By Keith Fitz-Gerald
Contributing Editor
I've been telling you for months, now, that the subprime mess isn't over.
But contrary to what you might be hearing in the mainstream news, the Four Horsemen of the Financial Apocalypse aren't thundering their way to our homes right now, either.
In fact, savvy investors will have the chance to make a mint with some financial sector bets in the months to come, just by being in the right place at the right time.
I'll explain just how you can do that in a minute. But first, let's see why this subprime mess still isn't over.
Merrill and Citi and Bear, Oh My
There's no doubt that Merrill Lynch & Co. Inc. (MER) and Citigroup Inc. (C) are each shaking things up internally. As well they should be.
Those two behemoths [with a couple additional votes for The Bear Stearns Cos. Inc. (BSC)] are the poster children for greed, avarice and the"we-know-better-than-the-little-people" attitude that's been so prevalent among the big financial players in this trillion-dollar subprime saga.
Unfortunately, they're not alone.
I've long believed that there's at least an additional $1 trillion of subprime slime out there - just waiting to rain havoc on investor portfolios. And just this week, in an interview on CNBC-TV, PIMCO bond guru Bill Gross made the same prediction.
The subprime mortgage market remains a "$1 trillion problem," Gross, the chief investment officer of Pacific Investment Management Co., or PIMCO, said during the interview."There are $1 trillion worth of subprimes ... basically garbage loans."
Merrill stunned investors last week when it announced a third-quarter write-down of $8.4 billion, and booked a $2.3 billion loss that was several times what the company had forecast only weeks before. And Citi has projected write-downs of as much as $11 billion.
But those are just the tip of the iceberg.
And investors are the RMS Titanic.
The Creeping Terror
The somewhat sobering truth of the matter is that nearly everybody in the financial sector - from American Express Co. (AXP) to Wells Fargo & Co. (WFC) - has subprime-related debt in their portfolios. Some, like investment giant Goldman Sachs Group Inc. (GS), have elected to make up valuations - and have produced seemingly huge gains in the process - while others are conceding they haven't a clue as to how they should value this stuff.
Nomura Securities Inc. (NMR) exited the U.S. mortgage business altogether, slashing its exposure and posting a third-quarter loss, opting to focus on its core investment-banking business in Japan. Still other companies have declared billions in write-downs and are hoping like hell this is where it ends.
I'm not so sure it will - stop, that is. That old saying about "bad pennies" seems especially apropos right now.
Two reports released yesterday (Wednesday) back this up. Citigroup's banking-industry analysts predicted that banks may be looking at $64 billion in write-downs on subprime-backed debt, while the Royal Bank of Scotland Group PLC (RBS) projected bank write-downs may reach $250 billion to $500 billion because of the worldwide credit mess.
“Of the many skeletons hiding in the subprime closet, write-downs on banks' positions on [collateralized debt obligations] of [asset-backed securities] are probably the scariest," London-based banking analyst Matt King wrote in a debt-market report released yesterday.
Profit Plays to Consider Now
Let me now tell you how to profit from what's going to happen next.
- First, if you believe there's another big financial-shares sell-off in the offing, buy a small, speculative position in the Pro-Shares Ultrashort Financials (SKF) exchange-traded fund. The more financial stocks get walloped, the higher this leveraged ETF increases in value.
- Second, once banks and other finance-sector players get left for dead, pick up a few shares of the ProShares Ultra Financials (UYG) ETF, because these companies will end up being terrific long-term investments at depths we'll not likely see again - at least not in this generation. Plus, by essentially purchasing a"basket" of these stocks, you'll diversify away the risk of the one or two companies that are certain to fail. You'll know when the timing is right for you to make your move when you see a story on the cover of Newsweek or Time portraying the end of the banking industry, or some other such gloom-and-doom scenario.
- Third, if dividends are more your speed [and they should be], you could at the same time also pick up the KBW Bank Index (KBE) ETF, which offers less diversification, but features a nice 5% yield - which never hurts.
It's important to understand that the financial-services sector will rebound - and probably a lot faster than most investors expect. And because the sector leaders are the"global titans" - the best in class companies that are crucial to global finance - you don't want to be without them.
News and Related Story Links:
- Money Morning Investment Research Report:
Could Goldman Sachs Explode? How to Dodge the Ongoing Mortgage Mess. - Money Morning News:
Citigroup's Troubles Continue to Grow. - Money Morning News:
O'Neal Finally Out at Merrill Lynch. - Reuters:
Gross: Subprime Mortgage Market a "$1 Trillion Problem." - Bloomberg News:
Subprime CDO Write-downs May Reach $64 Billion, Citigroup Says. - RMS Titanic:
Official Web Site. - Titanic.com:
Community Web Site. - Bartleby.com:
The New Dictionary of Cultural Literacy [“A Bad Penny Always Turns Up."]
About the Author
Keith is a seasoned market analyst and professional trader with more than 37 years of global experience. He is one of very few experts to correctly see both the dot.bomb crisis and the ongoing financial crisis coming ahead of time - and one of even fewer to help millions of investors around the world successfully navigate them both. Forbes hailed him as a "Market Visionary." He is a regular on FOX Business News and Yahoo! Finance, and his observations have been featured in Bloomberg, The Wall Street Journal, WIRED, and MarketWatch. Keith previously led The Money Map Report, Money Map's flagship newsletter, as Chief Investment Strategist, from 20007 to 2020. Keith holds a BS in management and finance from Skidmore College and an MS in international finance (with a focus on Japanese business science) from Chaminade University. He regularly travels the world in search of investment opportunities others don't yet see or understand.