Ominous Signs From the Beige Book

This does not bode well for the immediate future of financial stocks. I saw a couple of talking heads on the television during the day suggesting the investors begin to overweight the financial stocks. I cannot see how any one could make a rational decision to put money into these stocks right now. Even the plain vanilla companies without exposure to toxic exotics are going to feel the impact of low demand for the products and services they have to offer.

A lot of the banks are loathe to make new loans. They have tightened credit standards to the point where it is impossible to get a loan. They wisely choose to forego short-term profits to avoid putting any more problem loans on the books.

We also saw the much-awaited AMBAC (ABK - commentary - Cramer's Take) bailout plan. Talk about rewarding bad behavior. Mortgage insurance was once one of the most consistently profitable, low risk businesses in the world. Yet through sheer stupidity and greed, AMBAC wants us to pony up $1.5 billion to help correct its mistakes. As I've said before, it would be wrong to bail out these businesses. The municipal bond businesses should be sold and then closed if they cannot stand on their own.

There was no good news anywhere on Wednesday. Although I am long a few things I have written about such as Charming Shoppes (CHRS - commentary - Cramer's Take) and some battered commercial REITS, I am otherwise on the sidelines looking for a spot to put on another round of chicken shorts using put spreads.

Someone reminded me the other day that the market tends to anticipate a recovery several months in advance and that it is always darkest before the dawn. I just do not think that we are close enough to a bottom for the market to sense any recovery. To paraphrase Bob Dylan, it's not dark yet, but it's getting there. It is going to get worse before it gets better and I still do not see the type of fear that will mark a longer-term buying opportunity in the stock market.

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At the time of publication, Melvin did not hold any positions in the stocks mentioned, although positions may change at any time.

Tim Melvin is a writer from Stevensville, Maryland, who spent 20 years a stockbroker, the last 15 as a Vice President of Investments with a regional firm in the Mid Atlantic area. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Melvin appreciates your feedback; click here to send him an email.