They're Buying Financials: Somebody Knows Something About The Credit Crunch

Bailouts, buyouts and failures have come one after the other. The latest victim? Lehman Brothers. Apparently, Lehman may not be able to raise enough capital to stay independent.

One day, Wall Street surges on the stabilizing effect of a nationalized Fannie/Freddie. The next day, Lehman's near to finding itself on the auction block. (And Wall Street gives back its aforementioned gains.)

In fact, it has been 14 months since 2 subprime-related hedge funds blew up; the Fed then lowered emergency window rates for banks to borrow, Bear Stearns was later taken over by J.P. Morgan, Indymac went bankrupt and Fannie/Freddie were bailed out by the U.S. government.

So here we go again... the financial system is still clamoring to right its ship. It's almost as if there's no end in sight.

On a contrarian basis, one might enter the toxic arena incrementally. Many analysts have argued that... since the July 15 lows... financials are very attractive. (Of course, many did say the same thing during the previous lows in March, describing the opportunity as a once-in-a-lifetime buy.)

Yet there now may be another reason: Insiders. Bank directors and financial execs bought $300 million of their own stock in May/June/July.

This insider buying of financials represents the most in several decades; in fact, it is the most since data aggregator, Washington Service, began compiling stats back in 1986. (Learn more at Bloomberg.com.)

Alston Corral is a Sun Trust Inc. board member who bought nearly $3 million of the company on July 24, not far from the July 15 lows. He's up on his investment. James Maynard is a board member of BB & T who bought nearly $2 million in July; he has also seen gains in his share acquisition.

Is this type of activity by management and directors indicative of their confidence in banks getting through the credit crisis? Possibly. After all, the highest insider buying in two decades? These are the people "in-the-know," not John Q. Public Plural.

Let's review what the insiders do know. First, the government will bail out "too-big-to-fail" financial companies if necessary. Second, the Fed will help orchestrate a buyout of investment banks if need be. Three, the SEC will prohibit short-selling of certain financial companies if the markets need stabilizing.

In brief, the financial system not only has to be fixed, it will be. The only question is... will it happen sooner, or later?

And let's face it... insider buying is hardly a sure-fire indicator of a stock's prospects. Insiders make plenty of bad calls too. It follows that the turnaround may be later, even much later.

There really isn't a so-called safe way to play financial companies at the moment. None of the exchange-traded funds come without enormous volatility and risk.

Yet Powershares Dynamic Banking (PJB) and streetTracks Regional Banking (KRE) have impressively bucked the trend. If you've got an appetite for risk, you may want to consider the road less traveled.

Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, may hold Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.