BusinessWeek writer Steve Rosenbush released a frightening article today highlighting the potential $2 trillion economic fallout as a result of the subprime mortgage crisis.
I know you’re probably thinking the mortgage and banking sectors looks attractive (contrarian); however, you must look at the quarter to quarter balance sheet of companies in this industry to see how they are making money, and how they plan to press forward through this mess.
Even though companies like Bank of America (BAC), Citigroup (C), and Merrill Lynch (MER) appear rock solid based on their trailing P/E valuations, you must dive deeper into their finances to see the underlying problems—forward P/E, PEG growth, short interest, etc.
If they can’t generate enough quarterly revenue to pay off their massive debt, the chances of a small investor generating a return in the near future remains dismal at best. My recommendation is to avoid buying these companies until their situations improve. It could get worse before it gets any better.