Here's a summary of the state of the financial sector, courtesy of some recent Wall Street Journal headlines:
"BofA Sounds Grim Tone on Outlook"
"Another Bank Bashing"
"Wells Fargo Chairman Concedes Mistakes"
"WaMu's Uncertain Future"
"Profit Slump Fuels Recession Fears"
From the big banks such as Bank of America (NYSE: BAC ) , Wells Fargo (NYSE: WFC ) , and Washington Mutual (NYSE: WM ) , down to the working homeowner, everyone in this economy is feeling at least a little bit of pain.
Experts agree: Now is the time to panic
What's more, events may very well take a turn for the worse. Economists surveyed by the Federal Open Market Committee now see a 38% chance of recession -- a three-year high.
That's one of the reasons why just last month, I advised against buying small banks, even though they look cheap.
Against that dire backdrop, however, a very interesting trend is emerging. Insiders at the very companies being crushed daily these days are buying stock ... in spades.
That's right ... spades
According to a recent report from Thomson Financial, insiders in the battered finance sector are "actively buying." They picked up $91.7 million worth of shares in November -- "the 9th highest month ever!" -- with insiders at Wachovia (NYSE: WB ) , Thornburg Mortgage (NYSE: TMA ) , and Northern Trust (Nasdaq: NTRS ) leading the way.
While Northern Trust has been a solid investment (up more than 20% year to date), the insiders at Wachovia and Thornburg are taking a stand against market sentiment. Both Wachovia and Thornburg are down more than 20% this year.
That's the point, of course. To the insiders -- the people in the know -- these stocks look cheap. And rather than panic at the onslaught of bad news, they're preparing their portfolios to profit.
Time for you to choose
Insiders aren't the only ones starting to snap up their hated issues; some smart money managers are doing the same.
Legg Mason Value Trust guru Bill Miller wrote in his most recent shareholder letter that he's looking closely at this very sector:
The new [market] leadership will be U.S., large-cap, dollar-based, and grow to encompass what no one wants to own today, especially financials and consumer. ... Just as the right thing to do in 2002 was to buy what everyone was panicked about, I think the greatest gains over the next five years will be made in those securities people are panicked about today.
Of course, saying you'll buy what no one wants to own and actually doing so are two very different things. And I'd say it's even more difficult today than it was in 2002.
How hard is too hard?
See, in 2002, no one wanted to own tech. You could have bought Amazon.com (Nasdaq: AMZN ) at its 2002 nadir and earned nearly 700% returns to date.
Yes, Amazon had had a torturous two-year ride, but it was a consumer-facing business that individual investors could analyze and understand. That's not necessarily the case with banks and mortgage lenders.
These issues are complicated, dense, and even convoluted. Future write-offs are almost entirely unpredictable. Their balance sheets likely cannot be trusted.
A brave new world
Having the courage to buy financial stocks today and in the near future will take some courage. The good news is that insiders appear to be leading the way.
At Motley Fool Stock Advisor, Fool co-founders David and Tom Gardner have made a practice of buying the best operators in the most hated industries and profiting while others panic. That meant buying tech and asset managers in 2002, health care prior to the 2006 elections, and it will mean financials today. What's more, the strategy works. Their picks are ahead of the market by 41 percentage points on average.
So if you're looking for someone to help you navigate this panicky but potentially very profitable market, click here to join Stock Advisor free for 30 days. There is no obligation to subscribe.
Tim Hanson does not own shares of any company mentioned. Bank of America and Washington Mutual are both Motley Fool Income Investor recommendations. Amazon.com is a Stock Advisor pick. The Fool has a disclosure policy ... and its next move is to make some hot chocolate.