The big news item today is, of course, the release of information regarding the bank stress tests one hour after market close. Is it really going to be so bad? Can we trust our government to tell the truth? Is BAC really worthy of being up another 17% today? Is our nation in dire need of Gamblers Anonymous?
Without a doubt, we are in overbought territory, the likes of which we have not seen in almost two years. However, just remember—with clarity and vividness—-that markets can stay at overbought levels for a period of time.
The key today, as it has been this past week, is how the banks are behaving.
WE HAVE REACHED A MAJOR MILESTONE WITH THE BANKS NOW. IT IS CLEAR THAT THE GOING BUSINESS CONCERN/GOING OUT OF BUSINESS ISSUES ARE NOT ON THE TABLE.
Yes, at least 10 of the top 19 banks will have to raise capital, but there is no question that our blessed government will not let them fail.
One key measure that is driving all this bank asshattery is a 4% tangible common equity ratio. Knowing this metric is quite useful from a valuation standpoint, because you can then make assumptions (within the stress test) like default rates, writedowns, loan loss assumptions, etc. and figure out what these banks are really worth. Especially if you use a low 1% ROA and an 8x-10x PE multiple, is it possible there just might be some banks that are really undervalued?
What a thought! Who knew?!
I’ll leave you to do the math.
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