New SEC Governance: Mixed Blessing

The SEC has decided that short selling has gotten out of hand. The practice in which shares are borrowed and sold, hoping to be bought again at a lower price and returned in order to generate profits when a stock is falling, is a common practice among investors who feel a stock is overpriced. Financial stocks have been shorted heavily in the past year, Bear Sterns Cos (BSC) being case in point. When it was rumored to be in trouble, millions of shares were shorted, aiding the downfall of the company.
Today the SEC moved to curb excessive short selling by eliminating 'naked shorting' in which shares aren't actually borrowed. The idea is that as long as the institution could obtain shares it can allow shorting, it doesn't actually have to go through with the process of finding them. Starting Monday the practice will no longer be considered legitimate. Financial stocks which have bear ed the brunt of the short sellers rose hugely today, as investors bet the prices will start to rise once naked shorting is ended. Examples include Lehman Bros (LEH) which has risen over 50% since Tuesday, and Citigroup (C) which rose over 18%. Also seeing some day light are government backed Fannie Mae (FNM) and Freddie Mac (FRE) which are up 12.33% and 17.16% respectively.
This ruling is in a way a double edged sword for financial stocks. In the short term, it provides much needed relief from the battering their stocks were taking from short sellers. Also, it gives confidence to investors that the government will not stand for speculation to get in the way of the macro economy functioning. This can be seen from the recent price jumps. However, in the longer term, it may end up keeping profits down in the future. Many of these companies profit from not only arranging naked shorting, but do it themselves. The elimination of the practice, and continuing regulation by the government could cut into the incomes of these financial stocks in the future.
I am overjoyed that the market actually had a couple successful days among the weeks of crap we have seen, but I do find it interesting that this may come back to haunt the same institutions that are reaping the benefit currently. I'm hoping that the bulls can find their legs again, at least among deserving companies. I think that they may have gotten a little closer these past couple days.

The Credit Crunch

So the market is tanking. Bear Sterns got sold for a fraction of its value, the economy seems destined for recession and the Fed is cutting rates left and right. The problems which at once seemed only to affect home builders and those heavily involved in sub prime lending has stretched into the main stream financial institutions which provide the liquidity our market desperately needs to survive. SHIT.
Couple this with the dropping yield in Treasury's (10 yr T-Bill at 3.48% as of 3/18), diving US Dollar (.639 EURO as of 3/18) and most money market funds yielding less than 2%, it seems to be a terrible time to invest. However, the economic trouble we are now facing present unique opportunities for those who have some money to invest and some balls to go with it. Here are some opportunities I see for investment:

Financial Services

-This may seem strange, but as long as you have faith in the US government, that rational investors will eventually take hold of the market and that the banks are being fair with their reports to us, the large financial institutions are quite undervalued. A few I like:

• Goldman Sacs (GS)- GS is the largest firm within the Investment Services industry with a 69.38 B marketcap. It traded mostly above $200 in 2007. Earnings released today of 3.32 per share destroyed expectations of 2.58 per share showing that GS is doing better than the gloomy wallstreeters thought. GS has a forward P/E ratio of 10.35 and a forward PEG of .89. While the upside of GS may not be as high as others, the risk is defiantly lower. I look for GS to settle at $200 by the end of the year
• Citigroup (C)- C is one of the largest firms within the Money Center Banks sector. It has a marketcap of 108.21 B and has fluctated around $45-$50 for the past 5 years. As of 3/18 it was trading at $20.71, down 38.64% from 5 years ago to date. Citi may have more exposure to sub prime losses, but it has enough reserves to weather the sub prime storm and emerge with lessons learned. Currently forward P/E is 10.68 and foward PEG is 1.12. There is a 169.4% Growth Estimate for this year, and 79.4% Growth Estimate for next year. This bodes well for C. Potentially the best part about Citigroup is how cheap it is currently, and how far off its pre-crumble price it is. At just over 20 dollars, C is affordable for anyone. If it returns to $30, it will be a $10 increase, a 50% gain. If it returns to 40$, its a $20 gain and a 100% return. I look for C to hit $30 by the end of the year.

Mining

-Mining presents a solid opportunity for stocks that have potential for growth and no exposure to the current troubles within the credit market, other than investor sentiment. Mining companies are constantly merging, so being up on these stocks can make you some bankkk.

• BHP Billiton ADR (BHP)- BHP is a diversified resource company. It is a South American company that operates mines in Austrailia, southern Africa and Latin America. It mines resources used for energy as well as steel, iron ore and magnesium. It has a market cap of 192.07 B which ranks it first in the Metal Mining sector. It currently has a forward P/E ratio of 12.94 and a foward PEG of 1.5. While it may seem like BHP is a little overpriced based on these numbers, I expect earnings estimates to be topped for two reasons. One, BHP has a huge potential buyer in China. China's energy demand is huge and growing, and BHP is set to cash in on this. Secondly, South Africa's demand for coal has exploded. South African government has dedicated itself to increasing energy production, and it has chosen to increase coal imports 50% just this year. BHP has homefield advantage and will see much of this increase as increase in demand for their coal. I look for BHP to hit $80 in a year.
• Vale ADR (RIO)- RIO is also a resource company. It's located in Brazil and operates mining interests in aluminum, precious metals, copper, nickel and iron ore as well as others. It also operates some hydroelectric power plants. RIO offers a huge potential for growth. Its a small and quickly growing company that is seeing explosive growth and huge potential. It has a forward P/E of 10.9, forward PEG of .43, as it is expected to grow at a rate of 25.4% for the next 5 years. With increasing energy costs, expanding emerging market demand and many new investments, the long term prosepect of RIO is glowing. I look for RIO to hit $40 by June, and once the market recovers and investor confidence returns, for RIO to push $60.