Contrarian Investment Theory

This is really rather an interesting analysis of the current price of banks. Just as a bit of background, the writer is a Hedgie currently on a forced sabbatical as his ex-empoyers sue him to insist that he doesn't work for anyone else. From Falkenblog:

Thus the indicator is a two-fer: banks issuing equity indicates their stock prices are 'too high', and potential buyers (all banks) think their prices are 'too high'. Citibank, and Wachovia, also issued equity recently. The fact that so many banks are issuing equity, and not being taken over, suggests that our current swoon is seen by insiders as justified.

This has applications here of course: RBS issuing equity means that other banks believe that it is currently over-priced, otherwise they would try to buy themselves...OK, well, RBS might be too large a bite for anyone in current circumstances, but the fact that there's not an acquisition boom for smaller outfits means the same thing.

If bank portfolio values were merely a liquidity problem, that is, portfolios being marked below 'true value' because of selling for reasons unrelated to new information, one would think strong banks would be buying distressed banks on the cheap, the way JPMorgan picked up Bear Stearns (which probably was mainly a run, as opposed to a more fundamental insolvency). It appears that banks don't think this is mainly a liquidity issue, but more fundamental.

So bank shares are over-valued because the ultimate insiders, the banks themselves, are selling at current prices, not buying.

N.B. Yes, I was once a stockbroker and yes, I was an appallingly bad one. Do not take this as investment advice.

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