FDIC planning next bank crisis

Now, the FDIC is making the beginning rumblings of another help-the-poor boondoggle...

An FDIC study says roughly 17 million American adults don't have a bank account. The study labeled another 43 million adults as "underbanked," meaning they have a bank account but rely heavily on other financial services like check-cashing and money orders.

The FDIC thinks its job is to make these people use banks more often, even though they've told the FDIC they don't have enough money to justify all the fees and the risk of overdrafting. The FDIC thinks the way to get poor people to use banks is to regulate the banking industry even more...

In a conference call with reporters, FDIC Chairman Sheila Bair said, "Our challenge is to make sure banks have the appropriate range of products and services that meet the needs of all low-income communities and have the right fee mix that is cost-effective."

This sounds eerily like the platitudinous ramblings of people like Barney Frank, the senator from Massachusetts who thought it was a great idea for the government to guarantee mortgages for people who couldn't afford to repay them.

I'd like to sound real smart and contrary and say gold is looking toppy, but with this kind of crap coming down the pipeline, it's hard to say anything but "buy gold and don't look back." I, for one, haven't changed my gold-buying habits at all. I'm putting 12% of my after-tax income into gold every month.

Think of it this way. If I approached you with a business proposition that I expected to double your money in 29 years, would you think it was a good deal?

Well, that's what the U.S. stock market offers you now, trading at 29 times earnings.

Research service Investors Intelligence surveyed 140 newsletters and reported a mere 16.7% of newsletter editors are now bearish. This is the least bearish reading since June 2003, right after stocks rallied 30% from their 2002 lows.

Back then, it wasn't such a bad idea to be bullish. Stocks had a great run from 2003 to 2007. But with stocks at 29 times earnings and yielding less than 2%, betting on another four-year bull run seems like a bad idea to me.

Cast a skeptical eye at new long stock ideas. I'm not saying they're not out there, only that the odds of finding a truly undervalued stock are poor.

The guys at Investors Intelligence also note a 10% correction is expected by 30% of newsletter editors, a high percentage. They think maybe a big end-of-year rally will take out the last of the pessimists. That, they say, will be when we get the real top. Top, bottom, middle, whatever. Stocks are too expensive. That's all you need to know.

In addition to common stocks, Paulson is finding great values in high-yielding debt securities. About 50% of his credit fund is in high-yield bonds and mortgage-backed securities yielding an unlevered 10%. Paulson says these securities could yield 20% with "modest leverage." Paulson is borrowing money at 0.5% to buy these securities, allowing him to lock in the spread for approximately three years. Paulson explains one of his high-yield positions:

An example of our current pay bond portfolio is our position in GMAC the former auto finance arm of GM. While we originally entered our position when the yield was nearly 55%, we maintain our position today given the relatively attractive yield of nearly 11% and the very low likelihood of default (due to the government's injection of preferred equity, guarantee of maturing debt, and insurance of deposits).

Somehow, though, it doesn't feel toppy.

The first is a water infrastructure company from his latest issue (November 25). Over the next 15 months, the government has to spend $5.7 billion to improve water pipelines – and this company will benefit. Also, Frank explains why Goldman Sachs will upgrade this stock in the next six weeks. Shares could double from here.

The second is a micro-cap oil and gas company with assets in Australia, Canada, and the U.K. The stock trades for less than $2, and insiders bought more than 2 million shares in the past few months – a huge chunk. Also, the company just bought a large stake in a U.S.-based oil company – its first entry into the U.S. in the company's 52-year history.

Frank is about to find out why insiders are buying when he meets the CEO on December 9 at its annual meeting in Orlando. If he likes what management has to say, the company could make its way into the mid-December issue of Penny Stock Specialist. Frank says this company could easily quadruple from here.

Penny Stock Specialist is still in "beta mode" and only available to Alliance members. We'll continually update Digest readers on its progress and alert you when Frank's research is available to the public.