At some point all stocks get too cheap. Enron go too cheap. So did Fannie Mae (FNM) and Freddie Mac (FRE).

The next round of company shares that appear to be bargains is bank stocks. The government is throwing them cash at unprecedented rates. Some, like Citigroup (C), Wells Fargo (WFC), and Bank of America (BAC) are probably too big to fail. Low interest rates from the Fed ought to make lending more profitable.

According to Reuters, Ladenburg Thalmann analyst Richard Bove believes that banks are now "excellent values." The news service reports that he thinks that the mortgage refinance boom, the attractiveness of FDIC-insured accounts as "safe havens", and government economic stimulus should bring the financial firms back.

The analysis is almost certainly wrong. A deep recession is likely to increase home loan and credit card defaults. There are more derivatives on bank balance sheets, some based on consumer credit. Commercial mortgages and corporate loan defaults are likely to rise sharply and LBO write-offs are going to spike.

Otherwise, everything is fine.

Douglas A. McIntyre

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