The housing market is going from bad to worse. Yesterday, DataQuick Information Services reported that the median home price in California is down 30% in the past year. That's a stunning loss! Bear in mind that five out of six Americans have more invested in their home than in the stock market, and that home is the primary means of building equity for many people. These families have suffered huge losses now that the bottom has fallen out of home values thanks to a complex global financial mess.
In this week's issue of "What's Working on Wall Street Now," I want to tell you why this financial mess isn't over – and more importantly, how to protect your money in the months ahead.
Here's a hint: Have you heard of a steel stock that's rapidly consolidating the steel industry in China? This stock is up 900% in the last 16 months, and best of all, the shares are still less than $10 a piece. I'll drop the company's name in just a bit.
The Financial Mess Isn't Over
But first, I want to clue you in on what the banking regulators are now saying. They expect turmoil in the banking industry will continue until financial institutions face up to the ocean of bad loans they made during the boom days of building new homes and condos. Heck, you know its bad when even Ed McMahon is fighting foreclosure.
It's bad enough when homeowners default on their mortgages, but a bigger problem is unoccupied or unfinished homes that banks have to dump at sacrificial prices. This is what's hanging so many banks out to dry and why I think most of them won't recover any time soon.
Consider Fifth Third Bancorp (FITB). This bank used to be considered a rock-solid conservative financial institution. One year ago, shares were valued at over $40. Today, the stock fell below $10 a share. The joke around Wall Street is that they ought to rename themselves Two Fifths Bancorp.
Joke as we may, this is a scary reality to face since the health of the economy is heavily dependent on the willingness of banks to lend money. A vicious cycle may ensue: If banks are short of funds due to lousy real estate loans, they can't make loans to credit-worthy customers. That, in turn, puts the squeeze on businesses and soon more consumers aren't able to pay their mortgages thanks to rising prices and fewer jobs. And the cycle repeats.
According to housing research firm Zelman & Associates, U.S. banks could charge off between 10% and 25% of their residential construction and land assets over the next five years. That would amount to about $65 billion to $165 billion, or two to five times what was lost in the last housing downturn in the late 1980s and early 1990s.
The prospect of a new wave of losses worries federal regulators, given the large proportion of bank loans that went to housing developers. The problems are worse at small banks that cannot easily absorb losses, especially at banks with big exposure in states hit hard by the housing crisis. Banks in Arizona have placed 36% of their loans in construction and development.
According to the MBA, about 1.3 million homes were in foreclosure at the end of the first quarter. In that quarter, the foreclosure rate increased from 2.04% to 2.47% on a seasonally adjusted basis, while the number of loans that were at least 30 days past due climbed by 0.53% to a stunning 6.35%.
Buy General Steel Holdings
This is why I'm telling investors to steer clear of almost all financial stocks. If you own Wachovia (WB), sell it right now. Sell Merrill Lynch (MER). Sell Citigroup (C). Sell AIG (AIG). Check all the grades of your stocks in my free PortfolioGrader Pro tool at www.navelliergrowth.com, and sell all that are rated D or F.
But enough about what stocks to avoid, and on to ones you want to buy. In my Emerging Growth service, we've been making huge profits in niche plays, especially ones in emerging markets. One of my favorite niche plays is General Steel Holdings (GSI).
General Steel is almost completely unknown on Wall Street, but it's about to change. Over the past year, the shares have exploded higher and the Summer Olympics are only one part of the story.
The company is headquartered in Beijing and it operates a diverse portfolio of Chinese steel companies, which have the capacity to produce more than three million tons of steel products and pipes.
Now here's the secret that Wall Street doesn't get: China protects its steel industry the way a mother hen protects her nest. The government has decided that the hundreds of Chinese steel companies need to be consolidated. That means that there will only be a few winners – meaning "General" Steel is about to become "Commander-In-Chief" Steel. With the opening day to the Beijing Games just seven weeks away, you're making a big mistake if you don't have some niche plays like General Steel in your portfolio.
There are many more great buys out there with the potential for huge profits! Find them in my Emerging Growth service, which is designed to do especially well in nervous or confused markets. Since 1985, our legendary buy list is up over 50-fold. That's lapped the S&P 500 three times, and we're very close to a fourth!
You can sign up now for a three-month subscription to Emerging Growth for just $295. This is an excellent time to join us. I'm also prepared to extend this exclusive opportunity: If you don't like the returns you get from General Steel or any other Emerging Growth stock I recommend, then you can cancel during the first 90 days of your subscription and get 100% of your money back. No questions asked. I can make this offer because I'm confident that once you see how well our system performs, you'll become a happy, long-term subscriber. I've been writing Emerging Growth for nearly 30 years, and some of my original subscribers are still with me (and they're a lot wealthier too). I hope you join us today.
That's all for this week. I'll have the next issue of "What's Working on Wall Street Now" next Thursday, June 26.
P.S. Don't forget to buy General Steel Holdings (GSI) and sign up for a trial subscription to Emerging Growth.P.P.S. Here's a video of me talking about my investing philosophy and new book, The Little Book That Makes You Rich.