Navellier Growth: your source for market-beating growth stocks

 

What if I told you that you could double your money is just six days? Crazy, right! But that's exactly what happened to both Fannie Mae (FNM) and Freddie Mac (FRE).

Of course by doubling, I really mean that the stocks went from being down -90% to being down only -80%. Still, that's a double and it happened in just six trading sessions.

Well, don't be fooled by the big recent gains in financial stocks. The rally is bogus and it's about to come to a very painful end. In this week's issue of What's Working on Wall Street Now, I want to tell you why you must avoid almost all financial stocks. I'll also give you a preview of my upcoming issue of Blue Chip Growth (it goes out to subscribers on Monday), and tell you what alternative energy stock you should be adding to your portfolio. This stock is up 12-fold in less than two years, and unlike the rally in financials, its rally is for real.

The Government Tries to Spur a Rally

From mid-July 2007 to mid-July 2008, the S&P Bank Index (BIX) dropped by more than two-thirds. That's a staggering amount. There's no getting around the fact that this has been one of the worst credit crises since the Great Depression.

Since the middle of July, however, many bank stocks have been red hot–and a lot of investors are about to get burned. In less than one month, the S&P Bank Index is up over 43%.

So what's going on? Well, the stock market hasn't gone completely nuts. All that's happened is that there's been massive short-covering in financial stocks. This happened after countless hedge funds made huge amounts of money by betting against some high-profile ones. Recently, they've had to "cover" their short positions by buying back the stocks. A little short-covering prompted more short-covering, which prompted still more. Soon we had an explosive rally on our hands.

As is often the case, the short-covering rally didn't come about by the free market. Nope, it was triggered by the government. The Feds were afraid that these hedge funds were conspiring "short raids" to take down bank after bank, so they decided to change the rules and the Securities & Exchange Commission banned naked short-selling. Not in all stocks, mind you, just in 19 major financial stocks, including Freddie Mac and Fannie Mae. The SEC even subpoenaed Wall Street firms to look at their e-mails to see if they were spreading rumors to aid their short positions.

I hate to break it to the SEC, but the banking crisis isn't being caused by traders e-mailing each other. Nor was it the fault of hedge funds shorting stocks. They can ban that practice all they want, but it won't change the fact that the credit market is still in shambles. As a former-banking analyst, I can tell you that we're only in the second or third inning of this game, and it's way too early to start buying financials.

As long as the housing market is in trouble, the banking sector is vulnerable. Anywhere the big tract builders added too much inventory, home prices have collapsed. Currently 4% of prime mortgages are delinquent, and nearly 20% of sub-prime loans are delinquent. In Las Vegas, one out of every 35 homes is now in foreclosure. It's gotten so bad that banks are now offering "cash for keys" programs, which pay off folks in foreclosure as long as they don't trash their house before they leave...

Other recent e-letter issues:
11.20.08: Automakers Left Empty-Handed
11.13.08: Four Tips for Buying Stocks in Bad Times
11.06.08: The Bull Market for Fundamentals
10.30.08: Why You Should Be Buying Right Now
10.23.08: How to Invest in a Volatile Market