Merrill protests too much

We've been down on the banks for months, both here and in the US. Even before the extent of the subprime crisis came to light we hated them for the simple reason that we were sure the US housing market would collapse and that the UK market would follow it.

These days pretty much everyone thinks this and bank shares on both sides of the Atlantic have fallen accordingly. Now you can buy shares in Barclays on a p/e of 7.4 times and Citigroup for a mere 9.6 times.

But should you? We wondered about this at our editorial meeting this week. But not for long. We still don't know and, given that the cleverest analysts in the business aren't any closer to figuring it out, can't know the full extent of the subprime losses. US house prices are still falling at speed, US consumers are scared and even the mainstream American press is musing about the possibility that the economy is already in recession.

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At the same time mortgage approvals here are falling and, according to the Royal Institution of Chartered Surveyors, house prices are dropping all over the country. Worse, fast-rising inflation numbers (prices are soaring in China and here the CPI has just hit 2.1%) mean rates can't be cut.

None of this is good for the banks not for their mortgage businesses, their trading businesses, their broking businesses, their investment banking divisions or, indeed, for their SIVs (the off-balance-sheet vehicles they've been keeping stuffed with mortgage-related derivatives).

All in all, I just can't see how the sector can be worth the risk. Indeed, if I was going to go anywhere near it, I would take the advice of PFP Group's Tim Price and short it via the UltraShort Financials Proshare ETF (SKF.US)

However, had there been any doubt in my mind as to whether one might want to go bank bargain-hunting on Monday, it would have been dispelled by the big advertisement on page 11 of Tuesday's FT. This came to us courtesy of Merrill Lynch (which announced subprime-related losses of $2.3bn over three months) and is headlined "Why Merrill Lynch is still bullish on Merrill Lynch". This is followed by four paragraphs of pointless marketing guff the kind of thing you'd expect a dim-witted marketing junior to churn out which explain all about how "the people of Merrill Lynch rallied together" to produce exceptional growth after the 2000 tech crash and how, what with the firm's "pride, strength, integrity and optimism" they will do the same after the credit crunch.

This is not only embarrassing to read, but it entirely misses the point. Odds are Merrill's "exceptional growth" since 2001 has had little to do with the people of Merrill Lynch working to make a "meaningful difference in the lives of clients" and everything to do with exceptional levels of (horribly unbalanced) growth in the global economy and global markets over the last five years.

If the latter is now over, so is the former. I assume Merrill Lynch knows this, or it wouldn't be bothering with a full-page advertisement protesting too much: what's the betting Merrill Lynch isn't actually any more bullish on Merrill Lynch than I am?