Financial Sector hot picks

Bearing on the Bull
Expect Stan O'Neal, the beleaguered chief executive of Merrill Lynch & Co to step down in the next few days. In reality it is nothing that he did, as much as he was a victim of the success and failures of the financial sector. Unfortunately, when it comes to financials everyone expects them to consistently see double-digit growth; ML had warned of weaker earning, but in the weeks leading up to the report, they had done a wonderful job of downplaying their actual sub-prime exposure. All of this adds up to bad news for high-paid Execs and good news for investors. Merrill will bounce back, and now is the time to buy. As soon as the CEO is gone, the Market will respond, on speculation, that Merrill will turn things around.
Rating: Strong Buy

Bullish on Bear
Citic, Asia's largest securities firm, will pay $1 billion for the equivalent of 6 percent of New York-based Bear Stearns's shares, and the US brokerage will invest the same amount in Citic, the companies said yesterday. They agreed to team up to sell financial products and services in China, and plan a Hong Kong-based joint venture for other Asian markets.

Bear Stearns chief executive James "Jimmy" Cayne, 73, trails US rivals in China, where he has struggled to build a business since opening a Beijing office in 1992. His company has fallen as much as 37 percent this year in New York trading, beset by the collapse of the US sub-prime mortgage market. Surging defaults on loans to home buyers with poor credit histories pushed two of the firm's hedge funds into bankruptcy and eroded its fixed-income revenue.

Bear is still not as attractive as Goldman or Lehman on the short term, but in terms of value it is a cant miss stock. Almost every American bank lost money and/or brokerage house lost money this year. Why is that.

It seems that the Aussie's have the answer, just look at ANZ: they remained glued to their core competency and established a diverse mix of capital investments. Also known as good management. They have a 33% P/E ration, and expect 12% in growth over the next 12 months. Additionally, they are well placed in emerging markets, which tend to have high yields.
Rating: Buy

Financial Sector Options

For the savvy investor now may be the time to get back into financials, and a good place to start is Citi. The Nation's largest bank is really under emense pressure to step up its earnings. Citi's stock price is down more than 14% from the beginning of the year, and that has investors out for blood. Additionally Citigroup's equity report did not help; up just 1.7% since Aug. 10, versus a 5.7% gain for J.P. Morgan, a 4.5% gain for Bank of America and 8.1% gain for Wachovia. This means that the margins are there Citi just has to find them.

All of the big banks: Bank of America, Citigroup, J.P. Morgan, and Wachovia, have all recently begun tightening credit default swap spreads. If you want to take a gamble and be ahead of the curve on the rebound, try some stock options. What this will do is limit the risk in a particular stock, and/or sector. Remember the financial sector as a whole is just now peering though the credit-cloud that has been cast over it by the subprime mortgage crisis. The November 50 calls are a good bet.

Credit Default Swap
Many people may not have a clue as to what a CDS is, so we will explain. A credit default swap, or CDS, is a tradable contract, although not in the listed-securities market, that reflects the credit risk of a particular company, like Citigroup. The contract term is typically five years, and during that time the CDS owner is protected from a "credit event." In essence, a credit default swap is like a put option.

A tightening of credit spreads bodes well for a stock because it demonstrates that investors are less afraid the company will default on its bonds. CDS are increasingly important in options trading because there is a growing interest in the influence CDS products have on options volatility.