Una ganga

I love the idea of bottom-fishing and vulture investing more than anyone, but I continue to wonder whether the market's mini-catharsis following the Bear Sterns debacle isn't a false dawn. Certainly, I'm not alone, as this FT article suggests. Some choice metrics:

Domestic banks – this excludes Standard Chartered and HSBC, which make most of their profits overseas – trade on a prospective price earnings ratio of around 7.6 times earnings, according to estimates from Goldman Sachs.

However, it has been cheaper. In the period before the last recession in the UK, the sector was trading on a forward multiple of 5-6.

In any case, p/e ratios are of limited value when there is no visibility of earnings. And for a number of reasons that is certainly the case at the moment.

Of course, there are other ways to value banks. Many analysts use price to book value or price to tangible book value, which excludes things like goodwill. But even on this measure the sector does not look cheap. Domestic UK banks trade on 1.3 times book value and 1.7 times tangible book value, according to Goldman Sachs.

“This compares to 1.0-1.2 in the early 1990s when goodwill was written off against reserves, so making it more comparable to price to tangible book vale today,” the broker says.

As with p/e ratios, it is worth questioning how useful book value is. After all, Northern Rock was nationalised at a fraction of its year-end book value.

Somehow I keep coming back to the conclusion that the problems in the financial market simply will not go away in the near future. You have a housing meltdown that, by the very nature of that market, will be protracted. You have a financial industry that had reached epic proportions as a percentage of the economy. You have financial globalization built on the back of enormously complex instruments that no one really understood. None of these things make for a swift turnaround. If -- in addition to what looks like the worst economic situation for the financial industry since the great depression -- the stocks have yet to reach valuations consistent with the relatively mild set-back of the early 90's, how can you argue that we have already seen the bottom?