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How to Profit From Wall Street's Biggest Gaffe in Decades

I was perusing the newswires a few weeks ago when the following Reuters news story headline all but physically grabbed my attention.

It stated: “Exclusive: Morgan Stanley Rebuilds in Commodities Trading.”

Most folks probably looked at this and tossed it off as just another of the endless machinations of Wall Street.

But I knew better.

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U.S. Economy- Money Morning - Only the News You Can Profit From.

  • IMF Proposes "Fat Cat" Taxes on Banks to Pay for Future Financial Crises

    The International Monetary Fund (IMF) is proposing that Group-of-20 (G20) nations levy two separate taxes on banks, including a "Fat Cat" tax on profits and compensation to pay for the costs of any bailouts resulting from future financial crises.

    "Expecting taxpayers to support the [financial] sector during bad times while allowing owners, managers and/or creditors of financial institutions to enjoy the gains of good times misallocates resources and undermines long-term growth," the IMF wrote in a briefing paper for the G-20 industrialized and developing countries, obtained by The Wall Street Journal.

    The report proposes a tax – called the Financial Activities Tax (FAT) or "Fat Cat" tax – that would be levied against financial institution balance sheets, profits and compensation. It would be paid into a nation's treasury to help finance the broader costs of a financial crisis, The Journal reported.

  • Question of the Week: The Lingering Sting of a Jobless Recovery

    The U.S. unemployment rate held steady at 9.7% for the third straight month in March as the world's largest economy added jobs at the fastest pace in three years – the most-certain sign yet that the worst job market in a generation is finally improving and ending the "jobless recovery," economists say.

    "This recovery is for real," Chris Rupkey, an economist at The Bank of Tokyo Mitsubishi UFJ Ltd., said in a statement.

    Still, there's cause for concern.

  • We Want to Hear From You: How Do You Feel About the Status of U.S. Financial Reform?

    When the Securities and Exchange Commission announced last Friday it was slapping Goldman Sachs Group, Inc. (NYSE: GS) with fraud charges, Wall Street – facing financial reform – took a big gulp of reality.

    Scores of traders hurried to sell off Goldman shares, causing the stock to sharply fall 12.8%.   Meanwhile, spectators on Main Street cheered the thought of a financial giant – that has faced scrutiny for housing market investments, executive bonuses and bailout money – finally having to face the firing squad.   

    Money Morning readers' comments clearly expressed their negative feelings toward Wall Street, our government and the SEC: "Crooks, political snakes, fraudsters, soulless and self-interested leaders, running a corrupt nation…"

  • Here's Why U.S. Stocks May be Headed Higher

    U.S. stocks were back up to their old tricks last week, as volatility waned and financial, industrial and retail stocks waxed. It was a week in which risk was in fashion – until Friday, when the U.S. Securities and Exchange Commission (SEC) hammered Goldman Sachs Group Inc. (NYSE: GS) with fraud charges related to the subprime-mortgage crisis. With that, playing defense was considered offensive.

    Leading the way forward were companies that are the ultimate in beta and hopefulness – such as beaten-down bond insurer Ambac Financial Group Inc. (NYSE: ABK), which rose 60%, beaten-down car parts maker American Axle & Manufacturing Holdings Inc. (NYSE: AXL), up 10%, beaten-up retailer Tuesday Morning Corp. (Nasdaq: TUES), up 24%; and beaten shoemaker Crocs (Nasdaq: CROX), up 20%. We're not talking, here, about investors who last year bought the shares of companies that were left for dead; these stocks might actually be worth something in an economic turnaround.

  • Regional Banks Are Bouncing Back – And You Can Profit

    Our contrarian thesis in regional bank stocks has played out well in the past few weeks, as other investors are beginning to see that these companies are under-appreciated, under-priced, over-hated and over-shorted. 

    The iShares Regional Banks (NYSE: IAT) ripped higher by more than 8% in the past week alone.  And I still think that many of these stocks have a long way to go, since fair value in some cases is 2x, 3x, and even 5x higher than current levels.

    Super-regional southern bank Regions Financial Corp. (NYSE: RF), for instance, traded as high as $32.50 in 2007, then fell as low as $2.27 in 2009 – a decline of 93% in just two years. RF's recovery has gotten off to a much slower start than peers like U.S. Bancorp (NYSE: USB) because it made a lot more iffy loans along the Gulf coast. But over the past six months, it has become clear that super-low interest rates will allow RF to build enough reserve against losses. Additionally, other distressed-debt firms are stepping up to take problem mortgages off their hands. 

  • Congress May Double Taxes on Private Equity Firms in Search for New Revenues

    Democrats in Congress, seeking new sources of revenue after passing President Barack Obama's $940 billion health-care reform measure, may double tax rates on executives at private-equity firms.

    The U.S. Senate has taken up a House proposal to levy a new tax on executives who make long-term investments, including venture capitalists, managers of real- estate partnerships, hedge-fund and private-equity managers, Bloomberg News reported.

    The proposal, expected to raise $24.6 billion over a decade, eliminates a tax provision which allows money managers at privately held partnerships to treat most of the revenue they bring in as capital gains.

  • JPMorgan Posts Big Gains but Financial Reform Threatens Profitability

    JPMorgan Chase & Co. (NYSE: JPM) posted a 55% rise in first-quarter net income led by fixed-income trading and investment banking. But to ensure its profits remain in tact, the bank continues to fight against proposed financial reform.

    JPMorgan, the second-largest U.S. bank by assets, beat analysts' estimates with net income of $3.33 billion, or 74 cents a share. Estimates averaged 64 cents a share.

    Investment banking brought in $2.47 billion, 74% of total net income. The area is usually a strong contributor to profits, kicking in 57% in the previous quarter and 75% in the first quarter of 2009.

    JPMorgan claims the results are a strong indication of global financial economic improvement.

  • Financial Reform: Three Ways to Fix Wall Street

    The financial-reform bill introduced by U.S. Sen. Christopher J. Dodd, D-CT, seems likely to pass both houses without all that much alteration.

    And that should immediately raise our suspicions. After all, the U.S. financial-services business has a very effective lobby, so if there isn't huge opposition to the legislation, it probably won't achieve all that much.

    It won't fix Wall Street.

    But there's another issue here: It's also not clear to me that we know just what we want the financial-reform initiative to achieve. By that, I mean: What banking-sector reforms would we implement in an ideal world, to reduce the danger from the sector while preserving the essentials of a free market?

    To see Martin Hutchinson's blueprint for fixing Wall Street, please read on…

  • Hot Stocks: The iPad Proves It's Not What Apple Sells, It's How Apple Sells It

    Apple Inc.'s (Nasdaq: AAPL) iPad has lived up to the hype, garnering rave reviews and meeting sales expectations. That success is particularly impressive because previous attempts by other companies to launch similar products were met with abject failure.

    Because they make up less than 1% of the personal-computer market, few observers realize that so-called tablets have been around for about twenty years now.

    The first models offered detachable keyboards, pen-based applications, and were priced in the thousands. A few contributed to companies declaring bankruptcy shortly after their debuts. Most were as pricey as a laptop but without nearly as much memory or competitive features – "underpowered and overpriced" were the usual complaints.

  • Question of the Week: Overlooked Problems Will Kill the U.S. Bull Market

    The U.S. stock market has staged one of its most powerful rallies in history, zooming nearly 70% in the 12 months that followed the March 9, 2009 market low. U.S. stocks soared another 5% during the first three months of 2010 – its best first quarter in a dozen years. But where do we go from here?

    Between the New York Stock Exchange continuously reaching new highs, the Dow Jones Industrial Average rising up along its eight-day average, and a rebounding retail sector, there's reason to celebrate what appears to be a market recovery offering investors profit opportunities.

    "You can't bury your head in the sand and ignore what's happening," said Money Morning Chief Investment Strategist Keith Fitz-Gerald. "If you did that, you've missed a 60%-plus rally in the [Standard & Poor's 500 Index] since early last March. You cannot fail to acknowledge what's happening" in the markets, even though top traders understand that cheap money from the government bailout – and not a well-rounded economic recovery – is most likely behind the torrid run-up in U.S. share prices.

    Money Morning Question of the Week: Is this a true bull market? A year from now, are U.S. stocks – as measured by the Standard & Poor's 500 Index – trading higher, lower, or at the same level as they are today?

    What follows are some of the most well thought-out responses we received (as well as a previous comment regarding the bull vs. bear market argument posted on our Web site) with many agreeing this bull market is too good to be true.