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If you don’t live in a cave, you have probably hears about the current crisis in banking and housing. Many banks and mortgage companies have already failed (Netbank, Indymac, and others), and many more are expected to follow. But if the banks hedged their risks appropriately, the pain of the housing crisis would be mostly limited to the private mortgage insurance companies, such as MGIC Investment Corp (MTG).

Traditional wisdom states that you need a 20 percent down payment to purchase a house. The 20 percent down payment is the method a borrower can use to prove loan worthiness. The large down payment, and a good credit score were the traditional means a bank used to establish credit worthiness for such a large purchase. If a borrower wanted a home loan with less then a 20 percent down payment, they were structured as a piggyback loan. The piggyback loan consisted of two loans, one for 80 percent of the value of the house, and a second loan at a higher interest rate for the difference between the smaller down payment (sometimes nothing at all), and 20 percent. In addition, banks and mortgage lenders issuing piggyback loans required the owner to purchase additional private mortgage insurance. The mortgage insurance premiums paid by the owner was a protective insurance policy designed to hedge the banks risk against default. Companies such as MGIC, who sold the mortgage insurance, would cover the first 20 percent of loss and the banks would cover the rest.

But just as in the DOT COM era, the bubble got a hold of bank CEO’s, and greed and stupidity took over. The logic seemed simple at a time when competition for home loans was fierce and banks were fighting for their share of the loot. You know how the story goes; everything that could be overlooked was overlooked. $500,000 no money down home loans, often structured as interest only arms with negative amortization, were freely given out to anyone with a heart beat, and sometimes the heartbeat was optional. But the banking CEO’s figured there was no risk because houses were increasing in value by 10 or 15 percent per year – or so they WERE. It was a borrowers market and given the choice of a loan from a bank that required the additional mortgage insurance purchase, and one that didn’t, the decision was obvious. Just as the commercials say, banks had to compete, and when banks compete, banks LOSE. They dropped their demands for private mortgage insurance, effectively killing the hedge and taking on all the risk themselves.

Fast forward to present day and banks are now learning the painful lesson that mortgage insurance policies won’t help them if they never existed. Meanwhile, the impossible has suddenly become the probable. Housing values across the country continue to drop, and borrowers who never had any skin in the game find it easier to walk away and hand the keys back to the bank. And the banks are left wishing they had the private mortgage insurance in place to buffer the pain.

How do you invest your money? Do you throw it at mutual funds and let someone else manage it? Do you throw it an index and just play the averages? Or do you try to out maneuver the market, and beat the averages by picking your own stocks? If you are in the latter category, the good news is that there are now free and simple tools available to everyone to help you filter out the losers, and narrow in on the winners. Yahoo, MSN and Google offer three of the most popular, well featured, and free stock screeners around. This article will help you get started.

1) The Yahoo Finance stock screener is a basic screener that allows you to search on 13 criteria, and also allows for limiting results based on either industry group or index membership.

2) MSN Money goes a step further and offers pre-defined Power Searches, as well as the manual stock screener where you enter each specific search criteria. If you believe in the power of momentum, then perhaps the MSN stocks at new 52 week high power search is for you. The power search automatically orders the results with the highest prices at the top. The disadvantage with the power search is that the resultant data is limited to only price and market capitalization info. If I could limit the power search results to only US based companies with high liquidity (> 500,000 shares/day), and stocks priced above 20, then the MSN power searches would be a regular stop for me.

3) The google stock screener has a very simple look and feel, but certainly not lacking in sophistication. I especially like the distribution graphic for the various parameters.

I also like google’s choice for the default search criteria using 4 simple parameters – market cap, p/e ratio, dividend yield and 52 week price change percentage. For my own screen, I used the following parameters:

• Market Cap: 2B to 100B (not to small and not to large)
• P/E Ratio: 10 to 40
• Dividend Yield (%): 1 to 3 (why invest at all if they are not sharing the profits!)
• 52 week price change (%): -5 to 50 (stay away from major losers, and bubbles in the making)

The above 4 criteria resulted in 111 companies. If I add a criteria for average volume over 500,000 shares, and stock price greater then 20, the results are then limited to 82 companies. To see the most recent results of the above search, use this google search link.

4) The Marketwatch stock screener also has a very simple look and feel, but goes a step further by allowing a user to enter both screening data and output data. The screening data entry is very easy to use and allows criteria based on price, volume, fundamentals, and technicals. It also allows results to specific exchanges or industries. Once all the search criteria are selected, you can then choose how to display the results, selecting which fields are displayed as well as which field to key the sort from.

Food and fuel prices got you down? Stock market driving you broke? Don’t despair, just hedge your bets with some commodity exposure. It is now easier then ever to play the commodities market – without learning the complexities of the futures market.

Invesco Powershares offers several simple exchange traded funds to gain exposure to the commodities market, and to hedge the rest of your portfolios. One that is doing very well is the Deutsche Bank commodity index, with a 5 year annual average return of over 31%. DBC has exposure to the following:

• Aluminum – 12.5% base weight
• Corn – 11.24% base weight
• Gold – 10% base weight
• Heating oil – 20% base weight
• Light crude – 35% base weight
• Wheat – 11.25% base weight

Be sure to check out the powershares site for more information.

It’s information overload in the financial markets, and out of control marketing from the maniacs on wall street. What kind of returns are you looking for? Do you want Mad Money from the likes of Jim Cramer (“BUY BUY BUY”)? How about a daily dose of insanity from the Fast Money Team? When all else fails, there is always the 10 million plus links from the “Stock tips” google search. Beating the markets shouldn’t be to difficult this year, since the S&P, Dow Jones, and Nasdaq are DOWN 9%, 7% and 14% respectively so far this year. Those types of “returns” start to make the 1% bank yields look mighty attractive!

Is there any reliable way to achieve outsized returns in any market? Sure, plenty of sophisticated, experienced and good options traders continue to make 50% or more per year in any market, up, down or sideways. And many of those great traders and firms will try to sell you their systems and educate you on how to match their 50% returns. When you add it all up, however, it is nothing more than a market sum game. While some exceptional traders will continue make their living from trading in the markets, many more will go broke trying. The dollar sum (positive and negative, commissions withstanding) of the returns of all the traders in the world will always net out to the total return of the markets, year after year.

Trading the markets can be fun, but often consuming and addictive. The brokers will always win with the commissions they charge, assuming their expenses are lower than net commissions. For everyone else, it’s a market sum game. If you want an easy way to match the markets year after year, just throw your money at the index funds that do exactly that. If you can’t resist trying to beat the markets, then be prepared to learn everything you can, filter out the nonsense, and most importantly be careful!

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