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Tuesday, August 29, 2006

Financial Pulse

By William Trent, CFA of Stock Market Beat

ValueLine profiled the Banking industry in their latest Investment Survey, saying:

Bank stocks have generally performed well in the last few months, reflecting better-than-expected June-quarter earnings and expectations that the Fed wouldn’t raise interest rates in August. Few stocks in the group are ranked favorably for Timeliness, but a number have decent dividend yields and moderate total return potential to 2009-2011. Underpinning this outlook is our belief that there are still opportunities for growth in the bank sector in areas such as providing bank services for newly arrived immigrants and investment products for baby boomers.

By the release of the August housing numbers, it should become clear that the housing market is beginning a significant decline. When this realization hits home, investors will finally have to confront the fact that they are gambling on people who took out no-money-down, interest-only, adjustable-rate mortgages at the top of the market and the financial institutions that made those loans. The stock market should then begin a 25%-30% decline. If the market ignores the warning signs until fall, the decline could occur in a single week.”

The saying goes that if you owe the bank a little you are in trouble, but if you owe the bank a lot the bank is in trouble. Although the banks work hard to spread the risk by securitizing loans and selling them to investors, frequently they turn around and buy them back anyway. Collectively, we owe the banks a lot of money, which goes a good way toward explaining why the Watch List is contains the minimum 50 percent weight in financials.

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