The Big Banks Screwed Up (again)

All the talk now in the media is the "Subprime Collapse" or the "Housing Crisis" and how the real estate slowdown is going to send the stock market to spiral down the toilet. Once again, when you go through the hype, and look at the the numbers, the Dow Jones Composite is still up around 5% for the year, and the now forgotten tech ladden Nasdaq market is still up around 6%. Some market collapse. Having said that, there are plenty of stocks in the S&P 500 that are down 20%, and some even more. But that represents a good buying opportunity for quality stocks.

Now that is not too say that the housing market is not in a dire situation. It is, but that is not a bad thing. What's bad is that the big large U.S. banks lent out a ton of money to people who could not afford mortgages and then they bought derivates and now not even a guy with 2 degrees in Phd mathematics can figure out how to value this stuff on these banks balance sheets. I am lucky to know the mulitiplication table so I won't even try. In layman's terms, the Big Banks got greedy again and have no idea how much this is going to cost them.

In the 1990's, the banks in the U.S. got involved in junk bonds, which is basically another sub prime market for corporations. The Savings and Loans Banks collapsed and the Big Banks lost a ton of money. It was happy times for everyone, especially shareholders. The U.S. Federal Reserve came in and lowered interest rates and flushed the stock market with a ton of liquidity (printed money) and once again, helped the same Big Banks from themselves.

Whola, here we go again. However, I am not so sure the Federal Reserve is going to lower the Prime Rate right away, they still have a worry about inflation and to them, 3 months of statistics doesn't signal a pattern.Plus interest rates, are still relatively low, and the Big Banks are not near the verge of collapse as they were 16 years ago. Although the highly leveraged hedge funds managers are going through migraine headaches right now, because so many of them are about to collapse. But the U.S. Federal Reserve doesn't really care about them. My guess is the U.S. Federal Reserve will hold off on lowering interest rates for at least 6 months, but they will still pump the market with a ton of money.

What does this all mean for you? A good buying opportunity. You can buy great stocks at better prices, and you want to own companies that have a good cash flow and aren't as affected by the commercial bond market as the highly leveraged ones.

You want to stick with companies like Time Warner (TWX-NYSE) which I bought at $20.66 and is now $18.37. Time Warner makes a ton of money, people are still watching CNN, going to movies and reading Time Magazine. Not to mention Time Warner is buying back $5 billion of their stock.

A second good one is Berkshire Hathaway Class B (BRK/B-NYSE).I own it as well. I recommended those shares some time ago at $3600, now they are almost at $4000 a share. Legendary Investor Warren Buffet runs this company has a burning $40 billion pocket, no debt and is buying companies on the cheap. He actually buys and holds quality companies. What a concept most hedge managers and stock brokers have forgotten about.

I also like the beverage and food stocks, Kraft (KFT-NYSE) which I own, Pepsi (PEP-NYSE), Budweiser (BUD-NYSE) and Coke ) (KO-NYSE). Although they are not considered commodity stocks, I like to think they are. They hold the ingredients to something that people are always wanting to consume. I think Coke is a safer bet in the long term than gold.

Also look at TD AMERITRADE (AMTD-NYSE). This company has no exposure whatsoever to the Sub Prime Market, is a leader among the online investors, is 40% owned by TD bank, is very well managed, and is down from $21 to $17.77, I bought this company at just above $16 dollars. Not so long ago it was considered a prime target for a takeover, now its been forgotten.

As for the financials, I like the insurance companies more than the banks, but there are still some good banks that are attractive and that did not expose themselves to the sub prime market or have very little of it. You just have to do your homework on them.

Some closed end funds are good buys. These are basically closed off mutual funds and they trade as regular shares and do not have to worry about redemptions. I like AllianceBernstien Income Fund (ACG-NYSE) and it pays out just over 7.5% in U.S. dollars. They mainky hold U.S. Bonds issued by the U.S. Government and other debt the U.S. Government guarantee. I also started to look at a (gasp) a mortage fund. It is called Hyperion Strategic Mortgage Income Fund. My brilliant broker Vas, is going to have a heart attack if he knew that.

Why HSM? The fund has still maintained it's dividend payout and they seem to have purchased good mortagages. They issued a press releases that the net asset value of the fund has decreased because the market has lowered the value of all mortgages, but they have not suffered any credit problems in their fund. And as the usual saying going, disasters create opportunity. I am not saying put all your money into it, but start nibbling. It pays a yield of 9.55% in U.S. dollars, yes, there are some people still making their mortgage payments on time (Thank God). It also trades at about a 20% discount to its net assest value. So if theu liquidated the whole fund right now, you would get a 20% return.

Ok folks, don't be scared off by the business media. This type of business credit crunch always happens, but the sky is not following and think with your hear and not your emotions. Remember, investing is for wealth accumulators, trading is for gamblers.