Three of the financial institutions that were key catalysts to the global financial crisis – and that owe the federal government billions of dollars as a direct result of those problems – have seen their shares triple in price so far this month.

That could signal that a big rebound in bank-sector earnings is just around the corner. Or it could be merely a speculative “short squeeze” that all but confirms that these stocks are basically worthless.

Shares of busted insurer American International Group Inc. (NYSE:AIG) have soared from $13.14 to $50.23, as of Friday’s close, a gain of 282.3% so far this month. Shares of mortgage giants Freddie Mac (NYSE: FRE) and Fannie Mae (NYSE: FNM) posted similar gains,MarketWatch.com reported. Fannie’s shares advanced from 58 cents to $2.04, an increase of 251.7%. Freddie’s shares zoomed from 62 cents to $2.40 each, a gain of 287.1%.

AIG actually gained for a ninth straight day Friday, reaching a 10-month high, as short-shelling speculators got squeezed and were forced to buy back the shares they’d sold short, traders told MarketWatch. AIG has 21% of its “float” – shares available to the public sold short, the sixth-highest proportion in the Standard & Poor’s 500 Index, according toBloomberg News.

But the gains might also sign that the banking sector is poised for a major profit rebound, according to some new analyst research.

“Dating back to 1995, bank-sector outperformance has typically preceded [earnings-per-share] growth outperformance by one to two quarters,” Stifel Nicolaus & Co. (NYSE: SN) analysts wrote in a market-research note last week. “With sector earnings growth expected to exceed that of the general market in mid-2010, we question whether we will see another leg down in this rally before year-end. On the other hand, perhaps we should question the current growth expectations for the sector?”

Trading in financial-services stocks has dominated the stock-market volume this month. So-called “day traders” have gravitated to once-questionable financial stocks and helped fuel those stunning gains – and huge volumes.

Citigroup Inc. (NYSE: C), for instance, has seen daily trading volume topping 1 billion shares this week. The stock closed above $5.05 on Thursday and $5.23 on Friday. That represents a 439% gain from its 52-week low of 97 cents a share.

Financial stocks have led the market’s slingshot higher from the early March lows. Trading has been fierce in beaten-down shares of some companies that participated in the bailout, such as AIG, Citi and Bank of America Corp. (NYSE: BAC).

The New York-based AIG is trying to sell assets to repay government loans after accepting $182.5 billion in U.S. bailout money. AIG recently reported a profit for its second quarter – after having posted six straight quarters in the red. It engineered a so-called “reverse stock split,” in which AIG gave investors one new share for every 20 they turned in. The company did this to avoid a delisting action. That enhanced the short squeeze, since there were fewer shares available to for short-sellers to repurchase and “cover” their bets.

Despite the torrid run that AIG’s shares have been on, the insurance company’s bonds still trade at levels indicating the company’s shares may be worthless, Peter Boockvar, an equity strategist at Miller Tabak & Co., told Bloomberg.

“The value of the company is still the same,” Boockvar said. “AIG bonds tell you that the equity is possibly worth nothing and that they may not be able to pay back the government.”

AIG’s $3.24 billion of 8.25% bonds due in 2018 are quoted at 79 cents on the dollar, to yield 12.2%, Bloomberg reported. The insurer’s $4 billion of 8.175% percent bonds due in 2058 are quoted at 49.5 cents on the dollar to yield 16.7% Bloomberg said.

The Financial Select Sector SPDR Fund (NYSE: XLF), an ETF tracking the financial stocks in the Standard & Poor’s 500 Index, has rallied nearly 30% over the past three months and handily outpaced the market.

Market Matters

While the past few months have been anything but dull for the markets (euphoric may be more appropriate), investors enjoyed a few slow days of peace and quiet.

Another stimulus program came to a close as “Cash for Clunkers” ended with a last-minute flurry of activity.  Analysts claimed that more than 700,000 cars were bought over the past month and August auto sales should rise on a year-over-year basis for the first time since mid-2007.

While dealerships enjoyed a nice rebound in activity (even if just temporarily), banks continued to experience challenges as the Federal Deposit Insurance Corp. (FDIC)reported that 416 institutions were on its “problem” list at the end of the second quarter, up from 305 on March 31, and also conceded that its insurance-fund reserves were dwindling.

Goldman Sachs Group Inc. (NYSE: GS) was in the news again as controversy has continued to surround the investment giant since the AIG bailout and LehmanBrothers Holdings Inc. (OTC: LEHMQ) failures.  Regulators are investigating its weekly “trading huddles,” where its analysts allegedly gave short-term stock tips to select clients and traders, though most other customers were not privy to such insight.

Dell Corp. (Nasdaq: DELL) posted lower quarterly profits, though
the result still beat Street expectations and management projected stronger performance in 2010 when businesses get back in technology buying mode.  Intel Corp. (Nasdaq: INTC) boosted its revenue projections for the next few months, another sign that chip demand is increasing and the business climate continues to improve.

The Dow Jones Industrial Average roared to eight straight days of higher closes, before hitting a stumbling block on Friday (though no one may have noticed as volume was so light) and the days of triple-digit moves ended (for a week at least).

The other indexes traded relatively flat during the week and even the positive news from Intel did little to generate any investor enthusiasm in the tech-heavy Nasdaq Composite Index. Fixed income fared better than most would have expected, considering another $109 billion in government debt hit the street.

Oil surged to a 10-month high before a larger-than-expected inventory report indicated that crude demand remained weak despite expectations of an economic recovery just around the corner.  In fact, natural gas plunged to a seven-year low.

Economically Speaking

In perhaps the biggest news of the week, U.S. Federal Reserve Chairman Ben S. Bernanke will manage to avoid becoming a part of the so-called “jobless recovery” when he was nominated for another term as central bank chair by U.S. President Barack Obama.

While Bernanke certainly has his critics among grandstanding politicos from both sides of the aisle, few Fed watchers expect Congress to hold up his confirmation.  For now, continuity seems to be the best thing.

The economic data of the week was relatively favorable with signs of renewed strength in both housing and manufacturing.  New home sales jumped for the fourth consecutive month and the S&P Case-Shiller Index even depicted higher home prices last quarter for the first time since 2006.  Durable good orders surged in July on increased demand within the transportation sector as both General Motors Co. (OTC: MTLQQ) and Chrysler Group LLC put bankruptcy in their rearview mirrors and boosted production, while other companies also benefited from the “Cash for Clunkers” program.

When second-quarter gross domestic product (GDP) was announced as a decline of 1%, many analysts expected a downward revision (perhaps significant) in the months that followed.  Well, the initial revision again showed a 1% decline, a negative showing, but one that many economists believe will be the last contraction in overall activity for a while.

The U.S. consumer remains one big wildcard for the strength of the economy moving forward.  Though the Conference Board reported a better-than-expected increase in its August consumer confidence report, the Reuters/U of Michigan sentiment index offered a contrasting view as it fell to its lowest level in four months.  Personal spending in July got a nice boost from the increase auto sales (“Cash for Clunkers” strikes again), though the income component of the release was unchanged and concerns about the labor picture continued to hinder consumer activity.

Weekly Economic Calendar

Source: Soaring Prices for AIG, Fannie and Other Financial Stocks Sending Mixed Messages to Investors ]]> http://www.contrarianprofits.com/articles/soaring-prices-for-aig-fannie-and-other-financial-stocks-sending-mixed-messages-to-investors/20240/feed 0 http://www.contrarianprofits.com/articles/6-critical-factors-that-govern-your-portfolios-future-value/20087 http://www.contrarianprofits.com/articles/6-critical-factors-that-govern-your-portfolios-future-value/20087#comments Mon, 24 Aug 2009 16:59:56 +0000 Contrarian Profits http://www.contrarianprofits.com/?p=20087 Where are we now? Still in the Twilight Zone economy as far as we’re concerned. US stocks ended strongly on Friday. And they’re set to rise again today if Europe’s strong morning performance is anything to go by. Commodities are up too. Nymex crude oil futures are at $74.24 a barrel at writing. Gold is trading at $953.50 an ounce – not far off Friday’s one-week high.

“No rally can be sustained with yields and P/Es so poorly valued,” says underground investor Chris Weber, writing for DailyWealth. Chris is a very special kind of investor. When he was 16 years old, he turned just $650 (saved from his paper route) into $1.8 million through a series of remarkably insightful investments. So naturally…

He may well be right; more interesting is what this tells us about the U.S. banking system going forward.

“The institutions are insolvent,” Roubini said in a Bloomberg Radio interview. “You have to take them over and you have to split them up into three or four national banks, rather than having a humongous monster that is too big to fail.”

But that may be impractical. Citigroup Inc. (C), for example, can sell and is selling peripheral parts of its empire such as Japanese broker Nikko Securities. However, so much of its business involves an international nexus of connections – including its large U.S. operations – that splitting them may be both impractical and excessively value destroying.

However, Wells Fargo & Co. (WFC) showed Thursday what could be achieved by simplicity. It gave investors a preview of its first quarter results, in which it will make record earnings of about $3 billion, or 55 cents a share, after paying preferred stock dividends of $372 million on its $25 billion of preference shares from the Troubled Assets Relief Program (TARP).

Both the old Wells Fargo and Wachovia Bank, which it acquired last year, are showing good results, with $3.3 billion in loan-loss charge-offs for the combined group – down from $6.1 billion in the fourth quarter of 2008. As a result, bank stocks were up sharply Thursday, continuing their healthy rally over the last six weeks.

Wells Fargo is one of six U.S. banks – Citigroup, Goldman Sachs Group Inc. (GS), and Morgan Stanley (MS), Bank of America Corp. (BAC) and JPMorgan Chase & Co. (JPM) – with assets of more than $1 trillion. They are so large they form a separate “top tier” of banks, since the next largest bank, PNC Financial Services (PNC), has assets of only $295 billion.

However, Wells Fargo’s first-quarter success does not mean that all the top-tier banks will do well. Both Wells Fargo and Wachovia were heavily oriented to conventional retail and commercial banking, with massive branch networks all over the United States. The combined Wells Fargo was thus much less reliant on the slumbering investment banking business than other top-tier banks. It was also far less involved in high-risk capital-markets game playing, which got so many other banks in trouble. For example, while Wachovia got $500 million of dubious payouts from American International Group Inc.’s (AIG) dodgy credit default swaps, Wells got nothing, and therefore presumably had no net exposure.

Wells Fargo, in short, is becoming a model of what a nation should require of its behemoths under the “too big to fail” doctrine. It does mostly conventional retail and corporate banking, and provides economically useful services to its nationwide network of clients. It takes few huge risks, and is emerging from 2008’s disaster in pretty good shape. Without the Wachovia acquisition, Wells Fargo could probably have avoided the need for TARP capital.

In my February report on the top 12 U.S. banks, I showed how many of the top banks were in pretty good shape and offered investors good value, which would be demonstrated by higher first quarter earnings going forward. The Financial Select Sector SPDR fund (XLF) is up about 39% since then, so that was a pretty pleasing call.

Of course, what I didn’t get right was that the dogs are up even more in percentage terms than the solid citizens. Citigroup, the biggest bow-wow of them all, has more than doubled. Going forward, I would expect quality to assert itself. While some of the weaker banks should survive, they will be able to take much less advantage of currently juicy lending opportunities than their stronger brethren.

Sorting Out the Winners and Losers

Over the long term, the road forward is clear. Roubini’s suggestion to break up the largest banks – say those with assets of more than $500 billion – may be impracticable. It is also unnecessary. They should simply be tightly restricted, allowed to undertake only “vanilla” banking businesses, without a presence in investment banking, or in high-risk trading.

The market would then sort matters out. Some banks, like Wells Fargo, would probably prefer to remain gigantic, but simple and low-risk – earning a reasonable return, paying their top executives moderately, and having their stock serve as a fine investment for risk-average investors seeking dividend income. Bank of America and JPMorgan might wish to divest their investment banking businesses and move toward this model. The cultural clash between Merrill Lynch and the old Bank of America has been huge, suggesting that their merger has huge negative synergy and that the two institutions would be worth more separated.

The top six’s two investment banks, Goldman Sachs and Morgan Stanley, would have no interest in commercial banking, in which they have little history, so would have to downsize dramatically. One possibility is splitting them three ways – an advisory business, a medium-sized institution with a magnificent client base, and a more or less unregulated hedge fund that could be allowed to bankrupt itself in the shadows. They would not be permitted to retain their current huge positions in “principal trading,” an activity of little economic purpose beyond exploiting the firm’s insider information.

As for Citigroup, it seems likely that its troubles are too great and its culture too aggressive for any Wells Fargo-type solution to be possible. Over time, it should almost certainly be liquidated.

Below the top tier, the U.S. regional banks should mostly be in good shape, with a few exceptions that were based in particularly troubled regions or who had been excessively aggressive. In any case, they would not be “too big to fail” and would be allowed to engage modestly in investment banking if they thought it profitable.

Since they would be allowed higher leverage than the behemoths, they would be more profitable. And over time, the banking business might fragment further, which could only be good for competition.

As the world has seen over the past year, the arguments for creating financial services behemoths were spurious. They were too large to manage, and they survived only because their host country taxpayers gave them an implicit guarantee.

Source:  U.S. Banks: Why Only the Simplest Will Succeed

This week’s movement is Part 1 of the Elliott Wave Theory.

When the Wave 2 pullback begins, it should trade below its recent high for nine trading hours or more before Wave 3 takes it up to new recovery highs. The daily chart is also set up to give buy signals, but that could not occur until today (Monday) at the earliest.

For more, take a look at the chart below…

As you can see, the 50-day moving average happens to coincide with the top of a trading channel drawn from a high point last September. Both these technical tools currently show the $9.05 area as a significant level.

If XLF undergoes a decent pullback, short-term traders could try the long side with an upside target of $8.60 or better.

However, if the stock can manage to close above the $9.05 level a couple of times, there’s a good chance that the daily chart will trigger buy signals and we could see additional movement to the upside.

Source: Ticker Of The Week: Financial Select Sector SPDR (NYSE: XLF)

This from Steve:

The complete inability of the banks to offer any solution to their current problems, other than to have the taxpayers pay for their bailout is the best case for some form of government intervention.

Nationalization is a disgusting word to me, but even I have reached the point of believing something needs to be done to pull us out of this mess.

Bankers have always been a strange group to me. They are the first and loudest to scream about welfare and people taking responsibility for their actions, and they are the first and loudest begging for a bailout from a situation they are responsible for creating, at least in part.

These people absorbed the entire first half of the TARP money and made no appreciable change in their lending. They have acted as if the TARP money is theirs and not the taxpayer’s.

They created and bought mortgage-backed securities they knew were garbage and expected the U.S. Government to make good on them. It’s another form of welfare.

It’s hard to believe the best and the brightest didn’t know what they were buying, with other people’s money, of course.

The obvious solution to this problem is to have the banks work openly with mortgage holders and rework these problem loans, sell off the garbage, take the loss and get this show on the road.

They haven’t done this because I believe they have no ability, or lack the willingness, to see beyond the balance sheets and recognize that this is a unique situation. The solution requires imagination, creativity and stepping beyond the normal banking parameters.  Bankers are not known for their creativity.

Bankers cannot solve the banking mess. They have offered no solution other than to wait.

The best proposal, with the greatest probability of success, looks like this: a government group takes over the asset base of the zombie banks.  The group separates the good assets from the bad, values them as accurately as possible, sets up a sale mechanism similar to the Resolution Trust Corporation to get something for the dead wood and then turns the cleaned up operation back to the bankers.

The banks take a loss, but the good assets become available to be used as reserves for lending.  We can finally stop guessing and actually know exactly what we have.

There is money to be made in this nightmare, but you’ll have to do your best imitation of not thinking like a banker to take advantage of it. Here’s my recommendation.

There appears to be no way banks, or their stock, will recover from their current situation unless something radical is done. If the limited intervention concept wins, and I think it will, we will see bank stocks drop to something similar to an AIG scenario, the stocks will be near worthless until there is a resolution of their balance sheets and asset woes.

So the obvious play now is to short or buy puts on individual bank stocks or the S&P Select Financial Spyder ETF (NYSE:XLF). Yes, I know, they are already in the toilet, but take a look at the XLF puts for Sep 09 or Jan 10 and you’ll see some real profit potential.

Also, JPM and WFC have not been immune to the beating the markets have been handing out lately. While these are the two banks with the smallest problems, they are not immune to the coming slaughter. There is lots of room for a downside play here.

If the markets react as they always have, we will have a period of severe bleeding following the government intervention, which is why this strategy will work. This should be followed by the usual waiting period to allow the street to adjust to the change and then I see a big upward move in what I call “resolved banks.” Time frame? 18 to 36 months.

How do you make money now? Look further out than the end of your nose, imagine what we could do to turn this mess around, and don’t sit around waiting for the government to send you this month’s welfare check.

Keep your eye on the horizon.

Source: Short The Banks Again For A Huge Gain

This from Investment U:

I’ll be the first to confess, I flubbed the extent of the downturn in the financial space. Last April, I recommended “backing up the truck” and playing the rebound via the Financial Select Sector SPDR ETF (AMEX: XLF). Instead of a short-term opportunity, it’s turned into a really long-term rebound play.

But as I told members at our Central American meeting in Nicaragua last week, I’m human. I make mistakes. Both in life and investing. Thankfully, I’m not as bad as Wall Street analysts…

Forget Your Broker, Wall Street Analysts are a Bigger Threat

Most people will tell you a bad broker, motivated to increase his net worth by leeching fees off your net worth, is your biggest enemy. Not so. A blind faith in Wall Street analysts poses a bigger threat.

Forget being wrong some of the time. They’re wrong most of the time. Or as a recent MarketWatch article tells it, “If there’s one group of Wall Street denizens that have performed as poorly as bankers in the credit crisis, it’s the equity analysts who cover Corporate America.”

For instance, well into the credit crunch, they predicted earnings growth of 11.5% for the fourth quarter of 2007. Low and behold, earnings actually plunged 25%, based on Thomson Reuters data. They were off a whopping 36.5%! No rational explanation could explain, let alone justify, such a big miss.

Here’s the most compelling observation, though. According to Ashwani Kaul, the numbers cruncher at Thomson Reuters, the “figures show that analysts tend[ed] to err on the side of the positive when predicting earnings growth.”

But that was then. After being so wrong, for so long, I’m convinced most analysts fear for their jobs… and the pendulum’s swung back the other way. They’re being way too pessimistic now.

Case in point. Analysts’ estimates for the S&P 500 companies rest at their lowest levels for the last four years. In the last month alone, they’ve piled drive expectations into the ground, lowering EPS forecasts for 982 companies.

Companies themselves have even jumped on the pessimism bandwagon. In the third quarter, only 3% raised guidance. While the majority – you guessed it – lowered expectations.

Bottom line, the negative side of the market is getting overcrowded. And for once, I think analysts actually got ahead of the downward spiral.

That’s not so say we won’t have any more repeat performances. But we will certainly get pockets of outperformance. Companies beating expectations, with share prices eventually rebounding to reflect the good news.

Here’s how to play it…

Stock Profits From the Point of Maximum Pessimism

The late Sir John Templeton believed, “The time of maximum pessimism is the best time to buy.” (I agree.) And he did just that.

But he didn’t load up on the market indiscriminately. Instead, he cherry-picked companies trading at cheap valuations, with solid businesses and above average growth prospects.

He was talking about companies like Minnesota-based Fastenal (Nasdaq:FAST). It’s a supplier of nuts, bolts, parts and tools to manufacturers and commercial contractors.

I’ll concede that such a business is unglamorous and mind-numbingly boring. But the fact is, the company’s nearly 700,000 products are vital. They are used to operate and keep up large buildings, campuses and industrial plants, as well as bolt together furniture, appliances and trucks.

Recession or not, demand remains stable for Fastenal’s products. Otherwise, simply put, stuff stops working.

I originally alerted Oxford Club members to this stock in November. It reported earnings yesterday. And guess what? It beat expectations. The company posted a 10% increase in profits and enviable same-store sales growth of 8%.

Moving forward it will continue to grow thanks to four key competitive advantages – unparalleled convenience, market penetration, cost leadership and customization.

Strong insider ownership, double-digit growth opportunities and the most attractive valuation in over a decade (approximately 40% below its historic price-to-earnings ratio) only make the stock more compelling. I still rate it a “Buy.”

Whether you trust my analysis on Fastenal or not, just remember this: Analysts’ earnings estimates resemble a waterfall, cascading lower and lower with each passing week. They’re bound to overshoot the mark.

In many cases, like Fastenal’s, they already did. And that means plenty of bargain stocks exist to profit from the imminent pivot from pessimism to optimism.

Source: Stock Profits from Today’s “Maximum Pessimism”

Nevertheless, Jim Stanton says alternative energy — and the wind-energy market in particular — has a big future. Wind energy is already the second largest source of new power generation in the US, and it now has the backing of the much-hyped Pickens Plan.

Jim says two clean-energy ETFs that look undervalued right now are PBW and GEX. He also recommends FAN for a more wind-specific ETF. 

This from the Smart Profits Report:

With the steady climb of oil prices over the past few years, it’s become apparent that higher prices are here to stay.

As a result, the market has spawned dozens of new alternative energy stocks – and subsequently, ETFs devoted to the sector.

However, with alternative energy technology developing rapidly and sub-sectors like wind, solar, geothermal, bio-fuels, and bio-mass all springing into the headlines, it can be tough to know which stocks or ETFs an investor should play.

Fortunately, ETFs give you broad exposure and diversity to certain markets, with less risk than owning individual stocks.

For example, the two most widely followed alternative energy ETFs are the PowerShares WilderHill Clean Energy ETF (AMEX: PBW), which is mostly made up of American companies, and the Market Vectors Global Alternative Energy ETF Trust (NYSE:GEX), which gives you international exposure to some of the largest companies dealing in wind power.

In 2007, these ETFs turned in outstanding performances, chalking up gains of 62% and 50% respectively. And GEX may have done even better, due to the fact that it did not begin trading until May 2007.

In 2008, however, the funds haven’t been able to sustain that performance. As of September 26, PBW is down about 40% for the year, while GEX has lost 25%.

“Springing” Back To PBW

Back in the spring (March 24, to be exact), I highlighted the performance of PBW in my “Sector Watch” piece. At the time, the stock was trading around $21 and had recently tested its January lows. With the chart pattern still bearish, I said it represented a good short-selling opportunity.

Before it rebounded last week, PBW had traded below $15. But as long as oil prices remain high, ETFs like PBW should come back into favor. Moreover, after the beating they’ve taken this year, they look like good value.

That said, I don’t like trying to pick bottoms, so let’s take a look at the daily chart of PBW for more clues…

As you can see, the downtrend line drawn from the highs last December currently sits at $18.95. As time goes by, this number will go lower, but a couple of closing prices above this downtrend line will signal a change in trend – and that the stock is probably worth buying.

Profits From Thin Air

Between PBW and GEX, though, I actually prefer GEX, due to its higher exposure to the wind power segment. This fast-growing area is gaining some serious momentum and greater investment, thanks to the publicity that T. Boone Pickens is bringing. Pickens is a very smart businessman, who is investing billions towards the largest “wind farm” in the U.S. And you can see why he’s on board…

Wind power is the second largest source of new power generation in the U.S., surpassed only by natural gas.

• In 2007, wind provided enough power to satisfy the residential electricity needs of 150 million people.
• Capacity increased by a record-breaking 20,000 megawatts, which puts the world total at 94,100 megawatts.
• According to the U.S. Department of Energy, since 1980, the cost of producing wind power has declined by as much as 90%.
• Electricity from new wind power projects will be cheaper than electricity from new conventional power plants by 2010.

If you’re a fan of wind power, there is a relatively new ETF that deals strictly with the field. It’s called First Trust ISE Global Wind Energy (NYSE: FAN) and it began trading in June 2008.

Having hit a high of $31.50 in June, FAN has sold off, along with the other alternative energy ETFs. Earlier this month, it traded as low as $20, so let’s take a look at the chart to see what the next move might be…

With only a few months of data to go on, projecting the stock’s next move is a little trickier, but we have enough information to draw a regression channel from the June highs. The upper band of the channel is currently around $24.15 and a couple of closes above that level should lead to higher prices for the stock. We’ll keep an eye on this one, as wind power continues to gain traction.

PS. Yesterday, Oxford Club’s David Fessler described how the quiet passing of an $18 billion clean energy bill could mean ‘big moves’ for FAN and two other clean energy ETFs.

Source: Forget Washington’s Hot Air… Here’s How to Really Profit from Wind

In July, the Federal Deposit Insurance Corp (FDIC) said the cost of insuring the deposits of failed bank IndyMac would be $8.9 billion. The bailout of Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE) put taxpayers on the hook for at least $200 billion.

The AIG (NYSE:AIG) rescue adds another $85 billion to that figure.

“For those of you who don’t believe that Washington and Wall Street manipulate the economy and the market, it’s time to grow up and get real,” says Wave Strength Options Weekly editor Adam Lass.

This from Taipan Daily:

This is not some conspiratorial mumbo jumbo. Heck, several departments within the executive branch are specifically and publicly dedicated to preventing economic and market crashes.

Other semi-independent entities like the Federal Reserve, Fannie Mae, Freddie Mac and the FDIC were created to insure confidence in various components of the system as a whole.

The PPT itself has been described numerous times in legitimate media and spoken of in many Wall Street and Washington power player memoirs.

Beyond that, the evidence for its existence is readily observable. Over the years, students of the market have seen the following trick performed over and over whenever some “line in the sand” has been breached.

In the midst of a rout, “someone” ignores the six inches of blood on the trading floor and begins to buy massive quantities of S&P 500 futures with the apparent assurance that none of Wall Street’s major players will short this position.

We are talking billions of dollars here. Thus we presume that it must be a major Wall Street trading house that has been given the nod to act.

This sudden flood of cash on Wall Street is always followed by a flood of positive press releases from Washington: “We have confidence in the system… we will insure liquidity… might even fork over a rate cut… yadda, yadda, yadda.”

The following morning, the market turns a bit, and the futures buyer is made good. For the moment, a bottom is set, and Wall Street has a little breathing room in which to try desperately to work something out.

Does any of this sound familiar? Monday morning, in the face of the worst bankruptcy in history, “someone” began buying up great huge gobs of S&P 500 future contracts.

Right about then, a parade of premium faces (including President Bush and Senator McCain) went on the air with virtually the exact same speech, assuring us that the country’s fundamentals were sound.

Then word began to circulate that despite Washington’s initial reticence, it would pony up $50 billion fresh new dollars after all “to lubricate the banking system.”

Monday night, when even that didn’t work and the market had put in the worst day in recent memory, word began to circulate that the Feds would ignore its own warnings about inflation and cut rates Tuesday, possibly by as much as 50 to 100 basis points.

How to Survive – and Thrive – in the Coming Market Crash! While current market conditions are TREACHEROUS for naïve “buy and hold” investors… our cutting-edge WOW system is designed to exploit market weakness for quick, explosive gains… with very limited risk.  If you want to survive the coming market crash – and profit in the process — here’s all you need to know…

Tuesday morning, “someone” ignored common sense and began to buy great gobs of S&P 500 futures again. Lo and behold, the market put in a short-term bottom.

You can argue the wisdom of this sort of manipulation. In fact, I am about to. But you simply must accept the fact that it happens.

Now I will tell you exactly why sending more money to Wall Street is a very bad idea.

This crisis was created in the first place by Washington’s cowardly habits. For the past twenty years, every time Wall Street whined that it had created some kind of trouble for itself, Washington ginned up a trillion dollars to bail them out.

Sometimes Washington printed shiny new dollars. Sometimes it borrowed them from folks who may not have our best interests at heart, like the Chinese government, Russian oligarchs and the Saudis royal family.

Either way, the incredible increase in dollars in circulation without genuine growth in GDP is destroying America. Our consumers are broke. Our workers are not working. Our houses are being foreclosed. Our banks are failing. And the Federal institutions that were created to foster stability and protect against genuine emergencies are in shambles.

Our financial house has been bombed.

It is burning down.

And Washington is pouring more gasoline on the fire.

Another $50 billion and another rate cut may help out Wall Street for a day or so. But in the medium term it will only further make life worse for Americans trying to get by. And in the long term, the stock market will still fail, because it is those very excess dollars that are choking it to death.

A few weeks ago, I advised readers of this column to purchase put option contracts against Standard & Poor’s Select Financial SPDR ETF (AMEX:XLF). As I write to you, those puts have gained as much as 105%.

In time, Washington may be forced to stop flooding the market with dollars. If and when this happens, the rest of Wall Street’s worst players will go bankrupt. Billions more dollars will be lost. In the end, the survivors may even become value buys.

However, there is no sign of this happening anytime soon. And in the meantime buying puts is the only assured defense against Washington and Wall Street’s continuing malfeasance.

Source: The Latest Report from the Front Line of Wall Street’s War on America

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

The housing market is still a shambles, nine U.S. banks have failed so far this year, and Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE) are all but nationalized. What’s more, the world’s central bankers can’t agree on what caused this mess, let along how to fix it.

But amid the gloom and doom, Adam says put options on MetLife (NYSE:MET), Bank of America (NYSE:BAC) and Capital One (NYSE:COF) can still yield triple-digit gains…

Central bankers see few options to repair a damaged financial sector and weak global economy underway for years now. Thud.

Thud, thud, thud.

Bang!

It’s the sound of massive dominos falling, my friends – a worrisome crash that has become all too familiar to observers of the ongoing financial crisis.

U.S. home foreclosures climbed 55% in between June and July. Year over year, U.S. banks have tripled the number of “repossessed” houses.

I put repossess in quotes because it is questionable as to whether many of these folks ever actually owned the houses in question. Seeing as how their perverse loans allowed them no equity stake whatsoever, it might appear to a disinterested observer that they are in fact simply being evicted from rented houses.

Thud!

These foreclosures are both a fallen domino and the trigger for the next big crash. When they are wrapped into our national statistics, they distort our understanding of the situation at hand in the most peculiar ways.

First of all, they make it appear that both U.S. housing sales and GDP are actually gaining ground. In fact, just Monday, I saw some of Wall Street’s favorite shills post headlines touting July’s “3.1% Increase in Home Sales!”

The catch? Everyone involved is losing their shirts on these sales.

There is now an 11-month backlog – some 4.67 million unsold houses and condos – weighing down the U.S. housing market. This glut of “resale inventory” is keeping builders on the sidelines. Permits and broken ground are at a 17-year low. The Dow Jones U.S. Home Construction Index continues to grovel along around the 300 mark, making for a 61% decline from the heady days of early 2007.

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