Skip the Financials

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK ( InvestorPlace) --It's chaos out there. Market volatility has investors rushing in and out of stocks frantically trying to scoop up profits any way they can. It's a dangerous Wild West, and the mob is running the show.

I have to say, I understand investors' frustrations and reason for panic. The economic picture is hazy at best; jobs aren't picking up; we've lost faith that our elected officials can come to the table with real solutions (not to mention pass them into law) and there's the ongoing saga in Europe.

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If you invest according to your emotions, you're going to be caught in the same trap as everyone else: buying high and selling low as you're always one step behind. Now, it's not easy going against the crowd of investors rushing for the exits, but the fact of the matter is that frankly, investors are not rational. They're emotional. And right now they're heading for a world of hurt as they follow their emotions into "bargain" financial stocks.

There are only a few things that we have very clear insight into, and one of those things is that banking stocks are the worst choice investors can make right now.

I'm a former banking analyst. I worked for the Fed; I examined these banks and what I know would shock you. But I can tell you that banks always have manipulated their books. It's not unusual for a bank to have a performing loan that's underwater, and it is going to be years before the current mess is completely worked out.

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I can tell you that when a U.S. bank tries to "fix" a delinquent mortgage with a 2% workout loan, it just causes more problems. When a home is underwater, a 2% mortgage isn't going to do a darned thing except kick the problem down the road. The fact of the matter is the 2% workout loans are causing more homeowners to default because when they default they have more leverage to (1) restructure a better deal with their bank or (2) to get out from under their negative-equity home.

And this is just the start. Banks have all kinds of capital in tiers 1, 2 and 3. More banks nowadays have a higher proportion of capital in tiers 2 and 3 that are a bit "fuzzy" in both Europe and the U.S.

Then there's the obvious stuff:

Regulatory Issues: Banks are under the thumb of the Fed; they can't even issue stock buybacks without serious scrutiny. Buybacks are supposed to inspire confidence in shares, but even the Fed knows this is a bad time to buy.

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Scandal and Settlements: Here are just a few of the recent headlines that should steer you clear of financial stocks and banks:

Goldman Sachs (GS)pays $550 million for misleading buyers.

JPMorgan Chase & Co. (JPM)pays $153 million for misleading buyers.

Citigroup (C) accountant faces charges of stealing $19.2 million from the company.

Morgan Stanley (MS)pays $7.2 million to resolve subprime mortgage probe.

Bank of America (BAC) to cut 30,000 jobs .

The SEC seeks $200 million from Citigroup.

The question you need to ask yourself is whether the banking crisis is a massive black hole that will act as a giant spinning centrifuge, sucking the profits right out of your portfolio, or if it is a creator of misunderstood bargains that you should scoop up right away.

I think it's the former.

I understand the urge to get back into a sector and recoup losses -- and I know about the current dangers of the financial sector. Investors have been hurt by a number of false rallies in banking stocks over the past three years and I don't want that to happen to another investor.

So, my advice is to skip the sector altogether, and to get your revenge on financials by making hefty profits elsewhere. The big dividend-paying stocks are getting a lot of attention in the current flight to quality. Small-cap stocks were hit by volatility and there are quite a few bargains there, and a number of global companies traded on U.S. exchanges are great buys. Focus on earnings, sales and other fundamentals, don't be afraid to invest against the current market panics, and you'll stay ahead of the game.

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One of Wall Street's renowned growth investors, Louis Navellier is the editor of four investing newsletters: Emerging Growth (formerly known as MPT Review), Blue Chip Growth, Quantum Growth and Global Growth. His longest-running publication, Emerging Growth, has a track record of beating the market nearly 3 to 1. Navellier is the author of a BusinessWeek bestseller, "The Little Book That Makes You Rich," and the chairman and founder of Navellier & Associates, Inc.

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