What You Won’t Read Anywhere Else About These Stocks
Thursday, July 10th, 2008
By Michael Lombardi, MBA for Profit Confidential
As a contrarian by nature, I have always made money going against the trend. When gold bullion was so depressed in the late 1990s, I saw it as a great opportunity. When U.S. real estate was “frothing” in 2005, it was time for me tell my loyal readers to exit. In a nutshell, some investors do very well going against the general trend that the majority of investors follow, against “the herd” mentality as they say.
Many great American fortunes have been made by buying an investment when most investors were panic selling. You will likely not read this anywhere else but here: I see a great opportunity developing in financial stocks as panic selling reaches the point of paranoia.
Fannie Mae, one of the two largest home lenders in the U.S., paid a record premium yesterday when it raised $3.0 billion to shore up its balance sheet. To attract investors to its newly issued two-year notes, the company offered a yield of 3.27% — almost 75 basis points higher than the current yield on two-year U.S. T-bills.
What is most interesting is that Fannie Mae was created by Congress to promote home buying in the U.S. Like Freddie Mac, Fannie Mae has a congressional charter that gives it tax benefits.
It is highly unlikely that the government would ever let either Fannie Mae or Freddie Mac go bankrupt, so there is an “implied” government guarantee on the bonds they issue. Obviously, that didn’t stop the market from asking for higher yields from Fannie Mae.
At this point, with the shares of the largest U.S. financial institutions near record lows, I believe we are getting close to a bottom in the financial sector. In fact, investors may be overdoing it on the sell side.
Freddie Mac shares are at their lowest level since 1992. Same for Fannie Mae. You can buy Lehman Brothers shares today at the same price you could have in 2000. Same for Merrill Lynch.
I track the shares of the big six Canadian banks closely. These banks are among the largest and safest in the world. Unlike American banks, Canadian banks need a charter from the federal government to operate and are highly regulated.
At present, the yields on some of the Canadian bank stocks are extremely attractive at over six percent. These banks had very little exposure to the U.S. subprime mess. If you are like me and believe the long-term trend for the U.S. dollar against other world currencies will be down over the next few years, these banks’ stocks could soon present a great opportunity for American investors looking for stock growth and a profit on the currency play.
I continue to monitor the financial stocks and am getting close to turning bullish on them. Of course, I’ll keep my loyal readers posted.
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Tags: gold bullion, stock market, U.S. dollar, U.S. real estate market
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Michael bought his first stock when he was 17 years old. He quickly saw $2,000 of savings from summer jobs turn into $1,000. Determined not to lose money again on a stock, Michael started researching the market intensely, reading every book he could find on the topic and taking every course he could afford. It didn’t take long for Michael to start making money with stocks, and that led Michael to launch a newsletter on the stock market. Today, Michael only employs the top market analysts and editors. Some of our recommendations have posted gains in excess of 500%! Michael has authored and published over one thousand articles on investment and money management. Along the way to building Lombardi Publishing Corporation, now with over one million customers in 141 countries, Michael became an active investor in real estate, art, precious metals and various businesses. Readers of the daily Profit Confidential e-letter are offered the benefit of the expertise Michael has gained in these sectors. Michael believes in successful stock picking as an important wealth accumulation tool. Married with two children, Michael received his Chartered Financial Planner designation from the Financial Planners Standards Council of Canada and his MBA from the Graduate Business School, Heriot-Watt University, Edinburgh, Scotland.Follow Michael and the latest from Profit Confidential on Twitter
