JPMorgan and the U.S. Treasury just saved us from the real risk of Depression...
It was the Panic of '07. The economy was weakening. Stocks were falling. Banks had lent too much and were now seriously tightening up. It all came to a head when a major bank was about to fail. Something had to be done.
The U.S. Treasury understood the risk of a downward spiral. So after a secret meeting, it took the surprising step of providing a whopping $30 million to JPMorgan and other bankers. The goal was huge... it was to save the U.S. financial system. In hindsight, it worked...
Ultimately, the speedy actions of JPMorgan and the Treasury marked the bottom in the banking crisis and the stock market.
Wait a minute! There's something wrong with that story... Can you figure it out?
This was the Panic of 1907! The story today is similar to 100 years ago... only it's billions instead of millions from the government to save the financial system...
After our multiple credit crises in 2007, it all came to a head last month.
Once again, JPMorgan and the government got to together. The government provided roughly $30 billion in guarantees to JPMorgan, for Morgan to take over Bear Stearns.
Importantly for you and me, after the bailout in 1907, stocks (as measured by the Dow) doubled in two years.
I believe we'll be able to look back on March 2008 – when the government and JPMorgan got together in secret to save the financial system – as the bottom in share prices. I could be wrong of course. But from here, I believe stocks could do very well, just as they did after the 1907 JPMorgan bailout...
Earlier this month, our current Treasury Secretary Hank Paulson released a 218-page proposal, in part arguing the Federal Reserve should be granted exceptional new powers to deal with crises.
Once again, history repeats...
I'm writing to you from the Jekyll Island Club... It is the resort in Georgia where it's said the Federal Reserve was created, after the Panic of 1907.
Back then, a half-dozen men – supposedly representing a sixth of the world's wealth – sneaked out of New York and headed to this nearly deserted Georgia island. They lived here for a week under such secrecy they didn't use their real names (so the servants wouldn't know what was going on). B.C. Forbes called it "the strangest, most secret expedition in American finance."
Personally, I think many Jekyll Island-style meetings have been happening in the last month. I think many departments of government finally got sufficiently scared. And they're now in hyper "fix it" mode.
I'm not a fan of government intervention in markets, as the usual result is a colossal waste of taxpayer money. The only time intervention has a chance of working is if we are close to a turning point anyway... Then sometimes a nudge from the government starts the pendulum swinging quicker and more powerfully in its new direction. That's where I believe we are.
If this is the case, once again, we need to be looking to buy financial stocks. With the Fed now proving it'll provide a backstop to the financial system, the argument is only getting stronger...
Financial stocks have been beaten up. Most of them deserved it. Like UBS, which announced this week its subprime writedowns are up to $37 billion, many big banks took too much risk and bought "derivatives" they didn't fully understand. Now they're paying for it.
But some banks didn't do stupid things. The thing is, there are literally thousands of financial companies. Looking for the needle in the haystack – the one bank that didn't get into U.S. subprime real estate, didn't invest in all these exotic financial instruments, and didn't take on too much risk – is hard work!
In the latest issue of my newsletter Sjuggerud Confidential, out on Wednesday, I recommended to my paid subscribers a bank that may be the world's most conservative. It avoided all those complicated derivatives. I think our upside is 50% in the next 12 months in this one.
I wish I could share the name of it with you... but it wouldn't be fair to my paid subscribers. However, I can share another idea that should also do well... I like it so much, I recommended it a few months ago in my newsletter True Wealth.
It is the KBW Regional Bank exchange-traded fund. The symbol is KRE.
This is basically an index fund of smaller regional banks. The idea is, the smaller regional banks didn't try to get as crafty as the big banks like UBS.
Instead of doing exotic, risky things, they stuck closer to the simple business of taking in deposits at a low interest rate, and making loans at a higher one.
The banks in this KBW Regional Bank fund trade at as small a premium over book value as we've seen in bank stocks in over a dozen years. The fund pays a nice dividend, too. It holds roughly 50 different regional banks, so your risk is diversified. If one bank has problems... the other 50 can more than make up for it.
How high could it rise? In 1907, it took two years for stocks to double. I think today, we can see the same kind of move, in the same time frame, in regional banks. You can learn a bit more about this fund by typing its symbol into the search box at the fund's website: www.sgafunds.com.
Well, I'm off to breakfast here at the Jekyll Island Club... which is served in the Federal Reserve room, I believe...
History often rhymes in finance. It's rhyming now. Take advantage of it.
Good investing,
Steve
Editor's note: Steve Sjuggerud is a regular contributor to DailyWealth, a free investment newsletter focused on the world's best contrarian opportunities. We write with a simple belief in mind: You don't have to take big risks to make big money with your investments.
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