From Crisis Springs Opportunity…

Thursday, June 19, 2008
Smart Profits Report #533
Guest Editorial by Floyd Brown, Advisory Panelist for Investment U

Managing Editor’s Note: Once again, we’ve dipped into our extensive pool of investing resources to bring you a special guest article today. It comes from Floyd Brown – a man who began his investing career while still at high-school and enjoyed such outstanding success that he’d notched up his first million before turning 30. These days, Floyd shares his moneymaking tips with Oxford Club members, readers of the free Investment U e-letter – and now with you, too. Today, he advises you to look past the negative headlines on this crushed sector and focus on what could be the best buy in a decade. This article on banking stocks has been reprinted with permission from Investment U.

In a year seemingly flooded with bad news, this great crisis is still going strong as we hit the halfway point of 2008.

The lists of negative headlines in the financial press are omnipresent. Consumer confidence is in the dumps. Home foreclosures are at all-time highs. More than 8% of all mortgage loans are past due or in foreclosure.

And a sector known for stability and high dividends has suddenly transformed overnight into a high-risk, volatile rollercoaster ride.

Banking.

The list of banking stocks posting losses in excess of 50% grows with each selloff. Long-time shareholders have lost billions. Take a look…

Citigroup (NYSE: C): Shares have slumped from $54 to $19.50 – down 64%.

Washington Mutual (NYSE: VM): Shares have plummeted from $44 to $6 – down 86%.

Wachovia (NYSE: WB): Shares have dropped from $54 to $17 – down 68%.

National City Corporation (NYSE: NCC): Shares have tanked from $34 to $5 – down 85%.

Investors who bought shares of these and other banks last winter bought a falling knife and have paid a dear price.

In fact, the only individuals who profited in the last year were short sellers and the fired CEOs that walked away with millions.

For example, Stanley O’Neal of Merrill Lynch took more than $161 million with him, on top of the $70 million he made during his four-year tenure. Charles Prince of Citigroup left the firm with a $68 million exit package, including $29.5 million in accumulated stock, a $1.7 million pension, an office and assistant, plus a car and a driver, according to The New York Times.

So with the tale of the tape so bad, why are some of the best investment minds in America talking about buying bank stocks?

Listen to what one prominent financial mind wrote about the current malaise in his recent Forbes column.

“The good news is that the worst of the liquidity crisis seems to be over. After a slow start, the Federal Reserve Board under Ben S. Bernanke has done an outstanding job containing the panic in the financial system and dispelling the fear of a total meltdown.”

That’s from David Dreman, Chairman of Dreman Value Management, who then recommended three banks.

Dreman is an expert on the psychology of investing and is a self-styled contrarian. He believes that bank shares, while in distress, are also oversold, and that by controlling your emotions and buying banks while others are selling, opportunity abounds.

To be sure, long-term investors who understand the intrinsic value in this sector will buy and profit handsomely.

Tom Brown of Bankstocks.com is even more bullish…

According to Brown: “Our take on the arc of eventual subprime mortgage losses is simple: Most estimates, particularly of losses on loans originating in 2006 and 2007, are significantly too high. The reason why they’re too high is simple, too. They assume that last year’s credit performance will persist far into the future. Only it won’t.”

The news media has been full of reports that homeowners underwater on a valuation basis have been walking away from their homes. On his CNBC show, Jim Cramer repeatedly mimics homeowners that overpaid telling their bankers to, “Take the keys, I’m outta here.”

Might make for good viewing. But it’s not the reality, though…

For a dose of that, take note of Vikas Bajaj, writing in The New York Times: “Homeowners typically do not walk away from homes they live in unless they are unable to pay the mortgage. Usually [this happens] because of job loss, a death in the family, divorce or a big jump in their monthly payments. Real estate speculators, of course, do abandon properties when prices fall.”

As illiquid investors are washed out of the market, the rate of foreclosures will moderate. In turn, the non-cash charges to the balance sheets at many of these banking institutions will be reversed and show on the reports as profits. The year-over-year comparisons will be excellent and the shares should move substantially higher.

One year from now, a likely scenario is that investors will look back at the spring and summer of 2008 as the last opportunity to buy financial stocks at a generational low. Do not let fear keep you from participating in the buy of a decade.

Good investing,

Floyd Brown

Editor’s Note: If you liked this piece, be sure to check out Floyd’s other Investment U articles, plus those from Investment Director Alexander Green and other financial wizards like Louis Basenese and Horacio Marquez in the archives here.

Today’s Smart Profits Notes

•  More write-downs at Citigroup? CFO Gary Crittenden says the ongoing fallout from the credit and subprime mortgage crises is likely to be reflected in the company’s second-quarter results through another batch of heavy write-downs. While some of the write-downs are expected to be smaller than those during the first quarter, the company says the losses could still be ugly – with the ripple effect impacting Citi’s results for the rest of 2008. 
  
• If you’re a serious investor in young, up-and-coming companies, here’s an event that might interest you: Infusion Capital’s Summer Session: Where Wealth & Knowledge Meet Innovation & Ambition.
  
  In keeping with the Infusion Capital mission to provide a quarterly event, where emerging companies with strong ideas and solid leadership can meet with serious investors in a professional yet social atmosphere, the group has lined up six very promising companies. The respective industries fall under the categories of: Dental services, ForEx, unconventional natural gas, renewable resources from waste products, forensic DNA testing, and environmentally friendly waste water filtration. Members and guests will receive only the types of quality deals deserving of their time, attention and money.
  
  It takes place at the Edgewater Hotel in Seattle, Washington on July 15 & 16. Please contact Vickie Beard to register for this event at: 410-374-5522, or via e-mail at vbeard@infusioncapitalgroup.com. To register now, please visit: https://www.stayfitnt.com/register.php?auth=8a9610503700ef6d0d6c1caf8f04ed9f

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