Signup for our free newsletter:

The Quarter to Forget

Written By Brian Hicks

Posted September 2, 2008

…Next year could be worse.

Sure, we’ve said this time and time again. But we want to make sure you’re well prepared, and as far away from financial stocks, consumer stocks, and housing stocks, as possible. And if your advisor advises that you buy any of the aforementioned stocks, fire them.

As we’ve said in the past, "It shouldn’t come as a shock when mountainous Option ARM and Alt-A loans begin resetting and the second leg of the credit crisis begins. It’s estimated that only 60% of Option ARM borrowers make only minimum monthly payments. Others estimate that up to 80%. Say a borrower makes minimum payments on a $600,000 loan. That loan could easily be a $750,000 loan within two years."

And we’re supposed to be shocked when we’re knee deep in another crisis? People like Meredith Whitney, who just placed Merrill Lynch, Citigroup, and UBS AG in the "underperform" category, get it.

Even Wachovia gets it. The bank just announced that Q3 would be a "quarter to forget" for investment banks, cutting estimates for Goldman Sachs, Lehman Brothers (which may get help from a Korean bank), and Morgan Stanley.

And if you’re standing in the wrong place (housing, financial and consumer stocks) at the wrong time (now and through 2012), you will lose your money. Wachovia and Whitney are part of a long list of Street analysts, including ourselves, who see another tough quarter and year for U.S. investment banks, nailed by write downs across fixed income assets in a weak operating environment.

But there’s a simple way to profit from it. Simply buy put options in any of the above mentioned sectors, and you’ll do just fine. In fact, we’re playing those very sectors in Options Trading Pit.