Morgan Stanley, Wells Fargo Earnings Reveal A Confused Consensus Among Bank Analysts

When you look under the hood, the strong third-quarter performances of Morgan Stanley and Wells Fargo make for a great example of how uncertain -- and conflicted -- opinions are in the banking sector right now.

Morgan Stanley increased its involvement in risk-based activities such as underwriting and trading, and thus managed to eke out a profit that beat expectations. But its earnings are still way below what they were before the house of cards came tumbling down: Morgan Stanley said that it earned $757 million, or 38 cents a share last quarter vs. $7.7 billion, or $6.97 a share in the same period a year ago. At around $35 a share, Morgan Stanley is therefore 72 percent more expensive than it was at the time of last year's earnings announcement. In that light, it is hard to argue that the firm is still cheaply priced.

For Wells Fargo, which is a Berkshire Hathaway favorite, the situation couldn't be more different. The firm this morning announced that it increased profits to $3.24 billion, or 56 cents a share, from $1.64 billion, or 49 cents a share in the same year-ago period. The firm's $30 stock price, however, lags its same level a year ago by around 7 percent.

Here's the caveat however: conventionally speaking, Wells Fargo is still much more expensive than Morgan Stanley. Wells Fargo trades at a price-to-earnings ratio of 38. Morgan Stanley, on the other hand, goes for a paltry(-ish) 21 times earnings.

With this kind of valuation and earnings confusion, it's extremely hard to know what represents value and what doesn't. Depending on what metric you are using, you can end up with a different result every time you run the numbers. (Hence the large majority of analyst opinions that fall on the "hold" button these days.)

If investors cannot agree on what the definition of value is, buying tends to adopt a scattergun approach. It is for this reason that everything in the financial services sector is rising at once now; even the speculative bankruptcy plays such CIT Group. Simply put, there is no consensus right now on what constitutes a safe and fairly-priced investment in a bank.

By the law of economics, today's situation will eventually have to result in some pretty dynamic price adjusting. That only spells for much more volatility.