Financial Companies are Undervalued
This is one of the best times to be an investor if you can just get over the psychological inconvenience of recent losses.
The third quarter earnings season has been a disappointment to say the least. Banks are taking huge charges related to the real estate mess. Even financial companies that are not normally associated with banking, such as E*Trade Financial, have been hit hard by mortgage write-downs.
The cause of the mortgage write-downs is of course the collapse of the real estate bubble. The probability of default has increased across the board, but especially for more exotic, hard to value securities. Even large companies are struggling to value some of these securities — see, for example, Merrill Lynch’s recent restatement.
The fact that the liabilities are hard to value is creating uncertainty and apprehension in the financial arena as no one knows who is going to be hit next. Consequently, everyone with any exposure is on sale. If you are able to ignore headlines, and hold a security for the long term, start allocating more capital to financial companies. You almost can’t go wrong buying any large bank or investment bank in the current environment.
