1. Click over to Bankrate.com’s Safe & Sound ratings page. There you can plug in your bank’s name and see how it scores on the basis of 22 objective measures designed to gauge the capital adequacy, asset quality, profitability and liquidity of thousands of banks. If your bank doesn’t make the cut with a higher rating, then switch to one that does.
2. Use the FDIC’s electronic deposit insurance estimator to see if your assets are covered in full. With the recent signing of the bailout legislation into law, the FDIC now covers accounts up to $250,000 at any one bank in any single account or $250,000 per co-owner for joint accounts. Traditional and Roth IRAs, SEPS and other retirement accounts on deposit at an FDIC-insured bank or savings institutions are insured up to $250,000 separately from any other deposits you may have at the same institution. But this is mainly deposit accounts and doesn’t include stocks, bonds, mutual funds or life insurance policies.
3. Double-check your ownership. If a portion of your assets is uninsured, getting full coverage may just be a matter of changing ownership or spreading out your accounts to different banks. (But keep in mind, like most things the government doesn’t make this easy so that means more paperwork.) If you’ve got the big bucks, visit the Certificate of Deposit Account Registry Service, or CDARS, and learn how you can obtain full FDIC insurance on deposits up to $50 million – with a single interest rate on a single statement at a single bank. Ironically, a former U.S. Federal Reserve employee – someone who must have gotten “fed” up with the complicated FDIC insurance requirements and ownership restrictions – started this innovative service.

Source: Credit Crisis Safety Plays: Three Steps to Take to Make Sure Your Bank is Safe

Justice Litle isn’t fully sold on the bailout. But he says it isn’t an option to let Mr. Market sort himself out this time: the US is too leveraged to follow Andrew Mellon’s “liquidationist” approach during the Great Depression.

That’s why the feds will do whatever it takes to prop up the system… and run the dollar into the ground. And that’s why you should buy gold now.

This from Taipan Publishing:

The problem, in a word, is leverage. Rightly or wrongly, we all got leveraged up to the eyeballs these past few years. Not just the Wall Street banks (though they were the worst offenders) but everyone, including U.S. consumers.

As we all know by now the offending financial institutions – be they bought out or bankrupted or absorbed – were leveraged by as much as 30 or 40 to 1. That’s the equivalent of making a $100 bet with two or three bucks in your pocket, declaring yourself “good for it” if the bet goes bad.

So now, thanks to the laxity of Greenspan, Bernanke, the SEC, Congress and others, we’re saddled with “capitalism on the upside and socialism on the downside,” as some have aptly put it. Wall Street’s stupidly big bets have become everybody’s problem.

But you know what? Joe Sixpack got himself nicely leveraged, too.

Spengler of the Asia Times observes, “Leverage is the secret of American wealth. The average American family in 2004 had a net worth of US$448,000 on an income of $43,000, according to the Federal Reserve’s survey.”

When Americans talk about their net worth, they are largely talking about two things: the value of their homes and the value of their investment portfolios. Both those numbers are greatly inflated by the built-in leverage of the system.

For example, what is a house worth? Whatever someone is willing to pay for it… the “multiple” of which depends greatly on a few key things. (Like functional credit markets, for one.)

And what is a stock worth? Whatever multiple someone is willing to pay for the company earnings stream… again based on a handful of key factors.

The upshot is that the average American is leveraged, too, by a factor of 10 to 1 or more. And we’re only talking about Americans with positive net worth here — not to mention the trillions in pension funds.

If the financial house of cards comes crashing down, it doesn’t just crush Wall Street. It crushes Main Street, too. This is what the Cool Hand Lukes who want to say “screw the system” don’t understand: We as a country are too deep in the system to survive its sudden demise. When you’re in up to your neck, you can’t walk away.

The Mellon Plan: Not an Option

Andrew Mellon was the only Treasury secretary to have served under three U.S. presidents. He held office from 1921 to 1932.

After the crash of ’29, as the Great Depression got underway, Mellon made his position known as a “liquidationist.” Mellon’s famous advice in response to the budding ‘30s crisis: “Liquidate labor, liquidate stocks, liquidate farmers.” In short, liquidate everything in sight. Let the weak fail… and let God sort them out.

That’s simply not an option today. Our entire system is built on leverage. That is the Achilles’ heel of modern financial markets.

In normal times, it’s a good thing that a young couple with a promising future can buy a house on 20% down. In normal times, it’s a good thing that a single mother can get a low monthly payment on a car so she can drive to her new job. In normal times, it’s a good thing that an entrepreneur can get a loan to start up a small business.

But all those good things require debt and leverage… on at least one side of the equation, if not both.

Leverage, like debt, is not an inherently bad thing. It’s a tool that can be used or misused. The ability to use leverage efficiently has played a large part in our current prosperity. But as a result, the use of leverage has become too common and too widespread to just say, “liquidate.” We’re in too deep… we no longer have access to the “Mellon plan.”

The Nuclear Option

This is why I think the powers that be will go “nuclear” in a way we haven’t yet seen.

That is to say, when the depth of the danger really hits home… when it sinks in that the viability of the entire system is at stake, and that we are all at risk of being sucked into the deleveraging vortex… the public and political resistance to a full-blown, no-holds-barred rescue will evaporate.

We haven’t seen the full-blown response yet, only shades of it. But it is coming.

On Monday we got news that Wachovia (NYSE:WB), another major American banking institution, would disappear. The Fed took great pains to clarify it was “not a failure” like WaMu (NYSE:WM)… but another giant bites the dust nonetheless. We also got word that Fortis (EBR:FORB), a Belgian bank, is on the brink. (Welcome to the party, Europe.)

In response to all this, the Fed announced plans to pump $630 billion into the global financial system, according to Bloomberg. By the time you read this they may well have pumped a lot more. (Tell me again why $700 billion is supposed to a big number?)

The plumbing of our global financial system is rotten. Pipes are bursting left and right. A bunch of fat-cat bankers may be the ultimate culprits, but we all played a part… and it’s the only system we’ve got.

Really, what other option is there?

We cannot just “ride this out.” We cannot just “let it pass.” Full-on liquidation would be the equivalent of economic and political suicide. It is going to keep getting worse until the powers that be come up with the most dramatic response they can muster.

We haven’t gotten to that point yet. The “nuclear” option — in terms of flooding the system with enough dollars to flood the Panama Canal, or even writing outright checks for U.S. equities a la Hong Kong in 1998 — has not been tried.

It’s going to get worse from here. And so the government is going to do more. And they will keep doing more until things have been turned around, at least on paper.

“This Sucker Could Go Down”

“This sucker could go down,” as President Bush so eloquently put it last week.

The U.S. electorate and Congress did not really believe the Commander in Chief, seeing as how he has been so dead wrong on so many other things. They thought the crisis could be handled with a helping of provisos and quid pro quos — a little urgency with a little temperance, too. They didn’t really believe that the entire global financial system as we know it was at stake.

But, like it or not, it is at stake. As much as I find it surprising to agree with Dubya, this “sucker” really could “go down.” I view this not as a moral assessment, but a structural assessment… like an engineer testing the joints on a suspension bridge and finding it in danger of collapse. It doesn’t matter whether the situation is fair or unfair, or who screwed up the bridge or built it poorly in the first place. It just is what it is.

When the truth sinks in, the powers that be will do all they can to prevent collapse from happening. The blame game will by sidelined by emergency the task at hand.

And how do I know Washington et al haven’t “done all they can” yet? Because the dollar, heading into its twilight days as the world’s reserve currency, has not yet been destroyed.

That’s the final outcome of the von Mises prophecy… the final reality of the Austrian Endgame. And it’s where we are headed. When the dust clears, it may be recognized that we had to pass through this panic point, to reach the height of realization of what’s at stake, before the true “nuclear” measures were implemented.

Gold Shines Here and Now

There are few areas where I’d be willing to buy with both hands right now. There are some incredible bargains out there to be sure. But as the market bleeds, they are just becoming even more incredible.

I still think the “stocks in the stratosphere” scenario as laid out last week is likely to play out, as the flipside of a U.S. dollar meltdown plus hyperinflationary stimulus.

I think that, with the Dow in full-blown crash territory, we are closer to that “nuclear” trigger point now than we were before. It’s a bit of a counterintuitive thing… before we get paper asset lift-off, things have to get bad enough to panic the powers that be into creating the inflationary conditions that fuel lift-off.

In other words, you don’t walk the path of Zimbabwe and Weimar Germany if you can avoid it. A big part of my thesis is that America’s path is predestined — and we’re being forced onto that path now.

Being a trader at heart, I prefer to buy when the prices of things I like are going up, even when I’m buying for long-term investment purposes.

Today, what’s going up is gold.

Gold stocks aren’t following suit in the short term, but that’s because frightened hedge funds continue to dump assets left and right. We are witnessing a fire sale of epic proportions. I believe that hard on the heels of this we will see a stimulus injection of epic proportions, and that will push a lot of hard assets higher.

So you could do far worse now than to get your hands on gold: physical gold, gold ETFs, gold stocks. That’s the general ranking in order of safety vs. risk. I like them all now. Gold and gold stocks also make a compelling case for a trade from the technical side.

On the fundamental side, as the reality sinks in of what’s ahead of us, I believe gold will punch through its old highs and keep going (and going… and going… and going…).

Keep a cool head, and I’ll do my best to keep you informed.

Source: Why the “Nuclear” Response to the Crisis Is Still Coming… and What to Buy Now

The government’s bailout is supposed to revive the patient. The government says it has no choice. Without healthy banks, it says, the economy will spiral into a deep depression.

But that’s a big simplification of what is happening. Only part of the financial sector is on a death watch. The other part is healthy and thriving.

While the big banks concentrate on survival, the small banks are doing better than ever.

The problem with big banks is that they made risky mortgage loans that are worth a fraction of their original value. On the other hand, small banks make few mortgage loans and their lending in the local community is fed by deposits. They’ve mostly avoided the problems which are now plaguing big banks.

And right now, investors are moving their money out of their riskier investments and putting it into these banks – giving them plenty of capital to loan out.

Amazingly enough, some of these banks have price-to-book of less than one. That means they’re going for less than their assets and you get the business for free. That is one heck of a deal.

Source: “We’re Drowning in Liquidity!”

Indeed, those analysts will watch to see how the stock-and-bond markets open this morning (Monday) as investors “vote” on whether the deal is a good one or not. A lot will depend upon what the so-called “experts” have to say about the long-term prospects of any deal (or non-deal) – and what strategies those experts tell investors to adopt:

Should they avoid “risky” equities at all costs and look to the “safe-haven” of commodities? And can you label the commodities sector as “safe” during a market in which oil can shoot up $25 a barrel in a single day? And what about money markets, which most investors view as the safest of investment plays: Are more money-market funds close to “breaking the buck,” a trend that threatens the most conservative of investors?

Congress seems more concerned about affixing blame than fixing the problem, so it’s little wonder that while there was a lot of finger pointing, few of our elected officials were analyzing their own roles in – and responsibilities for – this mess. There were no admissions of that one of the root causes was the lack of legislative oversight. Surely, the next Congress will seek to prevent similar calamities in the future and will rush to enact new (though not necessarily better) laws and regulations.

While everyone already realizes the economy is sluggish, this week will bring further confirmation through reports on labor (unemployment rate, non-farm payroll), manufacturing (ISM index, factory orders), and the U.S. consumer (income/spending, confidence). Some positive surprises sure would be nice.

Market Matters

Ah, the theater of politics…let the grandstanding begin. Apparently, when a U.S. treasury secretary, Federal Reserve chairman or even a president speaks, House Republicans (and a presidential candidate) don’t listen (especially in an election year). Throughout the week, Congress grilled the powers-that-be about the specifics of the $700 billion government bailout plan; at one point, they appeared to have reached an agreement by adding provisions on executive compensation and equity interest in those participating firms. But before the “I’s” were dotted and “T’s” crossed, disgruntled House of Representative members offered their own “insurance-based” plan (that, of course, included tax breaks), which U.S. Treasury Secretary Henry M. “Hank” Paulson Jr. and many banking experts called “unworkable.” U.S. Sen. John McCain, R-Ariz., (apparently now a renowned economist) appeared to have sided with this vocal minority, ceased campaigning, and even tried to reschedule the first presidential debate to focus on these matters (and to further pander to certain constituencies), while Sen. Barack Obama, D-Ill., preached “change”).

Meanwhile, U.S. Federal Reserve Chairman Ben S. Bernanke warned that inaction could lead to “recession, higher unemployment, and increased foreclosures.” Even global investing icon Warren Buffett, whose Berkshire Hathaway Corp. (BRK.A, BRK.B) just made a confidence-building, $5 billion investment in Goldman Sachs Group Inc. (GS), urged Congress to act now and said “he could understand the anger… but action was needed.”

While most people would agree that the bailout is far from an optimal solution, inaction could lead to the worst economic times since the Great Depression. Despite the politicizing, some form of a deal most likely will be passed (and just in time for Congress to hit the campaign trail). But it will take years to evaluate the plan’s effectiveness.

While much of the country focused on the bailout, the negative ramifications of the financial meltdown continued. Washington Mutual Inc. (WM) was taken over by the Federal Deposit Insurance Corp. (FDIC) and became the largest bank failure in history. WaMu’s assets were promptly sold to JP Morgan Chase & Co. (JPM), which jumped into first place in terms of domestic banking deposits.

Meanwhile, Goldman Sachs and Morgan Stanley (MS) moved beyond the old investment-banking model to become bank holding companies with the hope that their newfound abilities to accept deposits will improve both their liquidity and their overall operations (even with the increased regulatory oversight). Morgan Stanley also bolstered its balance sheet by selling a 20% interest to Japan’s Mitsubishi UFJ Financial Group Inc. (ADR: MTU), while its country counterpart, Nomura Holdings Inc. (ADR: NMR), bought the Asian operations of Lehman Brothers Holdings Inc.’s (OTC: LEHMQ) for $225 million.

General Electric Co. (GE) reduced its earnings expectations, ended its stock repurchase program, and hold its dividend steady through 2009, thus becoming another victim of the financial crisis. This will be the first time in 32 years that it won’t boost its dividend.

• Circuit City Stores Inc. (CC) announced yesterday (Monday) that Chairman, Chief Executive and President Philip Schoonover would resign from all posts, effective immediately. Schoonover was the subject of increasing criticism as Circuit City posted slipping financial results over the past year. Vice Chairman James Marcum will serve as acting Chairman and CEO, Reuters reported.

• Microsoft Corp. (MSFT) yesterday (Monday) announced a $40 billion share repurchase program. The buyback plan – the largest ever on record – is slated to run through September 2013, MarketWatch reported. Microsoft gained 24 cents on the news to close at $25.40 on an otherwise down market day.

• McAfee Inc. (MFE) agreed to buy Secure Computing Corp. (SCUR) in a deal valued at $465 million. The second-largest maker of security software plans to expand its product line for protecting corporate networks and e-mail systems, Bloomberg News reported. The price of $5.75 per common share is a 27% premium over Secure Computing’s closing price on Friday.

• Electricite de France SA (PINK: ECIFF) yesterday (Monday) announced that it had offered to purchase Constellation Energy Group Inc. (CEG) for $6.2 billion, a 32% premium over Warren Buffett’s offer. The offer, made in conjunction with private equity firms KKR & Co. (KKR) and TPG Capital LP, was not accepted due to Buffett’s MidAmerican Energy Holdings Co.’s promise of an immediate $1 billion cash infusion. “The offer accepted provided immediate liquidity and a strategic transaction that we think is executable,” Constellation Chief Executive Officer Mayo Shattuck said on the call. “That, amongst other variables considered, represents a superior offer.”

• Moody’s Investors Service (MCO) yesterday (Monday) downgraded the financial strength rating of Washington Mutual Inc.’s (WM) main bank subsidiary to “E,” its lowest rating, saying the bank’s capital is insufficient to absorb its mortgage losses, The Associated Press reported. Moody’s also cut its rating on WaMu’s preferred stock further into junk status to “Ca” from “B2.”

• CarMax Inc. (KMX) said yesterday (Monday) that second-quarter earnings fell 78%, as a weak economy, high gas prices, and losses the company’s financing arm proved too much to overcome. Earnings for the quarter ended Aug. 31 fell to $14 million, or 6 cents per share, from $65 million, or 29 cents per share, last year. Total sales fell 13% to $1.84 billion from $2.12 billion a year ago.

• Sallie Krawcheck, head of Citigroup Inc’s (C) wealth management unit, will step down from the company, The Wall Street Journal said yesterday (Monday). According to the report, Citigroup will move the wealth management unit under the umbrella of its institutional clients group.

• Legg Mason Inc. (LM) yesterday (Monday) denied a report by The New York Post that it plans to go private to escape tumultuous markets and a deepening credit crisis. “While we don’t normally comment on market rumors, in this uncertain time we want to be clear that The New York Post story is not true and Legg Mason’s strategy has not changed,” Legg Mason spokeswoman Mary Athridge said in a statement.

Source: Global Investing Roundups Tuesday, September 23rd, 2008

With that, two government officials stepped up with competing plans to help ease the domestic economy through this difficult time. Sen. Schumer and U.S. Rep. Barney Frank, D-Mass., head of the House Financial Services Committee, have called for the creation of entities similar to the Resolution Trust Corp. that was created by federal government in the 1980s as part of its S&L bailout plan.

A government-run asset-management operation, the RTC took assets that had been held by insolvent S&Ls, and found ways to repackage them and sell them off. The RTC was widely heralded as a bold and innovative creation, and its success was one reason the S&L debacle was put to rest much sooner than experts predicted, and cost the taxpayers much less than many had feared.

Ex-Treasury Secretary Lawrence H. Summers and former Federal Reserve chairmen Alan Greenspan and Paul A. Volcker are all in favor of the plan.

But current U.S. Treasury Secretary Henry M. “Hank” Paulson Jr. remains admantly opposed to an RTC-like entity, according to BusinessWeek, and is proposing his own plan.

Reports of a government intervention raced across the newswires late yesterday afternoon – just in time to give the stock market a last-chance boost for the day – but details of the plans remain sketchy as news operations provided conflicting descriptions.

Fears Roil Commercial Paper Market

The U.S. commercial paper market – consisting of short-term corporate borrowing – recorded its biggest-percentage-point decline in more than a quarter century yesterday as the bankruptcy of brokerage giant Lehman Brothers Holdings Inc. (LEH) and the takeover of insurance heavyweight American International Group Inc. (AIG) sent a stampede of investors into government securities, Bloomberg News reported.

Commercial paper is a short-term debt obligation with a maturity ranging from two days to 270 days. It is issued by corporations, banks and other institutions to investors with surplus cash, which companies can use to finance their day-to-day operations. But a crisis of confidence among investors who fear they may not get their money back has made it impossible for firms to raise cash, creating a liquidity crisis big enough to shove otherwise solid firms into bankruptcy.

These investor liquidity fears had a major side-effect recently: By literally pouring cash into Treasuries, investors yesterday sent investment yields on the three-month T-bill to their lowest levels in at least 54 years, Bloomberg stated.

Thanks to this “flight to quality,” the U.S. commercial paper market actually declined by 2.9%, or $52.1 billion, to a seasonally adjusted $1.76 trillion for the week ended Sept. 17, the U.S. Federal Reserve said yesterday. Without the seasonal adjustments, the market declined 4.2%, or $74.1 billion, to reach $1.68 trillion.

That was the biggest-percentage-point decline in at least 26 years. It was also the biggest slump in corporate short-term borrowing since December, Bloomberg reported.

“There’s a loss of confidence in the market. You don’t know if one of the banks you’re trading with is next,” Ina Steinke, a money-market trader for Norddeutsche Landesbank Girozentrale AG, Germany’s fourth-biggest state-owned bank.

But this is one example of how a catastrophe on Wall Street can lead to major problems on Main Street since money-market funds are among the biggest buyers of corporate commercial paper.

Investors pulled $80.7 billion from taxable money-market funds in the week ended Sept. 16, including $39.6 billion of withdrawals from the Reserve Primary Fund. Total assets in U.S. money-market mutual funds fell 2.5% to $3.45 trillion, according to Money Fund Report, a Westborough, Massachusetts-based newsletter.

The Reserve Primary Fund and the Reserve International Liquidity Fund Ltd. became the first two money-market funds since 1994 to “break the buck,” meaning that their net asset values (NAV) fell below the $1-a-share price paid by investors. [For an in-depth look at the money-market-fund mess, check out a related story elsewhere in today’s issue of Money Morning].

The list of firms facing liquidity shortfalls after spooked investors and short-sellers sent their stocks diving over the past week continues to grow as Morgan Stanley (MS), Washington Mutual Inc. (WM) and Constellation Energy Group Inc. (CEG) all scrambled to restore investor confidence.

By Jennifer Yousfi, William Patalon III and Jason Simpkins
Money Morning Editors

Source: The Government’s Financial Crisis Fix-it Plan Sends Stocks Soaring, Though Some Argue There’s no Quick Fix for this Disaster

(Part 2)

For instance, check out this great looking company:

- It appears to be a deep value on the price-to-sales per share scale: 0.63

- Its P/E ratio last year was a sweet 9, well below its mid-range usual around 12 and its frequent values of 14-16

- What’s more this has been a growth stock despite its huge size, with a 5-year average annual sales growth of 33%. Net income grew 329% in five years.

- It was very successful and rewarded shareholders well with a return on equity above 20% the past three years and above 16% the past five years

- It won respect among the pros. S&P rated its debt quality A and gave its stock a three-star hold rating, down from a recent 4-star buy. Four firms rated it a strong buy, four more firms called it a buy/hold, 10 a hold, and none called it a sell.

Hope you didn’t buy Lehman Brothers (LEH). Because that’s who these great stats belong to.

Things looked about as good at Countrywide, Citigroup (C), Washington Mutual (WM), Wachovia (WB)—until they each rolled over and showed the ugly bellies of their business.

People’s methods for choosing a stock run from the mindlessly emotional to the supremely analytical. And today’s banking crisis is making mindless dart-throwing look good. It certainly throws doubt on the usefulness of mere numbers.

Isn’t this a comeuppance? As a value investor, I have always counted heavily on numbers. I always look at a 10-year record of earnings, sales, profit margins, tax rates, etc. if possible. At least five years. And bank numbers have been darned good these past few years.

In fact, I had one of today’s stinkers, Washington Mutual, in Fleet Street Letter (Alan Myers made the astute pick) back in the early 2000s just as it was beginning to break out of its regional mold. It did great, back then.

I’ve said nice things about American International Group (AIG) in the past, too. Also Wachovia, which still has a great economics department. And just last year, I thought that National City Corp had made a smart, early exit of the subprime mortgage business at a large profit. This year’s tripling in loan loss provisions it hadn’t yet sold were not what I expected.

Oh yes, I’ve made mistakes on banking stocks. I recommended Oriental Financial Group in Rising Tide a couple of years ago only to watch it go down after a bit. That pick looks pretty foxy in retrospect, though, because after the drop, OFG has been coming back. It’s up 43% this year and has doubled since its 2007 low.

Another bank I admired and recommended several times in years past was Popular Inc. (Banco Popular), though not in the last five years, thank goodness. And part of what I liked was its mortgage business of all things. Mortgages have traditionally been regarded as higher-quality loans than consumer revolving credit.

And I like East West Bancorp (EWBC) again, too. I’ve often been a fan of Zion’s, as well. And today I’m taking a closer look at both of these stocks.But you have to admit, bank stocks are downright scary, and I can see why investors don’t want any of them right now…The currently failing institutions were supposed to be blue chips. They were bastions of security in times past, stalwarts. Some are even in the business of advising people on which stocks to buy, for heavens sakes! All are supposedly in the business of telling people what to do with their money.When it comes to getting fleeced, all I can say is that, at least roulette croupiers only provide you with an opportunity to go broke, they don’t tell anyone it’s smart to bet it all on black.

So how do you miss a meltdown like this? Buying banks and brokers with decades-old track records of success was not exactly high speculation on the order of dot-com stocks in 1999.

This is where the other part of a value analysis comes in—business is not just numbers. Those numbers we look at, like P/E ratios and profit margins, are mere artifacts, the discarded potshards on the trash heap of lost corporate civilizations. The slime trail of the slug if you like a more picturesque metaphor.

Bottom line: the bottom line is not a number. Business is also mental—it involves planning, execution, vision, understanding, and all that comes down to strategy.

The reason I made a “bad” choice like Oriental and choices that worked out at the time, like East West, Popular and the old Washington Mutual had to do with the strategy these banks embraced. All banks make loans, sell CDs and so on. But East West has a special niche I like, stable, highly community-centered Chinese-American clientele and growing export-import businesses linked to Asia. Oriental’s different strategy was seeking out the newly emerging middle class in Puerto Rico and courting the un-banked Hispanic population in southern states. Washington Mutual was making a transition from a local savings and loan to a national mortgage bank (well, it seemed like a good idea back in the early years of this decade, and it was at the time).

There were some tell-tale weaknesses in most of today’s troubled financial stocks for those who can read deeply into financial reports, but strategy explains how a company gets where it’s going—and gives you a cue as to how smart the plan is. Washington Mutual, for instance, took a good idea too far and became overweighted in one direction, a reason I did not recommend it in recent years. (Though, to be honest, I never told anyone to avoid it either.)

This market is going to offer hundreds of cheap stocks. But only some of them will be values. When you are through looking at the numbers, scrutinize its style of business. If you can’t identify a special niche or some edge it has, think twice before investing.

Source: Balance Sheets and Valuations: By The Numbers Alone—You Can Hardly Tell the Dog from the Fleas—You Need This One Extra Key

– According to Bloomberg: “The Fed increased the amount of dollars that the European Central Bank, the Bank of Japan and other counterparts can offer from $67 billion ‘to address the continued elevated pressures in U.S. dollar short-term funding markets.’ The Bank of England, the Bank of Canada and the Swiss National Bank also participated.”

– This flood of cash seems to have cheered Wall Street. “US stock futures pointed to a stronger start. S&P 500 futures rose 16 points to 1,178.90 and Nasdaq 100 futures improved 21.25 points to 1,668.25. Dow industrial futures rose 96 points,” reports MarketWatch.

–New York Mayor Michael Bloomberg, however, sent shivers up the spine of investors. He warned that a “next wave” of the crisis could come as foreign investors stop buying US debt.”It’s not clear who’s going to be buying our debt,” he said. “It may very well be that the next wave is going to come back and bite us.”

– Two financial giants are on the block. Morgan Stanley (NYSE:MS) is in merger talks with Wachovia (NYSE:WB), the troubled regional lender. Morgan Stanly is also “exploring other potential deals in an effort to avoid becoming the next victim of the credit crunch [...] and is in close contact with a leading shareholder, China Investment Corporation, which owns a 9.9 per cent stake,” according to the FT. WaMu (NYSE:WM), the country’s largest savings and load bank, which saw its credit rating slashed to junk by Standard and Poor’s, is also looking to sell itself and has hired Goldman to run an auction, according to the paper.

– No end in sight, says the WSJ:

Lingering hopes that the damage could be contained to a handful of financial institutions that made bad bets on mortgages have evaporated. New fault lines are emerging beyond the original problem — troubled subprime mortgages — in areas like credit-default swaps, the credit insurance contracts sold by American International Group Inc. and others. There’s also a growing sense of wariness about the health of trading partners.

– Gold prices exploded yesterday as investors sought safety from the mayhem on Wall Street. The metal posted the biggest one-day gain ever in dollar terms. This from AP:

Gold for December delivery rose as much as $90.40, or 11.6 percent, to $870.90 an ounce in after-hours trading on the New York Mercantile Exchange after jumping $70 to settle at $850.50 in the regular session. That was the biggest one-day price jump ever; gold’s previous single-day record was a $64 gain on Jan. 29, 1980. In percentage terms, it was gold’s largest one-day advance since 1999.

– As gold soared, white-knuckled panic has gripped the global credit markets. Yesterday saw “a flight to safety of the kind not seen since the second world war,” reports the FT. According to the paper, lending between banks “in effect, stopped.”   While yields on short-term US Treasuries “hit their lowest level since the London Blitz.”

– This is how The Big Picture blogger Barry Ritholz explained the difference between AIG, Lehman Brothers and Bear Stearns to researches on The Daily Show:

Lehman Brothers was like the little kid pulling the tail of a dog. You know the kid is going to get hurt eventually, and so no one is surprised when the dog turns around and bites the kid. But the kid only hurts himself, so no one really cares that much.

Bear Stearns is the little pyro — the kid who was always playing with matches. He could harm not only himself, but burns his own house down, and indeed, he could have burnt down the entire neighborhood. The Fed stepped in not to protect him, but the rest of the block.

AIG is the kid who accidentally stumbled into a bio-tech warfare lab . . . finds all these unlabeled vials, and heads out to the playground with a handful of them jammed into his pockets.

– Dan Denning, editor of The Daily Reckoning Australia, has another view on the matter. Here’s Dan on why the Fed bailed out AIG and not Lehman Brothers, as quoted in Addison Wiggan’s and Ian Mathias’s 5 Min Forecast:

One answer is that most of AIG’s customers are overseas. Not only would a bankruptcy trigger chaos is the CDS market, but many foreign customers insured by AIG would be in doubt about the value of their normal insurance policies. Just like with Fannie and Freddie, foreign creditors may have again forced the hand of the Treasury to use American taxpayer dollars to guarantee the value of their financial investments in the U.S.

This from Martin Denholm in The Smart Profits Report:

Crude oil prices have declined dramatically from the record high of $147.27 a barrel on July 11  to about $91 a barrel. But consumers are still not seeing much relief at the pump.

Average prices have slipped back under the $4 a gallon level. But the devastating aftermath of Hurricane Ike has crippled many refineries in the Gulf of Mexico and pushed the price of gas back up.

According to AAA, the national average is $3.84. This is up almost 5% from last week. Ike forced the closure of 14 refineries in Texas and Louisiana that amount to 20% of US refining capacity.

It took 3.7 million barrels of production offline. Experts say it could be up to two weeks before normal operations resume.

This could push gas prices back to the $3.90 a gallon level. In this scenario public sentiment is likely to shift further towards offshore drilling for three reasons: 1) To break America’s dependence on foreign oil resources; 2) to alleviate some of the pressure at the pump; and 3) to provide a safety net from attacks to oil supplies in the Middle East and Africa.

The problem, however, is the US still gobbles up 25% of the world’s oil but only possesses 3% of the world’s oil reserves. Drilling, therefore, may not have the quick and positive impact on gas prices that many expect.

In fact, according to the International Herald Tribune, the government’s own analysis shows that a widespread offshore drilling program “would result in a price reduction of perhaps two-tenths of one cent 18 years after drilling begins.”

This issue is a longer term concern. But it’s one well worth keeping an eye on in the run-up to Election Day on November 4.

Source: Fed Up With Financials? Let’s Go Drill For Oil Instead…

Anyway, with Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) getting bailed out last week, Lehman’s bankruptcy comes at the same time as Washington Mutual (NYSE: WM) and insurance giant American International (NYSE: AIG) teeter on the edge of bankruptcy, too.

So now is the time to take a look at the latest carnage unfolding within the financial sector…

If You’re Investing In Financial Stocks… Here’s What You Need To Do

Despite the recent woes in the financial sector, it actually wasn’t faring too badly. Since the markets bottomed out on July 15, some banks have performed very well. Like BB&T Corp (NYSE: BBT), for example – up a whopping 82% – and US Bancorp (NYSE: USB), which has risen 64%.

Aside from the obvious major problems in both the bank and brokerage sectors, the brokerage stocks, which use more leverage in their businesses, seem to be getting the worst of it. For example, while USB was making a new two-month high last week, Merrill Lynch (NYSE: MER) traded at a 12-year low.

The moral of this story is this: If you’re going to trade the financial sector from the long side, you’d better do your homework and stick with these well-capitalized banks.

On the other hand, you can diversify and lower your risk from the sector through one of its most widely traded ETFs – the Financial Select Sector SPDR (AMEX: XLF)

As you can see below, the stock has remained stuck in a consolidation pattern since late July.

The Offsetting 85

However, this consolidation pattern is a bullish one – and for a good reason.

Because XLF is comprised of more than 85 stocks – mostly including banks, brokers, and insurance companies – when some of them are faring well and some doing poorly, the resulting action is sideways trade.

However, XLF appeared to trigger a daily buy signal off the July 15 lows and unless an alternative upside target is generated, the stock should eventually trade up to at least my minimum target around $24.40.

And that gives investors a good, low-risk opportunity to buy.

That’s because in the wake of the Lehman fallout, the stock will probably trade back down to the bottom of the consolidation pattern in the $19-$20 area. Beware, however…

A Financial World Still Crumbling

If you’re looking to invest in financials in hopes of grabbing some bargains, remember that the sector is still in crisis. Moreover, nobody really knows for sure if other institutions will stumble down the same path to bankruptcy as Bear Stearns and Lehman Brothers.

The best course of action is to wait for the dust to settle and see if XLF can hold the $19 area.

And on a broader scale, the S&P 500’s low for the year is 1,200.44. If the index closes below that level, it should have further to go – in which case, I’d hold off on buying anything until the dust settles.

Commodity Rewind… And Flash Forward

In the last couple of editions of “Sector Watch,” we’ve looked at some of the commodity sectors, including energy and gold, along with their related ETFs.

According to the analysis generated by the trading system I developed for my 1-2-3 Trader service, we noted that they all had bearish daily chart patterns.

And over the past couple of weeks, the US Oil Fund (AMEX: USO), SPDR Gold Trust (AMEX: GLD), and the US Natural Gas Fund (AMEX: UNG) have all made new correction lows.

In fact, USO and GLD have similar chart patterns and they reached my minimum downside objectives over the past week. With UNG, the chart is more complex and it’s hard to tell at this point if the “C” wave (or “3rd wave”) is complete.

Regardless, most of the commodity sectors are now reaching oversold territory and if nothing else, we can probably expect at least a decent rebound to work off the oversold conditions.

USO and GLD are now all set up for daily buy signals, so the risk of being short is increasing.

That also goes for the Powershares Commodity ETF (AMEX: DBC). Let’s take a fresh look at the chart…

We originally highlighted this chart in the August 25 edition of “Sector Watch.” At that time, the stock was trading above $38, and the “C” wave decline was just getting underway. Since then, the stock has made new correction lows and reached my minimum downside objective of $34.60.

So as I said, the same theory as USO and GLD applies here: The chart is set up to trigger a buy signal, so be wary of going short at this point.

We will revisit the commodity ETFs once we see what unfolds from here.

Take care till next time.

Jim

Source: If You Invest In Financial Stocks… Here’s What You Need To Do