You may see a recommendation to "overweight" a stock or sector. An analyst is bullish on a stock or group and feels buying more than usual will be rewarded. It may or may not come true. While it's a good idea to overweight at times, it should never be done in excess, to a point where you're putting too much of your portfolio in one stock or group of stocks. That's when overweight turns into speculate.
A rational approach to building a portfolio is to have at least five different sectors, ones that aren't correlated. There are different definitions of sectors but there are usually between 10 and 15, depending on what publication or expert you use. These sectors are categorized into broad groups, such as Healthcare, Technology, Manufacturing, etc. Within each sector are many industries. Value Line defines 98 different industries, ranging from Coal to Auto Parts to Water Utility to Beverages. Healthcare, as one example of a sector, has pharmaceutical companies, hospitals, medical devices, anything associated with health. Technology has a broad spectrum as well, encompassing everything from computers to wireless communication.
Lately, there's been lots of dire talk about the private equity world. Returns are likely to be much lower and perhaps there will be many firms that shut down.
Indeed, such things may turn out to be true.
However, whenever there is extreme turbulence and a pervasive credit crunch, there are also big opportunities to make money. Just look at Apollo Management and Cerberus Capital. Both firms made a killing during the rough early 1990s.
Fast forward to today, and we may be seeing something similar with one of the top beneficiaries possibly being Lone Star Funds. Yes, this week the fund purchased a collateralized debt portfolio from Merrill Lynch & Co. (NYSE: MER) at 22 cents on the dollar [subscription required]. The face value on it? About $30.6 billion.
This is not a one-off deal as it looks like Lone Star is hungry for high-risk debt. For example, the firm recently purchased the mortgage division of CIT Group Inc. (NYSE: CIT) and acquired Bear Stearn's mortgage segment. There was also the purchase of Accredited Home Lenders Holding Co. for $295 million.
It's been a brutal time for retailers. Some of the bankruptcies include: Linens 'n Things, Goody's Discount Clothing and Sharper Image.
According to a report in the Wall Street Journal [subscription required], it looks like Mervyn's LLC is also in trouble and may even shut down this month as a variety vendors are stopping shipments. There are also issues with financing from CIT Group Inc (NYSE: CIT).
Founded in 1949, Mervyn's is a low-priced retailer that's focused on young families. The typical store has 80,000 retail square feet. While there are 177 stores, they are concentrated in seven states, with a big concentration in California and Arizona -- both have suffered greatly from the real estate bust.
Back in 2004, a group of private equity firms, Sun Capital Partners Inc, Cerberus Capital Management, Lubert-Adler and Klaff Partners LP, purchased Mervyn's for about $1.2 billion, of which $400 million was in equity.
Are these folks suffering? Perhaps not. You see, the investors wanted to capitalize on Mervyn's real estate. As a result, the investment was structured into two sections. So while the retail component has lagged (and there has been lots of restructuring), the real estate component has done quite well.
After the implosion of IndyMac Bancorp (NYSE: IMB) and news of the deterioration of Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) last week, there's bound to be a certain level of trepidation as the earnings crunch begins this coming week and many big financial companies report. Here's a look at what Wall Street was expecting (see The week in preview: Expectations as the earnings crunch begins for expectations of other reporting companies.)
Analysts surveyed by Thomson Financial are expecting the following of companies to report lower earnings when compared to the same period of the previous year.
TheStreet.com's Jim Cramer says he has no confidence in these hated names, and neither should you.
The financials are flying -- there are finally bids for most of them underneath. Many, including Lehman (NYSE: LEH) (Cramer's Take), are running. What a great time to put the negative cards on the table and put the negatives in perspective. That's right, let's look at the financial Achilles' heels. What could go wrong? In other words, here's the companion piece to Doug Kass' positive conversion. Here's what I am worried about even as Doug thinks everyone's too worried and the bottom is being put in.
To get started, let's look at what's not causing the endless declines in the stocks -- don't worry, we will get to the financial dirty dozen when I finish this preamble.
First, it ain't earnings. Earnings aren't going to be that great. But that's why the S&P is at 14 times. It can go to 12 or 11, or most likely stays at 13-14, but the E goes down (earnings).
Second, it ain't oil. The stocks sensitive to the increase in oil have room to go down, but the price of oil is being factored in slowly but surely.
Third, it isn't inflation or recession. Those two are being baked in each day.
TheStreet.com's Jim Cramer says it'll be a huge, bizarre investment that sticks -- not a bid for Wachovia.
Why is there so much chatter about Wachovia (NYSE: WB) (Cramer's Take) getting a bid? Why do people think that its deposit base is worth the heartache of dealing with its mortgage portfolio?
We have all heard the chatter about a potential bid for Wachovia, and it sure would be sweet, because the stock has been one of the worst of the group. It doesn't have a CEO, so that fits the scenario of a company that could be for sale. The franchise was always a solid one until now. And I will admit that the secret to the bulls' case for a better second half is a bid for Wachovia, a premium bid that takes everyone's breath away and causes a short panic.
My problem is that if you wanted to buy Wachovia, why not wait? What's the hurry? Is it that you might miss a chance at a bottom? Is there someone else out there who might want it? Do you perceive a bidding war, for instance, between JPMorgan (NYSE: JPM) (Cramer's Take) and Wells Fargo (NYSE: WFC) (Cramer's Take) for WB? How about USB (NYSE: USB) (Cramer's Take)?
The bulls got to lead the first day of the quarter, although we would note that if today was the norm that trading volatility isn't slowing down regardless of the direction. Oil rose again toward session highs on tensions and the usual myriad of reasons we cite for oil rising (yes, it's that routine). Here are today's unofficial closing levels:
We actually saw many financial sector upgrades from research firms today, which sent many of the corresponding shares higher in what feels like a "for once" statement. We would caution that later in the day an analyst report did note other banks would need more capital (again).
Like many other financial institutions, investors are worried about the viability of CIT Group Inc. (NYSE: CIT), which is a major business lender. Of course, the stock price has plunged – and there are many rumors swirling.
But today, there was some good news. That is, CIT has struck $1.8 billion in deals to unload its manufactured housing/home loan units. The stock is up 16% to $7.93.
There were actually two buyers. First, private equity firm Lone Star Funds agreed to a $1.5 billion transaction for the home lending division. Next, Vanderbilt Mortgage and Finance will spend $300 million for the manufactured home segment.
These deals are certainly a big relief. Basically, CIT can now focus on its core business – and not deal with the headaches of the consumer area.
Actually, CIT has some big-time backing. For example, Goldman Sachs (NYSE: GS) recently made a $3 billion infusion.
Yet, there are still many challenges. After all, CIT has had difficulties generating profits and the credit crunch isn't going away.
CIT Group (NYSE:CIT) is recently trading at $7.60 in pre-open trading, above its close of $6.81. CIT agreed to sell its home lending business to hedge fund Lone Star for $1.5 billion and its manufactured housing portfolio to Vanderbilt Mortgage and Finance Inc. for $300 million. BMO Capital says: "Although this removes one of the risks to the CIT story, we continue to view its funding risk as being paramount, particularly given CIT's $7 billion in net unfunded commitments that it must find a way to fund if drawn upon." CIT July option implied volatility of 124 is above its 26-week average of 91 according to Track Data, suggesting larger price movement.
Option Update is provided by Stock Specialist Paul Foster of theflyonthewall.com
Dragged down by the challenging market conditions, many stocks have fallen under $10 lately. CNBC's Cindy Perman suggests that some of these stocks could be become good investments for traders. However, not everything that is cheap could be such a good bargain, Perman reminds us. You must always do your homework on potential investment before buying.
For example, Ford Motor (NYSE: F) fell down to around $6 compared with $38 nine years ago -- is it a good investment? Well, while the automaker revealed its plans to shift production from trucks to cars and give a boost to its turnaround plan, it also warned it won't be profitable until 2010 at the earliest.
Perman quotes several investment specialists on the matter. John Schloegel, vice president of investment strategies at Capital Cities Asset Management says, "An investment in Ford today feels like being in the wrong place at the wrong time." And Greg Womack, president of Womack Investment Advisers, advices to stay away from the sector, which doesn't look promising now, for the next three to five years to find out the "winner."
Stock Picks for Under $10 There are a lot of once-highflying stocks that have fallen below $10 and look like bargains ripe for the picking. See if CIT Group, Ford, Motorola, Tenet Healthcare, Dynegy and Interpublic. Stock Picks for Under $10 - CNBC 10 Worst Managed Companies in America With the trading year almost half over and results from the first quarter out, 24/7 Wall St. presents its latest installment of its Ten Worst Managed Companies In America list. They include Sun Microsystems, Sears, Boston Scientific, Starbucks, Sprint, Circuit City, Motorola, AMD, AIG and Pfizer. 24/7 Wall St.: The 24/7 Wall St. Ten Worst Managed Companies In America
Biggest Stock Losers Since the market slump began six months ago, U.S. companies have bled away trillions of dollars in value. 80% of companies in the Standard & Poor's 500-stock index have fallen in value, according to data provider Capital IQ. Here's a damage report. The biggest loser is Bear Stearns which lost $16.7 billion in value. Other big losers include National City Bank, Ambac, CIT, Countrywide, E*Trade, WaMu, Sprint Nextel & Freddie Mac. The Stock Market's Biggest Losers
6 Ways to Buy Checking 'Float' Time Is your bank speeding money out of your checking account faster than you can put it in? Do you feel like someone just set your financial hamster wheel on fast-spin? Welcome to the new reality of check "float" -- or lack thereof. Float refers to the time it takes for money to leave your checking account. Nowadays, it's harder to buy extra time to pay your bills. Here are six moves you can make today to reclaim some lost "float" time. 6 ways to buy checking 'float' time -Bankrate.com
TheStreet.com's Jim Cramer says this lender gave money to anyone with a pulse, and the shareholders are left holding the bag.
For pure laughs, go read the National City (NYSE: NCC) (Cramer's Take) conference call yesterday, the one where they destroyed what was remaining of their common shareholder base with the partial takeunder by Corsair, an unknown private-equity fund that surfaced to inject $7 billion to save the bank.
But this Nat City takes the cake. They have to be the most stupid and least rigorous lender since the S&L crisis. They have $10 billion in home equity loans that have got to be among the worst ever issued. I swear, I bet that many of these are going to turn out to be out-and-out fraud by the borrowers. Miraculously, Nat City found an even more stupid soul, Merrill's (NYSE: MER) (Cramer's Take) Stan O'Neal, to sell its main originator of this junk to, something that brought O'Neal down and almost brought Merrill down. Some would say that the latter is still in question. I have no idea what would have happened to NCC if they hadn't sold it before the height of the fraud, the first quarter of 2007.
MOST NOTEWORTHY: Lehman, CIT Group and Auxilium Pharma were today's noteworthy downgrades:
Oppenheimer cut Lehman (NYSE: LEH) to Perform from Outperform on valuation, as they see a "protracted challenging capital markets environment."
The firm also downgraded CIT Group (NYSE: CIT) to Perform from Outperform, as they believe the company addressed its liquidity concerns too late and will be forced into a fire sale of assets.
Merriman downgraded shares of Auxilium Pharma (NASDAQ: AUXL) to Sell from Neutral as they believe there were a number of unexpected adverse events in the phase 3 trials of XIAFLEX that could potentially delay the approval and launch. They see significant potential downside in the interim.
OTHER DOWNGRADES:
Gap (NYSE: GPS) was lowered to Neutral from Buy at UBS.
Wachovia cut Symmetry Medical (NYSE: SMA) to Market Perform from Outperform.
Wells Fargo (NYSE: WFC) was downgraded by Baird to Underperform from Neutral.
Ted Allrich is the founder of The Online Investor and author of: Comfort Zone Investing: Build Wealth And Sleep Well At Night. In this weekly column, he'll offer advice to investors who are just getting started.
Lately, there's been lots of dire talk about the private equity world. Returns are likely to be much lower and perhaps there will be many firms that shut down.
It's been a brutal time for retailers. Some of the bankruptcies include: Linens 'n Things, Goody's Discount Clothing and Sharper Image. 
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Like many other financial institutions, investors are worried about the viability of 
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