Meredith Whitney sees October plunge for bank stocks
Posted on 13 September 2009 with no comments from readers
The First Lady of Wall Street Meredith Whitney first came to global prominence with her masterful predictions about the global financial crisis last year and how it might unfold.
It was perhaps surprising then that observers seemed to largely over look her latest warnings in a CNBC TV interview late last week, see: http://www.cnbc.com/id/32773345
Banking bear
To summarize briefly the forecast is for a further 25 per cent drop in house prices, a further banking crisis and a decline in bank stocks as soon as October. Perhaps this pessimistic view did not chime with the current heady optimism on Wall Street that the bad days are over and the sky blue again.
But Ms Whitney knows her US banks, and it is easy enough to see that most of the recovery in their share prices has been down to, well, the recovery in their share prices. This is indeed self-fueling as a rising share price recapitalizes a bank on the equity side of the balance sheet.
However, the reverse of this leverage also therefore applies. Renewed stock market weakness in banking stocks, for whatever reason, will compound downwards, and rather quickly as we saw last autumn.
What could cause that? Take your pick from the outstanding issues: collapsing global trade, continued high oil prices, Iran or Afghanistan! Whitney goes simply for further US house price falls as unemployment rises, a historically proven correlation which will raise bad debt provisions.
Of course, for an immediate blow to the over-bought bank stocks you need to think of some sort of shock that will act as a wake up call to the nightmare scenario that still haunts the banks. That might be a major geopolitical event or something unexpected in financial markets.
Governments have done a pretty good job over the past six months in convincing investors that they just will not allow anything bad to happen in the banking sector. But remember these are just the same guys who failed to see a brick about to drop on their head last time.
Caution amid bullishness
They may be more cautious now but the aura of infallibility is frankly ridiculous. More cautious investors are moving to the sidelines as the five weeks of advancing bond prices and the $1,000 gold price surely indicates.
Why would anybody be buying bonds in a collapsing dollar if they did not think trouble lay around the corner? There were also record insider share sales in August as those in the know cashed out.
Shorting the banks might be the best market play if Ms. Whitney is right again. She only has a buy note out on Goldman Sachs and a sell note against everybody else.
no Comments posted by readers:
Dollar collapsing against what? The euro? Not a big deal. The euro is being run by mad socialists who desire to see the euro as strong as possible for ideological purposes, perhaps re-read their statements if you disagree.
China and the GCC are pegged at the moment, so this collapse talk is overblown. These are our major creditors, not Europe, and we are all in the same boat together.
China’s fumbling around the foreign press is a sign of their weakness, not their strength. Their only option is to acquire gold on the sly, and now that cat out of the bag. If they want RMB to be a real currency, they need real gold backing it, and it’s not coming cheap.
Joseph Stiglitz, a Nobel Prize-winning economist, said in an interview in Paris over the weekend that the U.S. banking system is in a worse state than before the seizure in credit markets and collapse of Lehman Brothers Holdings Inc.
Economic situation is pretty bad just about any place you look now. In order for US stocks to tank from here the big guys or the government would have to unload everything that they bought and in order for that to happen the market would have to be pretty active with buyers to take place. By dumping they will need another stimulus package to revive the market after the crash. I am not so sure they will do this although everything is possible. For now I think the US will continue printing money and people will continue doing balance transfers along with refinancing on their mortgage loans.
Here in Taiwan the local media has been projecting the local Index to double by next year from 7,000 to around 15,000 due to links with China now. As for me, I’m still holding my short position.
Obama had better send some special forces to waterboard the accounting standards board so that they don’t change the rules and require the banks to carry debt on their books at what it is actually worth, rather than what they wish it was worth. Some people say that, mark to market, I think it is called, would be a banking catastrophe. Not being a banking expert, I don’t know, but investors should check out such risk before investing in any banks, because a simple accounting rule change could cost you everything! There is some point where excessive government debt creation will collapse the economy by wrecking the financial system. Enough banking problems may cause that point to be reached. I would stick to investing in the oil majors. They might go down for a while, but they won’t go away unless civilization does, in which case, paper money or stocks will no longer be of much use. And some of the oil majors pay very nice dividends while you wait for peak oil. After which, you might get really rich. How nice is that! Don’t forget to give a big chunk of your fortune to charity. You’ll get a good night’s sleep while you wait, and won’t hate filling up your tank if you own a piece of the company. All their dividend history is on the web. Bank stocks can easily go to 0, can Shell, BP, Exxon, Total, Conoco, or Chevron? Somehow, I doubt that will happen anytime soon. And if you are paranoid like me, you can buy a few of them, so that a nationalization of their assets in a particular country won’t hit you too hard.
China’s not afraid to buy real gold whether on the sly or openly. Ask the IMF: they’re selling an eighth of their reserves to the PRC any day now.
Oct. 13 (Bloomberg) — Goldman Sachs Group Inc., the biggest U.S. securities firm before converting to a bank last year, was cut to “neutral” by Meredith Whitney, as the analyst dropped her only “buy” recommendation.
Whitney, who correctly predicted in 2007 that Citigroup Inc. would cut its dividend, didn’t update her price estimate on the shares in a summary note distributed to investors today. Further details on the downgrade weren’t immediately available.
The New York-based analyst upgraded Goldman Sachs to “buy” on July 13, since when the stock has risen 34 percent, compared with a 29 percent increase for the Standard & Poor’s 500 Investment Banking & Brokerage Index. The founder of Meredith Whitney Advisory Group LLC said on Sept. 10 that Goldman Sachs “still has a lot of gas in its tank.”
Goldman Sachs shares dropped 0.9 percent to $188.46 in German trading as of 10 a.m. in Frankfurt.
Goldman Sachs, which is due to report third-quarter results on Oct. 15, may say it earned $4.46 a share in the period, according to the report. The New York-based bank posted record earnings in the second quarter.