STAY AWAY FROM BANKS

September 3, 2008

Talk about a multi-billion dollar buyout! The state-owned Korea Development Bank is on the prowl for a 25% stake in the beleaguered investment bank Lehman Brothers (LEH). The offer is up to $5.3 billion!

Lehman's shares continued to edge higher Wednesday, as eager investors await news that the company will accept this much needed cash infusion. LEH still has over $60 billion of mortgage and commercial real estate exposure, and is under pressure to raise capital before it reports third-quarter earnings later this month.

This deal bodes extremely well for KDB, as it will launch South Korean financial services to the top of global investment houses, especially since U.S.-based companies have been badly beaten by mortgage write-downs.

Buyout or no buyout, the bottom line is that banks—even the big ones—are really hurting right now. In the past year alone, Lehman's share price has lost 70% of its value and the firm is looking to shed further assets to finance its debt.

Just last week, the FDIC reported that the U.S. banking industry posted its worst earnings since 1991. Specifically, earnings in the second quarter fell a whopping 86.5% to just $5 billion due to loan losses, compared with $36.8 billion in the same quarter a year ago.

Aside from Lehman, Citigroup (C) is another big bank that remains in precarious shape. It, too, has depleted much of its capital, so much so that Citigroup banned offsite meetings for investment banking employees and cut back on color photocopying to curtail expenses as its revenues continue to decline. Yikes! Revenue at the company's corporate and investment banking division plunged 71% in the second quarter, so more job cuts are also likely.

The bottom line is, STAY AWAY FROM BANKS! It's simple: These companies' fundamentals have deteriorated considerably in the past year. They just don't have the cash to cover all of their debt obligations.

Don't be fooled by the temporary run-ups in banks' share prices. The truth is they're significantly down from where they were a year ago. Those kinds of losses can't be recovered in a matter of months.

You should invest your money in commodity stocks, like agriculture and energy—why? Because commodity-related stocks have the strongest earnings. Plug these companies into PortfolioGrader Pro, my FREE stock ranking tool, and let the numbers do the talking.

It should come as no surprise that there are still some serious challenges ahead for the American economy. No matter how much we'd like to see the Dow climb back to where it was a year ago, that turnaround is never going to happen until we hit bottom in the housing and financial sectors.

The good news for subscribers across all four of my services is that Wall Street is coming to grips with the fact that we haven't seen the last of the credit crisis. Investors have already begun to bail out of banks and brokerages, and are running back to the fundamentally superior stocks my subscribers already own! Their Buy List is good and ready to profit from the pending surge in commodities stocks—is yours?