The forced selling is prolonging the underperformance of the value investing approach — which has been quite extensive lately. Research published on the U.S. market by Joseph Mezrich, head of quantitative research at Nomura Securities, shows a model portfolio of momentum stocks gained more than 70% year-over-year while a model portfolio of value stocks fell about 50%. Value stocks haven’t been this cheap in 35 years.

Historically, when value stocks get beaten up to this extent, they usually go on to do very well. However, this time round, they are cheap mainly because of the financial sector, which is facing ahistoric problems. Some say the business models in the financial sector are busted, just like dot-com business models were busted in the early 2000s.

On the other hand, some would say monetary policy in the U.S. is based on central banks feeding the commercial and investment banks enough liquidity to keep them lending and dealing liberally. So the business models of the financial institutions will survive and flourish because they are a necessary adjunct of the central banks’ modus operandi for managing economic fluctuations.

All of which is leading to speculation that the Canadian banks could be getting ready to swoop in and buy up some ailing U.S. financial institutions at bargain prices. “I think they’re in a position to really pick over the carcasses,” a portfolio manager with Toronto-based mutual-fund firm CI Investments, Eric Bushell, is reported to have said at a Morningstar Canada investment conference held in Toronto on June 11, 2008.

In other words, as agued in this Canadian Business Online article, the global financial crisis may actually end up benefiting the Canadian banks. They could emerge as bigger and more global players. “Canadian banks are going to be in the driver’s seat for the next decade,” said Dennis Gartman, editor of The Gartman Letter, at the same conference.

Nevertheless, the financial crisis has weighted on the share prices of the Big Five chartered banks in Canada during the past year – most of all CIBC (-48%), followed by Bank of Montreal (-42%), Royal Bank (-28%), TD Bank (-23%) and Bank of Nova Scotia (-13%). CIBC was worse hit because of its exposure to credit derivatives and monoline insurers.

The Bank of Montreal, Royal, and TD are down in large part because their U.S. subsidiaries expose them to U.S. loan defaults. The Bank of Nova Scotia is getting off lightly because it has pursued expansion into overseas markets instead of the U.S. Of the five, I suspect (without having done a great deal of digging) that Royal Bank shares could be the most likely to benefit from the growth opportunities in the U.S market. It has long been the biggest of the Canadian banks and its existing U.S. operations are not as exposed to U.S. loan defaults as the other Canadian banks with a U.S. presence.