Financial Food for Thought

The financial saga continues with the threat now shifting to Morgan Stanley (NYSE: MS) and Goldman Sachs (NYSE: GS). Why? They are the only two left and because they can. The new/old SEC rules of physically borrowing shares before you can short, go into effect today. Regulation at its best. The SEC has to announce they are going to enforce the short selling rules already in existence and give a date they will start enforcing them? So, can we do this with offshore drilling as well? This could lead to a short term bounce, but the real problem is still unresolved.

The vultures are circling as fear and anxiety in the financial sector continues to rise. VIX hit above 36 yesterday matching the highs for the July lows. Does this mean the low is in? I would like to say so, but this decline has been more like your high school science experiment of putting a frog in warm water and then turning up the heat. Slow death. I expect we could see a climax run near the 45-50 mark on the VIX before this has bottomed. Fear hasn’t peaked, yet.

Adding to my Bank of America (NYSE: BAC) saga, more reading and digging turned up some interesting tidbits. Jim Jubak did a piece on this buyout. He quoted Lewis in June 2008 just three months ago saying, “he wouldn’t use petty cash to buy an investment bank.” Then this week he paid $50 billion for Merrill (NYSE: MER)? Interesting. What changed? Lewis explanation was he wanted the Merrill retail sales force. Well in case he was wandering the investment bank comes with them! That same bank by the way is expected to write off $3-7 billion this quarter and they still have plenty of problem assets on the books. As I mentioned in my previous post, this acquisition is not accretive to earnings until 2010. This all leads me to believe they paid a premium for an acquisition that is dilutive to shareholders and likely not in their best interest short term. With the preliminary earnings projections on this purchase I would have to say sell. More to come on this.

After hours was like the movie, “Sex, Lies and Videotapes”. Wachovia talking with Washington Mutual (NYSE: WM)? For some reason the old song lyric, “if loving you is wrong, I don’t wanta be right”, comes to mind. But, gratefully the next rumor was Morgan Stanley and Wachovia getting together. Citigroup (NYSE: C) was also rumored to be talking with Morgan Stanley. In reality they are all talking to each other hoping someone has a plan. As I stated in the post last night, the great minds need to get together and come up with a cohesive plan instead of making a quilt with patchwork. I like a Resolution Trust Corp (NYSE: RTC) type company well funded to take on the rescue plan. Let Paulson run it as the Treasury Secretary and the balance of the financial companies will have to survive or die. This is similar to what was done in the 1990 S&L crisis. That worked out the problems and sent the vultures somewhere else to circle. Solutions not band aids.

I stated there would be those with the balance sheets to survive this mess and one that is rising to the top is Wells Fargo (NYSE: WFC). They continue to look solid and the latest review of their 10k shows a stock that will not only survive, but thrive as the mortgage lending business comes back on line. That should not be long with the drop in rates from 6.5% to 5.8% on the Fannie (NYSE: FNM) and Freddie (NYSE: FRE) bailout. The break above $32 was positive and I would ladder into a play with a longer term outlook of 18-24 months.

ishare DJ Financial Sector Index ETF (NYSE: IYF) fell below the bottom of the trading range. That was a negative short term, but support is attempting to come into play near $64. I continue to watch this as an opportunity as the fear and anxiety recede from the sector.

Regional banks continue to hold up well in this mess. SPDR KBW Regional Bank Index ETF  (NYSE: KRE) broke above resistance at $35 and held support above the 200 day moving average. Technically I like the outlook. This remains my watch list to ladder into a play.

It is important to have a discipline strategy to putting any play into your portfolio. Entry, stop and target must be defined prior to investing. Remain patient and prudent.