NEW YORK - The media continues to be enamoured by the stock market often saying news is good or bad by the movement of its share price. In after hours trading shares of Bank of Ireland and Allied Irish Bank are up over 10% on seemingly disastrous news that the government will substantially increase its stake in the lenders. The only way investors could send the stock higher on the news would be if they felt yesterday the government would have taken a larger stake in the company. While Allied Irish Bank has announced it will be nationalized up to 99.9%. But if investors felt this then the stocks should be valued substantially lower.
If we examine the market capitalization of AIB in 2007 at $30 billion a 99.9% nationalization initiative would give the shares a value of $300 million U.S. dollars. Which is half of the current market capitalization. However if we were to use the current market capitalization it would mean that AIB's current shareholders have a value of $1 million. Essentially the stock is worth less and worthless yet the market has rallied the shares 12% higher. But don't let the market dictate to you if this is positive or negative news. The market IE the masses soon meet reality.
Bank of Ireland is reported to have the government stake increase to 50% as the government will invest at least 2.7 billion Euros more of capital but the stock is up 18% in after hours trading.
While this news is good for the Irish banking sector in general it is extremely poor news for sharheolders. The stock market buys the news, sells the news, buys the rumor sells the rumor but eventually it prices a stock correctly.
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