Bank Consolidation

The financials have taken a huge hit thanks to the government takeover of IndyMac Bancorp. This marks the second largest bank failure in the history of the U.S. and is also causing much concern among the smaller regional banks putting downward pressure on their shares. Today on CNBC they showed images of a "modern" bank run with people lining up outside the IndyMac branches waiting to get their money. I thought bank failures were a thing of the past, but the credit crisis has struck down another victim and will continue without consolidation within the banking industry. The Federal Deposit Insurance Corporation which insures deposits up to $100,000 nationwide, has a watch list of 90 banks that could potentially fail, but the bad news is that IndyMac wasn't on that list. One can only speculate on which bank is next but there was a major scare that National City was going to be next until they halted trading and released a statement claiming that they had sufficient capital to back their deposits. The major problem for the banks is that all the money they receive in deposits is immediately thrown out of the door in loans, but with these loans not being paid on time the bank is left with no money to pay back their customers or finance anything else the company wishes to do. There is a solution to the problem though and that involves M&A activity in the banking sector. It could come in a number of ways... maybe a merger between two banks that would fail alone but survive together, maybe a large bank acquiring another small commercial bank that will broaden its portfolio among others. The 90 bank list doesn't include any investment banks, however they too are under pressure after the fallout of Bear Stearns. Look at Lehman Brothers for example. Shares have been blasted in the last week of trading and many experts say the only way to save the bank is for it to become part of another. The lack of liquidity and capital in the market is changing the game for banks. No longer can they just throw money around and be rewarded. Only the smart and lean banks will make it through the storm.

What Sectors Work Now?

The major stock averages in the United States have clearly entered into bear territory, but the question that remains is if anything in these markets work right now. After listening to many experts there seems to be a consensus that health care and energy are performing comparatively well right now, with financials dragging down the market.

Personally I'm not sold on health care since consumer's budgets are becoming tighter and health care related inflation is a main concern for the entire sector, however companies that produce supplies for health care related businesses will handle this bear market fairly well in my opinion.

Energy is a no brainer right now with oil reaching a new high of 147.27 today during trading. The recent rise in crude prices has been largely due to the tensions in Iran. We might see a slight pullback as tensions decrease however energy prices this high are going to create large profits for companies in the business. When they start reporting earnings in the next month these stocks should go even higher.

Some people, myself included, think that this downturn in the market has provided great opportunities for long term investing. Many sectors might not be yielding great returns for the 3rd quarter but in a year might appreciate in price. I think retail is getting hammered because of higher oil prices but as they decline their numbers should become better. However if oil falls $20 a bbl then we should see some relief in these stocks. The sector I like best for the long term (1-2 years) is industrials. Continued demand from overseas and a weak dollar is going to help generate better earnings for the future. Companies like Boeing (BA) and United Technologies (UTX) have fell recently offering great deals on quality stocks.