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You are probably correct on assuming big gains from financial stocks when things smooth out. I just don't see the economy as being at all stable right now. As bipolar as the market has been lately though, I don't think it would take much to spark another huge sell-off. So....I'm just sitting on my thumbs, and my cash, for now.

I guess a lot depends on your personal motives, strategies, and tactics as far as your investments go. My personal time horizon has always been long term (that's because I am really, really lousy at picking short term stock movements!!!). I buy stocks because I understand how they make money, and I believe that they will continue to do so for many years to come, AND they pay a dividend.

The current turmoil in the market can be viewed as unsettling, or can be viewed as a great opportunity to buy quality companies cheap. Especially financial companies!

What happened over the past six to eight years is easy to figure out. When interest rates kept dropping and dropping, people found out that they could afford larger and more expensive homes on the same salary base that they had. So, they traded up. That led, in turn to a continuing spiral of price increases on housing, which led to higher mortgages. Don't you all remember the infommercials and the advertisements of how to buy houses for no money down, flip it in a few months, and become millionaires? Well, the base money underlying all of that were really cheap mortgages!

This trend did not affect only those who were able to afford the payments, it became a game where everyone wanted to play. So, mortgage brokers popped up who promised any comer that they would get them some of that cheap money. The brokers are, after all, commissioned salespeople. Ergo, sub-prime borrowers getting large mortgages that in saner times they could not afford.

Starting in 2004/5 the Fed started raising rates. The rates went up, what?, 19 times over three years? Well, that meant that the money wasn't so cheap anymore. And guess what else? ARMs reset - and because of this they reset at a higher rate.

Another impact of this was that house prices stopped spiraling upwards. As a matter of fact, they started dropping.

So, now we have some people holding mortgages that reset to a payment they could not afford, who cannot refinance because the house is no longer worth the amount of the loan, who cannot sell because the house price went down and there are few buyers. So, what happens in these cases? These people default on the loans.

Well, that brings the whole house of cards down doesn't it?

So much for the history. What will happen from here on out? There will be bankruptcies, there will be gnashing of teeth, and the government will ride in to "save the day" (and probably cause a bigger distortion in the economy somewhere else). But, ultimately, house prices will stabilize (the country is still growing in terms of population) and people will buy houses, and mortgages will be let, and the banks will have swallowed their medicine and start making money again - even on mortgages!

How long will that take? I have no idea! I do know that I am buys financial stocks right now like BAC, WM, WB, NCC, USB, etc. because even if some of them fail, they will be bought out by someone else (CFC) and with my time horizon, those dividends will eventually pay me back my investment and more.

Am I happy? No. But I will stick this out like I stuck out the 1987 Black Monday thing, the S&L mess, the dotcom boom and so on. That's simply life in the investment world as I see it.

Sorry for the length of the message.
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