• Williams-Sonoma Inc. (WSM), America’s biggest gourmet-cookware retailer, yesterday (Thursday) announced second quarter net income fell to $18.4 million or 16 cents per share, from $26 million or 23 cents per share in the same period the year prior. Sales worsened through the quarter as the “macro-economic environment deteriorated,” Chief Executive Officer Howard Lester said, Bloomberg News reported.

• Financial Guaranty Insurance Co. (FGIC) avoided regulatory intervention by having MBIA Inc. (MBI) reinsure a portion of its municipal bond debt, but still faces solvency issues according to CreditSights. “While the deal will boost capital supporting the remaining FGIC policy-holders, it does little to solve the company’s longer-term solvency issues,” CreditSights analyst Rob Haines said in a report issued yesterday (Thursday), Reuters reported.

• Diageo PLC (ADR: DEO), London-based maker of Smirnoff vodka, Captain Morgan rum and others, yesterday (Thursday) said it earned $2.8 billion (1.52 pounds), an increase of 2.7% over the prior year. Diageo shares traded in London closed up 2% on the day of the announcement, the Associated Press reported.

• Lehman Brothers Holdings Inc. (LEH) plans to layoff 1,500 employees. The battered investment bank will cut 6% of total employees prior to its announcement of third-quarter fiscal earnings on Sept. 15, The New York Times reported on its website yesterday (Thursday).

• Toyota Motor Corp. (ADR: TM) lowered its 2009 sales forecast to 9.7 million vehicles from a previous estimate of 10.4 million based on slower global demand. “The business environment is rapidly becoming more difficult. Things remain very uncertain, not just in the United States but in emerging countries and resource-rich nations as well,” Toyota President Katsuaki Watanabe told a press conference, AFP reported.

Source: Global Investing Roundups Friday, August 29th, 2008

Reuters reports that spot gold “was at $964.00/965.00 an ounce at 0951 GMT from $963.10/964.10 in late New York trades on Wednesday, when it fell more than 1 percent after oil prices tumbled.”

Gold and silver have been on a tear lately, says Taipan Daily editor Justice Litle. Soon the Fed is going to get carte blanche to ’save’ Fannie Mae (FNM) and Freddie Mac (FRE). You want to have a signicant portion of you portofolio in the yellow metal when they do…

As you may have noticed, gold and silver have been on a tear lately.

The good news is, it’s not too late to protect yourself — and get some big upside to boot — by buying gold. The uptrend in gold is still in early days, and the most spectacular gains are still a good ways off.

Why am I confident in saying this? Well, for one thing, We’ve been making the golden case in Taipan Daily for a good six months now… and in other venues long before that. Events have been playing out like clockwork thus far.

The Acid Test

There is a simple way to test whether a “thesis” is working, or rather, whether one’s big-picture views on markets are holding up.

If new developments, current events and ongoing facts on the ground continue to support your view, that suggests that your thinking is correct. If the thesis keeps getting blindsided or challenged by new events, though, that’s a sign that the thinking is off track.

Not to pick on them too much, but take Barron’s for example. Barron’s has served up multiple bottom-picking covers over the past six months, and every single one got whacked by Mr. Market.

Just off the top of my head, Barron’s readers were urged to buy financial stocks like MBIA (NYSE:MBI) and AIG (before they were cut in half yet again); they were told to buy General Motors (before the stock plunged and hit a 1954 low); and they were told more than once that it was time to be bullish on stocks overall (nope).

Now Barron’s is telling us “Home Prices Are About to Bottom.” I don’t know about you, but their enthusiasm doesn’t give me much comfort.

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Calling the Tune

In comparison, when it comes to what’s happening with gold, inflation and the financials, just look at a few examples of what’s been said right here.

• In April we wrote, “Neglected Gold Could Be a Monster Buying Opportunity”… and gave a number of reasons why. Gold is up about $100 an ounce since then.
• Six weeks or so ago we called Lehman Brothers “the new bellwether for financial stocks,” adding that, “If [Lehman or the Philly Bank Index] cracks, there could be another big downward whoosh in the financials.”
• In a mid-June piece titled Wall Street Fiddles While America Burns, Adam Lass observed, “The financial sector… has given up some 41% over the past 12 months… It is not done yet.” (Underscore emphasis his.)
• In March we talked about “The Fourth Branch of Power: How the Fed Is Set to Become More Powerful Than the White House.”

That last one might have seemed a little breathless at the time — but not so much in hindsight. Again, just look at how things are unfolding. As the markets wait to see which major bank will implode next, the idea of Fed as “Supercop” is gaining ever more traction.

The Fed and Treasury will soon be granted the right to purchase “unlimited stakes” in publicly traded companies like FNM and FRE. The general consensus is that there’s no move too drastic when it comes to saving the “system”… and so it’s only a matter of time before the Fed gets carte blanche to carry out its mission by “whatever means necessary.”

Source: As Financials Implode, It’s Not Too Late to Buy Gold

Moody’s Investors Service, subsidiary of Moody’s Corp. (MCO), downgraded MBIA to A2 from Aaa, and Ambac from Aaa to Aa. The downgrade caused MBIA shares to shed more than 13% of their value, with an 86-cent decline to close at $5.59 on Friday. Ambac shares fared a bit better, gaining 2 cents to close at $2.05.

Moody’s downgrades follow similar reductions from Standard & Poor’s and Fitch Ratings Inc.

Many even question MBIA’s very survival, as it lacks the $2.6 billion in capital needed to regain its Aaa rating, according to Moody’s.

MBIA Chairman and Chief Executive Jay Brown fought off critics, saying that “despite the change in our ratings from Moody’s, our financial condition is very strong.”

“We remain committed to maintaining capital strength for our policyholders and financial flexibility consistent with our goals of increasing shareholder value,” Brown added in a company statement.

The downgraded ratings may have had an immediate affect on the insurers’ share prices, but also raised more questions about the more than $1 trillion in securities the firms guarantee. Those securities become riskier with the downgrade of the guaranteeing firms, making it more likely that defaults will escalate.

“The trouble for the banks is that the protection provided by the monolines becomes ‘less effective’ as the credit ratings of the monolines are downgraded,” said Simon Adamson, an analyst at CreditSights, MarketWatch reported.

“In other words, the probability that the monolines will pay out on the contracts decreases,” he wrote in a note to clients last week.

Some see the decline in ratings as an open door to new competitors.

“The issue really is, would they ever be able to get back to a triple A rating and I would think that would be a very heavy lift for them,” billionaire investor Wilbur Ross said in an interview on Bloomberg Television on Friday. “On the other side of this credit crunch, people will be even more sensitive about ratings and the quality of the paper they’re buying.”

And it’s likely that the “other side” of the credit crunch is still far off, according to analysts at the Royal Bank of Scotland Group PLC (ADR: RBS).

RBS analysts have warned clients to brace for a full-blown crash in the global stock-and-bond markets in the next three months, as the conflicting realities of slowing growth and rising inflation paralyze the world’s major central banks – causing “all the chickens [to] come home to roost,” Great Britain’s Daily Telegraph newspaper reported.

The predicted swoon would cause the U.S. Standard & Poor’s 500 Index – already down 16% from its trading high of 1,576.09 reached Oct. 11 – to nosedive all the way down to 1,050 by September. For the closely watched, broad-based U.S. stock index, that would represent an additional decline of 20% from Friday’s close of 1,317.93- and a total decline of 33% from its Oct. 11 apex.

Source: Moody’s Joins Other Rating Agencies in Downgrade of Ambac, MBIA 

The PPI report will undoubtedly rekindle the inflation-versus-recession debate (with more than a few comments about stagflation thrown in for good measure).

While the wholesale inflation gauge (PPI) provides another look into how escalating food and energy prices are impacting the economy, the most recent moves in oil and gas may not be factored in for another month or two.

On an optimistic note, gasoline prices historically peak around Memorial Day and then fall throughout the remainder of the summer. As we’ve said here a number of times before, don’t expect that pattern to repeat itself this year [Indeed, please click here to check out a related story in this issue of Money Morning that details our expectation that oil-and-gasoline prices are headed even higher].

In this column four weeks ago, we told you to ignore a U.S. Energy Department forecast that gasoline prices at the pump would reach $3.73 a gallon before falling. In fact, I said flat out that the Energy Department was wrong. And Money Morning Investment Director Keith Fitz-Gerald shortly thereafter reiterated that belief that the Energy Department’s prediction was way off the beam. And how right we were – that price already has been surpassed and consumers in some parts of California and Hawaii are paying in excess of $4.00 a gallon.

Less than two weeks ago we actually boosted our target price for oil to $225 a barrel (remember that Keith Fitz-Gerald, now Money Morning’s investment director, was probably the first investment guru to predict triple-digit oil prices).

As noted, however, much of this won’t be reflected for a couple of weeks.

Wednesday’s release of the minutes from the last Fed meeting should provide investors with a bit more insight into the mindsets of central bank policymakers and just how likely they will be to stand pat on interest rates: In one of the most aggressive rate-cutting campaigns in the central bank’s history, policymakers have pared the benchmark Federal Funds rate seven times since mid-September. Investors expect the Fed to sit tight (and hold off on further rate activity) at least through the summer months.

More retailers will report this week [Target Corp. (TGT), The Home Depot Inc. (HD) but few surprise are expected at this point in an earnings cycle that – except for the discounters – has been full of disappointing retail-sales reports.

The Money Morning Story SNAFU

When they received their daily e-letter last Monday, sharp-eyed Money Morning readers noticed something peculiar about this column.

It seemed familiar.

There’s a very good reason they felt that way. They were right.

Due to a technical problem, and some human error, the column we’d put together for Monday’s newsletter was inadvertently replaced by the afore-mentioned April 14 story in which we’d told you that the Energy Department’s optimism about summer gasoline prices was wrong.

We replaced that story on the Web site with the correct piece – a warning about the week’s upcoming retail-sales reports, but we heard about the mistake. As we deserved to.

As bad as we felt about the mistake, we still found several positives. First and foremost, we were reminded yet again that we have a loyal following that reads our work closely and carefully – and for the most part enjoys and benefits from what we do.

And if you all had to read one of our “old” stories a second time, I’m happy to say that it was a strongly worded prediction piece that proved us correct.

Market Matters

Over that past year-plus, the subprime debacle and related credit crisis have prompted discussions about “disaster,” “devastation,” “tragedy,” and “catastrophe.” Homeowners were unable to afford their houses, institutions faced significant asset write-downs, hard-working folks lost jobs, and investors watched portfolio values decline. While these financial consequences undoubtedly have been traumatic for many, the events of the past two weeks can serve to lend some perspective. The death toll in Myanmar has reached about 80,000 with another 50,000 people still missing. Likewise, in China, where the earthquake eventually may take over 50,000 lives as well. Somehow, missing quarterly earnings by a few cents simply does not seem quite as significant.

Speaking of…earnings season plugged along and the results to date have given some analysts (the slightest) reason for optimism. As the week began, about 90% of Standard & Poor’s 500 Index companies had reported and 62% actually beat expectations. While average quarterly earnings have plummeted by over 17% on a consolidated basis, the results looked far stronger once the financial firms were removed from the equation.

Without that struggling sector, first-quarter profits actually increased by more than 7%. Retailers took center stage this week as Wal-Mart Stores Inc. (WMT) proved again that discounters are benefiting from the current consumer nervousness. However, while Macy’s Inc. (M) and JC Penney Co. Inc. (JCP) suffered from weak sales, their results (and guidance) bested Street projections. Sony Corp. (ADR: SNE) rebounded as TVs and cameras moved back onto consumer shopping lists. Bond insurers MBIA Inc. (MBI) and Freddie Mac (FRE) reported wider losses, while UK-based HBSC Holdings PLC (ADR: HBC) realized higher profits.

Board directors and corporate execs again played “Let’s Make a Deal” as CBS Corp. (CBS) announced its intent to buy CNET Networks Inc. (CNET); Hewlett-Packard Co. (HPQ) made overtures toward Electronic Data Systems Corp. (EDS); General Electric Co. (GE) is reportedly putting its long-time appliance biz up for auction; and billionaire stakeholder Carl Icahn pushed for Yahoo! Inc. (YHOO) management to reopen talks with Microsoft Corp. (MSFT). Analysts often welcome merger news and consider it a positive sign of a rebounding business climate. Research in Motion Ltd. (RIMM) shares soared this week on news that its newest Blackberry creation will soon hit the market; and Merck & Co. Inc. (MRK) received a major victory when a Texas appeals court overturned a Vioxx verdict that, initially, awarded $32 million in damages.

Goldman Sachs Group Inc. (GS) apparently enjoyed the limelight (and the stir its analysts caused) two weeks ago. Last week, the investment bank was at it again, forecasting that crude prices will rise to $141 a barrel during the second half of 2008. Oil surged to about $128 a barrel late last week as gasoline prices soared to over $3.75 a gallon – just a week before the widely-traveled Memorial Day weekend.

• Ambec Financial Group Inc. (ABK), the world’s second-largest bond insurer, posted a wider-than-expected loss of $1.66 billion, or $11.69 a share, after more than $3 billion in charges for subprime-mortgage securities, Bloomberg reported. The company has lost 96% of its stock value in the past year.

• Liberty Mutual Group announced that it will buy insurer Safeco Corp. (SAF) for $6.2 billion deal, which would make Liberty the fifth-largest U.S. property and casualty insurer, Reuters reported. Each share of Safeco will be exchanged for $68.25 cash, more than a 50% premium to Safeco’s closing stock price of $45.23 on Tuesday.

• Microsoft Corp. (MSFT) is prepared to walk away from its $43.6 billion bid for Yahoo Inc (YHOO) if the two sides can’t agree on a price, Chief Executive Steve Ballmer said yesterday (Wednesday). “We’re prepared to move forward without a merger with Yahoo,” Ballmer said at a technology conference in Italy. “We think the best way to move forward quickly is to come together with Yahoo. Hopefully that works. But if it doesn’t, we go forward. Time is money,” he said.

• U.S. mortgage applications plunged last week as interest rates soared, the Mortgage Bankers Association said yesterday (Wednesday). The group said its seasonally adjusted index of mortgage applications for the week ended April 18 fell 14.2% to 637.6. Borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 6.04%, up 0.3% from the previous week.

• Susquehanna Bancshares Inc. (SUSQ) reported first-quarter net earnings of $28 million (33 cents a share) up 35% from $20.7 million (40 cents a share) last year, Thomson Financial reported. The company posted net interest income of $98.2 million versus $63 million a year ago.

• The warehouse club, Sam’s Club, part of Wal-Mart Stores Inc. (WMT), has had to limit the amount of rice its members can purchase, The Associated Press reported. Customers will be limited to four bags of Jasmine, Basmati and long grain white rice. The price of rice has reached record highs lately due to supply concerns.

• Shares of bond insurer MBIA Inc. (MBI) plunged yesterday (Wednesday) after its chief rival, Ambac Financial Group Inc. (ABK), announced a first quarter loss of $1.66 billion. MBIA shares dropped over 30% with a decline of $4.49 to close at $8.79. MBIA will not release first quarter earnings until May 13.

• Shares of Level 3 Communications Inc. (LVLT) gained over 20% after the company announced first quarter revenue of $1.09 billion, beating analyst expectations. Despite a quarterly loss of 12 cents per share, the stock jumped 54 cents to close at $2.91 on a positive outlook for the remainder of 2008.