PNC Financial Services Group Inc. (PNC), which will get $7.7 billion from Treasury’s Troubled Assets Relief Program (TARP), is using that cash infusion to help finance its $5.2 billion buyout of embattled National City Corp. (NCC).

And U.S. Bancorp (USB), which received a $6.6 billion capital infusion from that same rescue package, has acquired two California lenders – Downey Savings & Loan Association, F.A., a subsidiary of Downey Financial Corp. (DSL), and PFF Bank & Trust, a subsidiary of PFF Bancorp Inc. (OTC: PFFB). U.S. Bank agreed to assume the first $1.6 billion in losses from the two, but says anything beyond that amount is subject to a loss-sharing deal it struck with the Federal Deposit Insurance Corp. (FDIC).

While the Treasury Department’s investment of more than $250 billion in U.S. financial institutions has been billed as a strategy that will bolster the health of the banking system and also jump-start lending, buyout deals such as these three show that the recapitalization plan has actually had a much different result – one that’s left whipsawed U.S. investors and lawmakers alike feeling burned, an ongoing
Money Morning investigation continues to show.

Those billions have touched off a banking-sector version of “Let’s Make a Deal,” in which the biggest U.S. banks are using government money to get even bigger. While that’s admittedly removing the smaller, weaker banks from the market – a possible benefit to consumers and taxpayers alike – this trend is also having a detrimental effect: It’s reducing the competition that’s benefited consumers and kept the explosion in banking fees from being far worse than it already is.

This all happens without any of the economic benefits that an actual increase in lending would have had. And it does nothing to address the billions worth of illiquid securities that remain on (or off) banks’ balance sheets – as the recent Citigroup Inc. (C) imbroglio demonstrates.

In fact, Treasury’s TARP program has even managed to create a potentially illegal tax loophole that grants banks a tax-break windfall of as much as $140 billion. Lawmakers are furious – but possibly powerless, afraid that a full-scale assault on the tax change could cause already-done deals to unravel, in turn causing investor confidence to do the same.

One could even argue that since this first bailout (the $700 billion TARP initiative) has fueled takeovers – and not lending – the government had no choice but to roll out the more-recent $800 billion stimulus plan that was aimed at helping consumers and small businesses – a move that may spur lending and spending, but that still adds more debt to the already-sagging federal government balance sheet.

At the end of the day, these buyout deals are bad ones no matter how you evaluate them, says R. Shah Gilani, a retired hedge fund manager and expert on the U.S. credit crisis who is the editor of the Trigger Event Strategist, which identifies trading opportunities emanating from such financial-crisis “aftershocks” as this buyout binge.

“Why in the name of capitalism are taxpayers being fleeced by banks that are being given our money to grow their businesses with the further backstop of more of our money having to be thrown to the FDIC when they fail?” Gilani asked. “Consolidation does not mean that bad loans and illiquid securities are somehow merged out of existence. It means that they are being acquired under the premise that a larger, more consolidated depositor base will better be able to bear the weight of those bad assets. What in heaven’s name prevents depositors from exiting when the merged banks continue to experience massive losses and write-downs? The answer to that question would be … nothing.”

Lining Up for Deal Money

In launching TARP, U.S. Treasury Secretary Henry M. “Hank” Paulson Jr. said the government’s goal was to restore public confidence in the U.S. financial services sector – especially banks – so private investors would be willing to advance money to banks and banks, in turn, would be willing to lend.

“Our purpose is to increase the confidence of our banks, so that they will deploy, not hoard, the capital,” Paulson said.

Whatever Treasury’s actual intent, the reality is that banks are already sniffing out buyout targets, while snuffing out lending – and the TARP money is the reason for both.

Fueled by this taxpayer-supplied capital, the wave of consolidation deals is “absolutely” going to accelerate, says Louis Basenese, a mergers-and-acquisitions expert who is also the editor of The Takeover Trader newsletter. “When it comes to M&A, there’s always a pronounced ‘domino effect.’ Consolidation breeds more consolidation as industry leaders conclude they have to keep acquiring in order to remain competitive.”

Indeed, banking executives have been quite open about their expansionist plans during media interviews, or during conference calls related to quarterly earnings.

Take BB&T Corp. (BBT). During a conference call that dealt with the bank’s third-quarter results, Chief Executive Officer John A. Allison IV said the Winston-Salem, N.C.-based bank “will probably participate” in the government program. Allison didn’t say whether the federal money would induce BB&T to boost its lending. But he did say the bank would likely accept the money in order to finance its expansion plans, The Wall Street Journal said.

“We think that there are going to be some acquisition opportunities – either now or in the near future – and this is a relatively inexpensive way to raise capital [to pay the buyout bill],” Allison said during the conference call.

And BB&T is hardly alone. Zions Bancorporation (ZION), a Salt Lake City-based bank that’s been squeezed by some bad real-estate loans, recently said it would be getting $1.4 billion in federal money. CEO Harris H. Simmons said the infusion would enable Zions to boost “prudent” lending and keep paying its dividend – albeit at a reduced rate.

Sounds good, right? Not so fast. During a conference call about earnings, Zions Chief Financial Officer Doyle L. Arnold said any lending increase wouldn’t be dramatic. Besides, Arnold said, Zions will also use the money “to take advantage of what we would expect will be some acquisition opportunities, including some very low risk FDIC-assisted transactions in the next several quarters.”

Buyouts Already Accelerating

With all the liquidity the world’s governments and central banks have injected into the global financial system, the pace of worldwide deal making is already accelerating. Global deal volume for the year has already passed the $3 trillion level – only the fifth time that’s happened, although it took about three months longer for that to happen this year than it did a year ago.

At a time when the global financial crisis – and the accompanying drop-off in available deal capital (either equity or credit) – has caused about $150 billion in already-announced deals to be yanked off the table since Sept. 1, liquidity from the U.S. and U.K. governments has ignited record levels of financial-sector deal making.

According to Dealogic, government investments in financial institutions has reached $76 billion this year – eight times as much as in all of 2007, which was the previous record year. And that total doesn’t include the $250 billion in TARP money, or other deals that Paulson & Co. are helping engineer – JPMorgan Chase & Co.’s (JPM) buyouts of The Bear Stearns Cos. and Washington Mutual Inc. (WAMUQ), for instance.

If You Can’t Beat ‘em… Buy ‘em?

When it comes to identifying possible buyout targets, M&A experts such as Basenese say there are some very clear frontrunners.

“I’d put regional banks with solid footprints in the Southeast high on the list, and for two reasons,” Basenese said. “First, demographics point to stronger growth [in this region] as retirees migrate to warmer climates – and bring their assets along for the trip. Plus, the Southeast is largely un-penetrated by large national banks. An acquisition of a regional bank like SunTrust Banks Inc. (STI) would provide a distinct competitive advantage.”

There’s a very good reason that smaller players may be next: Big banks and small banks have the easiest times – relatively speaking, of course – of raising capital. It’s toughest for the regional players. Big banks can tap into the global financial markets for cash, while the very small – and typically, highly local – banks can raise money from local investors.

The afore-mentioned stealthy shift in the U.S. Tax Code actually gives big U.S. banks a potential windfall of as much as $140 billion, says Gilani, the credit crisis expert and Trigger Event Strategist editor. What does this tax-change do? By acquiring a failed bank whose only real value is the losses on its books, the successful suitor would basically then be able to use the acquired bank’s losses to offset its own gains and thus avoid paying taxes.

“While everyone was panicking, the Treasury Department slipped through a ruling that allows banks who acquire other banks to fully write-off all the acquired bank’s bad debts,” Gilani says. “For 22 years, the law was such that if you were to buy a company that had losses, say, of  $1 billion, you couldn’t just take that loss against your own $1 billion profit and tell Uncle Sam, ‘Gee, now my loss offsets my profit, so I don’t have any profit, and I don’t owe you any tax.’ It was a recipe for tax evasion that demanded an appropriate law that only allows limited write-offs over an extended period of years.”

Given these incentives, who will be doing the buying? Clearly, the biggest U.S.-based banks will be the main hunters. But The Takeover Trader’s Basenese says that even foreign banks will be on the prowl for cheap U.S. banking assets.

Basenese also believes that Goldman Sachs Group Inc. (GS) and Morgan Stanley (MS) will be “big spenders.” Each will use TARP funds to help accelerate its transformation from an investment bank into a bank holding company.

The changeover will require each company to build up a big base of deposits. And the best way to do that is to buy other banks, Basenese says.

“One thing [the wave of deals] does is to restore confidence in the sector,” Basenese said. “It will go a long way in convincing CEOs that it’s safe to use excess capital to fund acquisitions, and to grow, instead of using it to defend against a proverbial run on the bank.”

Not everyone agrees with that assessment. Investors who play the merger game correctly will do well. But the game itself won’t necessarily whip the industry into championship form, Gilani says.

“While consolidation, instead of outright collapses, in the banking industry may serve to relieve the FDIC of its burden to make good on failed banks, it in no way guarantees fewer failures,” he said. “In fact, it may only serve to guarantee, in some cases, even larger failures.”

Source: Billions in U.S. Bank Rescue Funds are Fueling Buyouts Worldwide – Instead of Lending at Home

Our closed recommendations (i.e., stock recommendations with specific buy and sell recommendations), we recorded average gains of 24.1%, with an average holding period of 27 days.

Some gains in particular were truly stellar…

· 50.1% on Smith & Wesson Holding Corporation (NASDAQ:SWHC)
· 87.1% on National City (NYSE:NCC) Jan 2.5 calls
· 79.6% on Boeing (NYSE:BA) Feb 55 puts
· 190% on Boeing Aug 90 calls
· 55.5% on Rex Energy Corporation (NASDAQ:REXX)

But now it’s time to throw in the towel on some duds…

The shipping sector sank with the global recession. If you are still holding any, it’s time to unload shares of:

· China COSCO Holding (PINK:CICOF)
· Diana Shipping Inc. (NYSE:DSX)

Energy explorers’ and drillers’ share prices have probed new depths of late with oil prices hovering around $50. Ditch any shares you might have of:

· Grand Tierra Energy Inc. (AMEX:GTE)
· Parker Drilling Company (NYSE:PKD)
· Royal Energy, Inc. (NASDAQ:ROYL)
· Pyramid Oil Company (AMEX:PDO)

With the delay in the production of the Nano continuing to impact stock price, let’s put the breaks on this Indian carmaker. Let go of any shares you might have of:

· Tata Motors (NYSE:TTM)

As gold fluctuates, this Canadian/Chinese gold miner is no longer a good investment. Lose any shares you might have of:

· Jinshan Gold Mines Inc. (TSE:JIN)

We suggested that readers with the stomach for risk might want to pick up shares of this troubled banker in case of a buyout. No such luck. Dump any shares you might have of:

· IndyMac Bancorp, Inc. (OTC:IDMCQ)

A great seasonal brew and a recession didn’t help this beer maker. If it’s in your portfolio, sell:

· Craft Brewers Alliance, Inc. (NASDAQ:HOOK)

Not that any of those stocks represent bad companies. Far from it! If this were a normal market environment, we’d have no problems holding on to most of them. But reason and rationality have departed from the markets… and it might take months or even years for the prices of these stocks to even get close to our original buying range.

Source: Drop these losers from your portfolio

This from Money Morning:

While the U.S. government’s plan to invest $250 billion into U.S. financial institutions has been billed as a strategy that will bolster the health of the banking system and also jump-start lending, the recapitalization plan is likely to have a secondary effect – one that whipsawed U.S. taxpayers likely won’t be very happy to learn about.

Those billions are a virtual lock to set off a merger tsunami in which the biggest banks use taxpayer money to get bigger – admittedly removing the smaller, weaker banks from the market, but ultimately also reducing the competition that benefited consumers and kept the explosion in banking fees from being far worse than it already is.

One last point: Experts say that takeovers financed by the government infusions are likely to have less of a beneficial impact on the economy than an actual increase in lending levels would have. And because so much of this money will be used for buyouts, the reduction in the benchmark Federal Funds target rate announced yesterday (Wednesday) by central bank policymakers will likely do very little to actually spur lending, experts say.

Fueled by this taxpayer-supplied capital, the wave of consolidation deals is “absolutely” going to accelerate, Louis Basenese, a mergers-and-acquisitions (M&A) expert and the editor of The Takeover Trader newsletter, told Money Morning.

“When it comes to M&A, there’s always a pronounced ‘domino effect.’ Consolidation breeds more consolidation as industry leaders conclude they have to keep acquiring in order to remain competitive.”

Lining Up for Deal Money

Late last week, the Pittsburgh-based PNC Financial Services Group Inc. (NYSE:PNC) became the first U.S. bank to make use of the government’s Troubled Assets Relief Program (TARP), announcing plans to purchase the beleaguered National City Corp. (NYSE:NCC) for $5.2 billion. To help finance the purchase, PNC will sell $7.7 billion worth of preferred stock and warrants to the U.S. Treasury Department, as part of that department’s bank-recapitalization program.

With regards to that program, U.S. Treasury Secretary Henry M. “Hank” Paulson recently said – yet again – that the government’s goal was to restore the public’s confidence in the U.S. financial services sector – especially banks – so that private investors would be willing to advance money to banks and banks, in turn, would be willing to lend, The Wall Street Journal reported.

“Our purpose is to increase the confidence of our banks, so that they will deploy, not hoard, the capital,” Paulson said last week.

Whatever the Treasury Department’s actual intent, the reality is that banks are already sniffing out buyout targets, thanks to the TARP money. Indeed, they’ve been quite open about it during conference calls related to quarterly earnings, or in media interviews.

Take the Winston-Salem, N.C.-based BB&T Corp. (NYSE:BBT). During a conference call that dealt with the bank’s third-quarter results, Chief Executive Officer John A. Allison IV said the Winston-Salem, N.C.-based bank “will probably participate” in the bailout program, accepting federal infusions. Allison didn’t say whether the federal money would induce BB&T to boost its lending. But he did say the bank would probably accept the money in order to finance its expansion plans, The Wall Street Journal said.

“We think that there are going to be some acquisition opportunities – either now or in the near future – and this is a relatively inexpensive way to raise capital [to pay the buyout bill],” Allison said during the conference call.

Talk about brazen. However, he’s not alone. For instance, there’s also Zions Bancorporation (NASDAQ:ZION), a Salt Lake City-based bank that’s feeling the pain due to losses from bad real-estate loans. On Tuesday, Zions announced it would be receiving $1.4 billion in capital from the Treasury Department – cash it would use to boost lending and keep paying a dividend, albeit at a reduced rate.

“As a strong regional bank with a major focus on financing small and middle-market businesses, we are pleased to have this additional capital to better serve the lending needs of customers throughout the Western United States,” Chairman and CEO Harris H. Simmons said. “We expect to deploy this new capital in the form of prudent lending in the markets we serve. This new lending will be good for our country’s economy, our customers and our company.”

However, during a recent earnings conference call, Zions Chief Financial Officer Doyle L. Arnold said that while new capital might allow it to boost lending, the increase wouldn’t necessarily be a dramatic one. The Journal said. Besides, Zions will also use the money “to take advantage of what we would expect will be some acquisition opportunities, including some very low risk FDIC-assisted transactions in the next several quarters.”

Buyouts Already Accelerating

The reality is that – with all the liquidity the world’s governments and central banks have injected into the global financial system – the global game of “Let’s Make a Deal” has already become a reality.

Indeed, as WSJ.com reported a week ago, global deal volume for the year has already passed the $3 trillion level – only the fifth time that’s happened, although it took about three months longer this year than it did a year ago.

This time around, the new kings of deal making aren’t such highly compensated “Masters of the Universe” as The Blackstone Group (NYSE:BX) LP’s Stephen A. Schwarzman, or KKR & Co. LP’s Henry R. Kravis, The Journal’s blog reported. Instead, they are the much-lower-paid – but decidedly more powerful – civil servants of the U.S. and U.K. governments: Treasury Secretary Paulson, U.S. Federal Reserve Chairman Ben S. Bernanke, U.K. Prime Minister Gordon Brown and Chancellor of the Exchequer Alistair Darling, the Web site stated.

At a time when the global financial crisis – and the accompanying drop-off in available deal capital (either equity or credit) – has caused about $150 billion in already-announced deals to be yanked off the table since Sept. 1, liquidity from the U.S. and U.K. governments have ignited record levels of financial sector deal making.

According to Dealogic, government investments in financial institutions has reached $76 billion this year – eight times as much as in all of 2007, which was the previous record year. And that total doesn’t include the $125 billion the U.S. government is investing in the large U.S. banks as part of its rescue package, the similar amount it may invest in smaller banks, or other deals that the feds are helping engineer (JPMorgan Chase & Co.’s (NYSE:JPM) buyouts of The Bear Stearns Cos. and Washington Mutual Inc. (WAMUQ) are two such examples).

When the dust settles on this buyout boom, we may well have a record in hand that’s even less beatable than Joe DiMaggio’s 56-game hitting streak. That’s because with the Fed, the U.K. and other governments and central banks doling out the capital, there’s no financial-sector equivalent of Kenny Keltner to bring this buyout fest to an abrupt close. That means that the “hits” – the buyout deals – will just keep coming.
If You Can’t Beat ‘em… Buy ‘em?

When it comes to identifying possible buyout targets, M&A experts such as The Takeover Trader’s Basenese say there are some very clear frontrunners.

“I’d put regional banks with solid footprints in the Southeast high on the list, and for two reasons,” Basenese said. “First, demographics point to stronger growth [in this region] as retirees migrate to warmer climes – and bring their assets along for the trip. Plus, the Southeast is largely un-penetrated by large national banks. An acquisition of a regional bank like SunTrust Banks Inc. (NYSE:STI) would provide a distinct competitive advantage.”

With a lot of bigger deals already in the books, many analysts agree with Basenese’s assessment, and are now watching to see if regional banks will be the next to succumb to the dealmaker’s bid. Indeed, earlier this month, Matthew Schultheis, a senior analyst at Boenning & Scattergood Inc., told a reporter that he expected this to be a “trend that continues at least through the first half of ’09, unless some of these [companies] stabilize. It could even last beyond that.”

There’s a very good reason that smaller players may be next: Big banks and small banks have the easiest times – relatively speaking, of course – of raising capital. It’s toughest for the regional players. Big banks can tap into the global financial markets for cash, while the very small – and typically, highly local – banks can raise money from local investors. Regional banks have a tougher time, says Doug Landy, a partner in the U.S. banking practice of the law firm of Allen & Overy.

“A regional bank lacks both the international access and the local character,” Landy told The Associated Press.

Several big regional banks at least acknowledged the possibility of buyouts on recent earnings conference calls, The Journal reported.

The Cincinnati-based Fifth Third Bancorp (NYSE:FITB) talked about raising $1 billion in capital by selling non-core assets. Bank executives said that a difficult 2009 is “a view that continues to seem likely to us.” They confirmed discussions with a number of possible investors or asset-purchasers, and said they were “confident that an attractive transaction would be available to us as the opportunity and timing are appropriate including the ability to generate capital in excess of our original expectations.” Earlier this week, however, it announced that it was getting $3.4 billion in TARP funds, the Cleveland Plain Dealer newspaper reported.

Clearly, the bank isn’t thinking in terms of an outright sale, or at least doesn’t admit to that publicly.

One other potential buyout candidate includes Huntington Bancshares Inc. (NASDAQ:HBAN), a Columbus, Ohio-based regional that just received a $1.4 billion federal infusion of its own, the Plain Dealer said.

Who will be doing the buying? The Takeover Trader’s Basenese tells investors to “also look for banks with foreign ownership” to be on the prowl for acquisitions.

“Just like Spain’s Banco Santander SA (ADR: STD) [which earlier this month said it would buy the 76% of Philadelphia-based Sovereign Bancorp Inc. (NYSE:SOV) it didn’t already own for about $1.9 billion], foreign-based banks will likely jump at the opportunity to expand their U.S. presence at a discount,” Basenese said. “M&T Bank Corp. (NYSE:MTB) fits the bill, as Allied Irish Banks PLC (ADR: AIB) already owns a 24% stake.”

Then there’s the Minneapolis-based U.S. Bancorp (NYSE:USB), which is one of the few regionals still in a strong position. CEO Richard K. Davis has reportedly rejected the idea of buying large banks that are already in trouble and was asked if the new rescue plans might change his mind.

“It makes it a little easier to do those things,” Davis told The Journal. “But first and foremost, whether the capital is less expensive or the opportunity that TARP is present, we’ll continue to look at deals on an accretive basis where they make sense and where they would fit into this company’s long-term structure. So it would definitely make it more attractive, and so some of our positioning and our targets look more attractive and our valuation is easier now.”

There’s something else to consider, Davis said.

“To the extent that [a deal] has to hit all of the normal bellwether marks and the expectations we have for the near term and long term, it still has to be a good deal. So it doesn’t really change our philosophy, but it does make it easier to find our way to partnerships that might be more accretive sooner.”

Basenese, the M&A expert, believes that Goldman Sachs Group Inc. (NYSE:GS) and Morgan Stanley (NYSE:MS) will be “big spenders,” using the TARP funds to help accelerate their conversions from an investment bank to a bank holding company – a transition that will require them to bulk up their deposit bases. And the quickest way to do that is to buy other banks, Basenese says.

“One thing [the wave of deals] does is to restore confidence in the sector,” Basenese said, “It will go a long way in convincing CEOs that it’s safe to use excess capital to fund acquisitions, and to grow, instead of using it to defend against a proverbial run on the bank.”

Source: Billions in Bank Rescue Funds are Fueling Buyout Deals, and not the Increase in Loans That Would Help Ease the Financial Crisis

• The Organization of Petroleum Exporting Countries, which produces 40% of the world’s oil, is “very likely” to cut its crude production at its next meeting on Nov. 18, according to the group’s President Chakib Khelil. “The Organization is concerned about the deteriorating economic conditions with contagion risks,” OPEC members said today in a statement. The official production quota for 11 of OPEC’s members is 28.8 million barrels a day. The group exceeded that target by 390,000 barrels a day in September, according to Bloomberg estimates.

• Iceland yesterday (Thursday) took control of Kaupthing, the country’s leading bank, and suspended trading on its stock exchange for two days, as it the island country struggled to overcome a financial crisis that could ultimately result in bankruptcy. Iceland’s Financial Services Authority now has control of all three of the country’s major banks.

• New applications for unemployment benefits dropped from a seven-year high last week, according to the Department of Labor. Initial claims for jobless benefits dropped 20,000 to a seasonally adjusted 478,000. However, the four-week average, a more stable indicator, rose to 482,500 – the highest since October 2001.

• Micron Technology Inc. (MU), the largest domestic producer of memory chips, yesterday (Thursday) announced it would reduce its staff by 15% and scale back production levels. Over-production has flooded the market, pushing memory-chip prices below the cost to produce them, Bloomberg News reported. Micron has racked up $1.9 billion in losses over the past two years.

• National City Corp. (NCC) could be the next bank to get bought out by a larger rival as financial firms look to stabilize their capital positions by buying deposit assets at discount prices. PNC Financial Services (PNC) and Toronto-based Bank of Nova Scotia (BNS) are two of the potential buyers for the regional bank, Forbes reported.

• Abercrombie & Fitch Co. (ANF) and The TJX Cos. Inc. (TJX), parent company of T.J. Maxx and Marshall’s, both lowered their profit outlook as retail sector sales continue to worsen. “Consumers are bracing for recession,” Ken Perkins, president of Retail Metrics, wrote yesterday (Thursday) in a report, Bloomberg News reported. “Credit will continue to be very difficult to come by through the holiday-shopping season, and the jobs market is likely to further deteriorate.”

Source: Global Investing Roundups Friday, October 10th, 2008

More from Andrew:

Right now, the equities markets are down about 25% from their peak. The decline is just slightly higher than the discounting we see during an average recessionary market. It means we could be close to a bottom. That is first set of good news.

The only piece of bad news is this recession will hurt worse than normal. We will likely lose another five to ten percent decline. A stock selling for a hundred bucks today, could be selling for $90 or $95 in a week or two. That is not too hard to swallow.

The second set of good news, which is really good news for savvy traders, is we will lose that chuck of value in wild day-to-day fluctuations. In essence, it is more of the same whipsaw action for the next few weeks or even months.

We made it this far

Looking back, we did not lose the 25% in one, long decline. We lost it in small increments: one step forward, two steps back. It is that kind of market that offers the most profit potential. Pay attention to the clues your given and you can make some fantastic investment choices.

For example, if you followed my advice and bought shares of National City Corp (NYSE:NCC) or the January 2.50 Calls (NCCAZ.X) I recommended on Tuesday, you are sitting on some huge profits. Most importantly, you made that money while the market made two steps backwards.

If you followed that play, it is likely you also bought the Boeing February 55 Puts (BANK.X) that I recommended in the same article. Once again, congratulations on the profits. Just as expected, Boeing’s valuation is falling and investors that foresaw the drop are profiting.

Boeing has plenty of room to fall. After all, the entire transportation industry is getting hammered today. So you should continue to hang onto those options.

Source: Market Volatility: Huge Profits for National City (NCC) Investors

Andrew Snyder says the current “neck-breaking” volatility creates great profit plays for contrarain investors. He recommends using puts to bet on further downside for Boeing (NYSE:BA).

To hedge, he advises investors buy call options on National City Corporation (NYSE:NCC). This bank has a solid balance sheet and could soar if the $700 billion bailout is passed in Congress.

This from Today’s Financial News:

There is an old adage on Wall Street that says as long as the markets are moving, you can make money. It may be a tired, overused cliché, but boy is it right.

No matter which direction the market heads, there is always a profit opportunity. And with the Dow making huge day-to-day swings, this is a monumental chance for savvy traders.

We have seen “neck-breaking” volatility over the past three weeks. Yesterday’s [Monday] 777-point mega-plunge will go down as one of the worst days in Wall Street history, but you need to look at it as a fantastic gift. After all, shares of thousands of companies are selling at incredible discounts.

There is going to be more volatility over the days and weeks ahead. As Congress debates another bailout package and as news of more troubled firms cross the wires, the equities market will surge and plunge and surge and plunge. Take advantage of the swings and profit with every move.

I have created a hedge-type plan that will allow you to profit no matter which way the market moves. As this market works itself out, it could make you a lot of money. So pay attention.

Market divergence

In the next few days, Americans will begin to realize the truly dire economic situation this country is in. We will read more and more about an impending recession. Share prices of companies that have anything to do with consumer spending will get hit hard.

One company that will be hurt is Boeing (NYSE:BA). The company was doing quite well just a few months ago, but now that a global slowdown is imminent and a lot of its workers are circling the company in a picket line, it is in serious trouble.

Shares have started on a rapid decent and will continue to plunge until this economy rebounds. In the past twelve months, shares are already down nearly 50%, from $107 to just $55. The combination of a strike and a major economic slowdown will drag prices even lower.

Judging by historical trends, trading volume, and valuations, a share price drop to $45 is not only justifiable, it is almost a certainty. With a huge order backlog and creditors nipping at the company’s heals, Boeing cannot afford to have its workers on strike. They need to be on the assembly line pumping out planes.

To take advantage of the impending fall, you have two options. Directly short the company’s shares or take the options route. Since shorting is considered un-American right now, I recommend buying Boeings February 55 Puts (BANK.X).

With a strike price of $55, they are close to being in the money. As share price drops, they will rise dollar-for-dollar. As Boeing drops towards $45 per share, these puts could easily double in value.

Taking a short position on Boeing is just one side of this hedge. Not every company will be hurt by this market downturn, especially if you believe as I do that action from Congress will create a significant, even if short-lived, share price surge.

As I already mentioned, there are a lot of companies unduly discounted by Wall Street’s decline. Many of them are in the headline sector, the financial industry. As companies like Lehman Brothers, Wachovia, and AIG disappear, investors worry if the smaller, regional banks will follow the same path.

Companies like Sovereign Bancorp (NYSE:SOV) and National City Corporation (NYSE:NCC) have seen their share prices destroyed by the negativity. Some of the companies deserve the deep discounting; many others do not.

Catch the rebound and score

National City does not deserve the horrific action its investors have been forced to digest. It does not have the huge exposure to the sub-par mortgage industry that companies like Wachovia (NYSE:WB) have. In fact, its balance sheet is healthier all across the board.

National City records more than $11 billion in cash, with over $7 billion in operating cash flows. It is working to support just $30 billion in debt. Yes, its debt ratios are fairly high, but nothing it cannot work itself out of, especially with the help of an industry bailout. Share price deserved a hit, but not one of this magnitude.

The company’s share price has dropped from over $30 to less than $2 in the past two years. Over the last three weeks it has plunged by over 50%. It is giving savvy investors a shot at some bragging-worthy profits.

To take advantage of the short-term appreciation potential, once again, you have two options. Buy shares of National City, or buy the company’s call options. Either way, you have a shot at triple-digit profit potential.

Buying the underlying shares is simple, but deciding which options to purchase is a bit more difficult. You have to factor in time decay, market volatility, and valuations.

How about I do the hard work for you? Buy National City’s January 2.50 Calls (NCCAZ.X). They will soar on any positive news from Congress.

The markets are highly volatile. If you pay attention and are prepared to act fast, there are some fantastic profit opportunities. When Congress finally gets a bailout bill on the president’s desk, expect some positive action in the financial sector. Meanwhile, the nation’s economy is not out of the woods.

Companies that rely on consumer spending or economic expansion are going to be feeling the pain of a major slowdown for at least another year, maybe two.

Take advantage of the market dichotomy and profit no matter which way it heads.

Source: Volatility Hedge: Short Boeing (BA), go long on National City (NCC)

In the short term, you may sleep a lot better with a big chunk of money tucked safely away in cash. But in the long run, you may lose sleep. After all, your biggest risk as an investor is not market risk – the inevitable rise and fall of your stock portfolio from week to week – but shortfall risk, the possibility that good health and steady inflation may cause you to outlive your investment portfolio.

Knowing this, many investors have been searching for higher dividends in the beaten down financial sector. This makes sense at first blush since bank stocks have fallen so far that many sport double-digit yields.

But beware. Many of these dividends will be cut sharply. Some will be eliminated altogether.

That doesn’t mean that banks aren’t a decent Contrarian’s buy right now. But tread carefully.

Reeling from the rise in foreclosures and the ensuing credit crunch, earnings at many banks are quickly evaporating and, in many cases, disappearing. For example, Citigroup Inc. (C) has already lopped its dividend by 41%. National City Corp. (NCC), a major regional bank, cut its payout in half. And Washington Mutual Inc. (WM) slashed its quarterly dividend to a mere penny.

Seventeen of 20 financial companies in the S&P 500 have cut their dividends so far this year, more than in the past five years combined.

These banks didn’t take this step lightly. Most blue-chip banks have a long history of not cutting dividends. Management wants to keep shareholders happy. But if the money isn’t there to cover the dividend, it will not be maintained. It doesn’t make sense to borrow money – or dilute equity holders – to continue a payout.

Still, you can get a good idea which financial stocks will maintain or increase their dividends – and which ones will not – by taking a close look at the underlying business.

Consider Bank of America Corp. (BAC), for example. Here’s one of the nation’s top banks, down so far that it is yielding a mouthwatering 7.7%.

Is this dividend secure? Almost certainly not. Quarterly revenue is down 35%. Earnings have slumped 77%. And analysts have slashed future earnings estimates 20% over the last 90 days. It’s just a matter of time before this dividend gets whacked.

On the other hand, there are some choice income picks overseas. Take a look at Spain’s biggest bank, Banco Santander SA (ADR: STD).

The bank has more than 13,000 branches worldwide, the most of any bank. It has virtually no exposure to subprime mortgages.

First-quarter profit rose 37% on revenue of $11.63 billion. And while many major banks are reporting record losses, Santander just reported its tenth consecutive quarter of double-digit profit growth. Management is sticking to its forecast of 15% annual earnings growth over the next two years.

This bank’s 4.4% yield will almost certainly rise over the next two years. Banco Santander is a far superior choice for the dividend-oriented investor.

To enjoy high total returns, you need only know where to look.

Source: Beware the Dividend Trap

• The Standard & Poor’s 500 Banks Index dropped 10% to close at 136.01, it’s worst one-day decline since the index’s inception in 1989, Bloomberg News reported. National City Corp. (NCC) was one of the leaders, as it dropped more than 17% to close at $3.12. National City continues to fight off persistent rumors that the Ohio-based bank is not adequately capitalized.

• Crude oil for August delivery dropped 4.5% percent with a decline of $6.49 yesterday (Tuesday) to trade at $138.69 at the close of trading on the New York Mercantile Exchange, Bloomberg News reported. Contracts had traded as low as $135.92 earlier in the day as high gas prices curb demand due to changing consumer-driving habits.

• Citigroup Inc. (C) stock slumped to its lowest level since the financial giant’s creation via the merger of Travelers Group and Citicorp in October 1998, Reuters reported. Citi shares traded as low as $14.01 before paring losses to close down $0.70, a 4.6% decline, at $14.52 yesterday (Tuesday).

• Volkswagen AG (OTC: VLKAY) chose Chattanooga, TN over rival sites in two other states for a new U.S. assembly plant expected to create about 2,000 jobs, The Associated Press reported. Sites in Alabama and Michigan were also considered for the plant, which is part of Volkswagen’s strategy to increase its presence in America. Volkswagen, Europe’s biggest automaker, closed its last U.S. production facility in 1988.

• Johnson & Johnson (JNJ) yesterday (Tuesday) reported an 8% jump in second-quarter profit, thanks to strong consumer sales and the weak dollar spurring sales overseas. For the first time ever, international sales topped U.S. sales for the company. Favorable currency exchange rates due to the weak dollar accounted for almost two-thirds of the increased sales, according to the Associated Press.

• The U.S. Securities and Exchange has issued an emergency edict to stop “naked” short selling in major financial firms, Reuters reported. The rule requires any person making a short sale in the listed securities to borrow the securities before the short sale is effected and deliver the securities on settlement date.

• European stocks as measured by the FTSEurofirst 300 Index hit a 3-year closing low of 1,110.09 yesterday (Tuesday) as financial shares got hammered. The index of top European shares ended down 2.1% after having been down as much as 3% earlier in the day, Reuters reported. “The sell-off is extremely violent, it’s a bloodbath, and I fear that it could last all summer,” one anonymous Paris-based trader said.

• Shares of biotech firm ViroPharma Inc. (VPHM) tumbled yesterday (Tuesday) after announcing a bid to takeover Lev Pharmaceuticals Inc. (OTC: LEVP), Forbes reported. The potential $617.5 million deal will eat away most of ViroPharma’s cash reserves, causing its shares to drop $1.95, a 15% decline, to close at $10.62.

Source: Global Investing Roundups Wednesday, July 16th, 2008

Whitney slashed her rating on Wachovia to ‘underperform’ from perform in a research note, as she predicts a $1.35 per share loss this year and a 35 cent per share loss in 2009. She also noted that the bank likely reduced its mortgage portfolio by $50 billion in the second quarter.

“We are hard pressed to find examples of financial companies that have successfully shrunk their businesses,” Whitney said, speaking of Wachovia’s asset reduction, Reuters reported.

Wachovia shares dropped after Whitney’s prediction, and were trading at $9.60 at 12:30 p.m. in New York.

Wachovia shares are down nearly 75% year-to-date as the struggling commercial bank has already raised $8 billion in additional capital and cut its dividend in an attempt to help offset the $13.7 billion in losses the bank has taken since the current financial crisis started to unfurl. Wachovia has also ousted its chief financial officer, replacing Ken Thompson with Robert Steel, a former undersecretary of the U.S. Treasury Department.

Whitney: One to Watch

Whitney’s Wachovia call is big news, in part because the Oppenheimer analyst has made quite a name for herself with her bearish, but highly accurate, calls on the global financial sector. Previous Whitney predictions that have come to pass include her accurate claim that Citigroup Inc. (C) would be forced to slash its quarterly dividend, despite repeated management promises, prior to installing Vikram Pandit as CEO, that Citi’s dividend was safe.

Even with $416 billion in losses and write-downs tied to mortgage-backed assets in the global financial industry thus far, Whitney sees more trouble ahead for the beleaguered financial sector.

“We believe the credit crisis is far from over,” Whitney wrote in a research report in late May as Money Morning reported. “In fact, we believe what lies ahead will be worse than what is behind us.”

Investors barely had time to recover from the devastating failure of The Bear Stearns Cos. Inc. (BSC), at the time the fifth largest Wall Street investment bank before witnessing the plunging market capitalizations of twin mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE).

It seems Whitney’s call of a deepening banking crisis has indeed to come to pass, but it’s still unclear how much further we have to go as national and regional domestic banks alike struggle to keep afloat. Other analysts and industry insiders have started to echo Whitney’s earlier prediction.

“We have seen a ‘too big, too important to fail’ instance,” William Gross, the chief investment officer of PIMCO’s bond fund, told The International Herald Tribune, referring to the government bailout of Bear Stearns and the recent plan to save Fannie and Freddie.

“The market wonders: which institution is too small to bail out? Where is the dividing line? They seem to have picked on the regional banks as potential candidates to be the ones too small to bail out,” Gross added.

Current analyst predictions say as many as 150 out of the 7,500 domestic U.S. banks could fail over the next year to 18 months, IHT reported.

Customers are already clamoring to withdraw money from regulated thrift IndyMac Bancorp. Inc. (IMB), which was seized by federal regulators prior to the weekend. Meanwhile, Ohio’s National City Corp. (NCC) is doing its best to keep from being the next failed financial intuition as it works to dispel rumors of a run on its own deposits.

“It’s about to start getting real bad,” Christopher Whalen, managing director at Institutional Risk Analytics, told IHT. The Federal Deposit Insurance Corporation should just move on with the process and “close not just one but a half dozen institutions at the same time.”

Source: Whitney Slashes Wachovia Rating on “Bleak” Shareholder Prospects Highlighting Ongoing Banking Crisis

Home prices as measured by the S&P/Case Shiller composite index of 20 metro areas fell 1.4% in April from March and slumped by a record 15.3% over the year. The group’s composite index of 10 metro areas dropped 1.6% in April, making for a record 16.3% annual drop.

According to the S&P, 13 of the top 20 metro areas are still posting record annual declines with price losses in the double digits for half of the areas.

“The potential is a vicious cycle which we may already be experiencing. Falling home prices are leading to more foreclosures, which cause a further decline in prices,” Richard DeKaser, chief economist at National City Corp. (NCC) in Cleveland, told Reuters.

The only bright spot to be found in the data was that the 20-city month-over-month decline was the smallest drop since the August-September 2007 period.

“If there is anywhere to look for possible improvement, it would be that the pace of monthly declines has slowed down for most of the markets,” David Blitzer, chairman of the Index Committee at Standard & Poor’s, said in a statement.

Meanwhile a separate report from the Conference Board indicated consumer confidence had hit its lowest level in 16 years.

The Conference Board said its overall monthly index tumbled to 50.4 this month, its lowest point since hitting 47.3 in February 1992. The index measured a revised 58.1 in May.

Most analysts agree that consumer spending has held up relatively well in recent months, but that is easily attributable to the $50 million in economic stimulus payments the U.S. government sent out in May. Also, annual tax refunds have been coming in after the April tax season.

“Getting both [checks] at this time of year has led to an increase in household spending, but I expect this to be temporary. I’m looking for spending to trail off in the latter part of the summer,” Bernard Baumohl, an economist at the Economic Outlook Group, told CNNMoney. “If consumers are not spending, then the economy is in serious trouble. I think we’re in a recession right now.”

Source: Home Prices and Consumer Confidence Traverse Record Lows