“Analysts rate Westpac (ASX: WBC) a buy,” says Andrew Carswell in today’s Daily Telegraph. The bank told investors on Friday that it expected profit for the financial year to rise between six and eight percent. Let’s call it seven. But wait. It gets better.

Analysts at UBS raised the price target on the stock to $25, which is about thirty-one cents below where it trades today. Bold! Merrill Lynch (NYSE:MER) says Westpac has the lowest risk, highest quality assets in the Aussie banking sector. It rates the shares a buy too. Zig.

But why not zag?

Is it not obvious by now – one year into the credit crisis – that banking is a terrible business when you strip away the fancy suits and big ties? It is subject to massive blowups and failures. When run prudently, of course, this does not happen. Banks are discrete in their loan-making, maintain adequate capital, and pay investors a dividend for their risk.

For banks to deliver faster earnings growth, they have to take more lending risks. This leads, especially at the tail end of a manic credit boom, directly to the situation you most want to avoid, banks that lower lending standards to grow the portfolio. It also leads, inevitably, higher rates of default.

Why on earth would anyone want to own a business that is structurally exposed to black swan events that destroy shareholder capital? Anyone? Beuller?

The ‘zag’ strategy would be to forget shares altogether until the banking crisis is sorted out globally, in which case you’d be primarily in cash. Or, you could buy shares of companies that are less prone to negative black swans but equally (if not more so) beaten down. Here we have companies like Worley Parsons (ASX:WOR) in mind.

Worley Parsons reported a 53% rise in full year profit today. It’s Australia’s best engineering firm. It’s got business in four different booms: energy, infrastructure, mining, and power. It has clients all over the planet. And as far as beaten down value, it’s down 33% year-to-date.

Here’s what we’d say for the moment: the beat down in the resource market is going to give you the best chance since 2003 to buy a portfolio of world-class projects at very good values. By the end of the year, a smart investor could end up with a buy-and-hold ten-year portfolio of the best resource and energy firms in the world. It’s an opportunity that probably won’t come again for quite some time.

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Sources: Buy Resources, Not Banks

Then there’s oil. The black goo rose 87 cents to $137.61 a barrel in electronic trade this morning.

MarketWatch has S&P 500 futures down 6.5 points to 1,311.80 and Dow industrial futures down 54 points.

Dan Denning in The Daily Reckoning Australia expects a ‘highly differentiated’ performance in stock markets for the rest of the year. Behind the grim stock index headlines lie individual winners and losers. For investors, it’s all about picking the former…

There’s just one full week left in the financial year. And what an awful year it’s been! The All Ordinaries index is down just over 14% for the year. It’s the worst showing for the benchmark since 1982.

But when you thin-slice the performance, you find something interesting. Specifically, you find local evidence of the global battle between the forces of commodity inflation and asset deflation. The big Aussie banks are down by nearly 30% for the financial year. Meanwhile, the big resource stocks are up 24%.

Aren’t the valuations on bank stocks cheap? Yes! National Australia Bank (ASX:NAB) trades at 8.47 x trailing earnings, Commonwealth Bank (ASX:CBA) at 11.22x, ANZ (ASX:ANZ) at 8.93x, and Westpac (ASX:WBC) at 9.7x. Those all look cheap.The trouble is you need to know what the forward earnings multiples are. You need to know future earnings. Of course no one can actually know what next year’s earnings will be. But the banks could offer us projections. Analysts would have their own opinion as well.

Our analysis? Cloudy. The earnings picture for banks is still very cloudy. If high oil and energy prices send Australia’s economy into recession, demand for loans is going to fall. Banks make money by lending money. You do the maths. Without an increase in lending volumes, banks have to generate earnings from higher fees.

On the other hand the resource stocks-as we’ve mentioned before-seem to have moved to the head of the cyclical queue. Copper and aluminium prices were up nearly seven per cent last week. Tin was up eight per cent. And those laggards lead and zinc were up nearly six and three percent, respectively.

You’d think that would be good news for resource stocks, specifically base metals. And it is, in a general sense. But part of the price rise comes from production disruptions due to higher energy costs. That’s not good. In your stock selection, then, you have to focus on low-cost producers.

What you’ll find for the rest of the year, we reckon, is highly differentiated performance. The general direction of the market will be apathetic. After all, it looks like we’re in for another wave of losses in the credit markets. Stocks will have a hard time rallying with recurring write offs and high oil prices.

Source: Big Australian Resource Stocks Up 24% in 2008