The Whitney Whiplash

After four straight weeks of market declines, the stock market has soared on Monday in anticipation of major earnings releases. The broad market indices are trading about 2.5% higher, and the biggest gainers have been the stocks in the finance sector. The financial sector, as tracked by the SPDR for the financial sector (XLF), has steadily climbed throughout the day and was up 6.5%. The news that is propelling these gains comes from superstar analyst Meredith Whitney of Meredith Whitney Advisory Group LLC, who has initiated a “buy” rating on Goldman Sachs (GS) ahead of tomorrow’s earnings report. Of course there are other stories we are watching today, but none has had the same weight that Whitney’s bullish call has. It appears that Whitney’s opinions have the ability to move the market.

For anyone still unfamiliar with Meredith Whitney, she had a successful career as an finance analyst at Oppenheimer (OPY). She was one of the first to see the leverage bubble was on the cusp of bursting, as she boldly predicted that the problems at Citi (C) are far worse than most thought. In the summer of 2007 she predicted that Citi would have to cut their dividend. Since then, she has benefited from this notoriety and has started her own firm after leaving Oppenheimer in early 2009. This bullish call on Goldman is her firm’s first “buy” rating on any of the eight bank and finance stocks that she covers. Her analysis claims that Goldman is, “going to surprise big to the upside,” tomorrow on the strength of huge revenue from fixed-income, currencies, and commodities businesses. Whitney thinks that Goldman’s results will come in well ahead of a consensus view of analysts calling for EPS of $3.65.

The crux of Whitney’s argument is that the U.S. is issuing so much debt right now that Goldman will be a beneficiary by the sheer volume of issuances. With news today that the federal deficit has passed $1T in the first nine months of this fiscal year, we have a hard time arguing with that sentiment. A portion of her note,

“To be clear, our reasons for liking GS stock today are drastically different than any we have had recommending the stock on and off over the past decade. In the past, GS shares were a great play on equity markets and expansive global GDP. While that may still hold true down the line, our thesis today is that we expect GS to be the key competitor in some of the most unpredictable markets: government, corporate and municipal debt.”–Meredith Whitney

We will know soon enough whether Meredith Whitney is correct in her assertions about Goldman, but you have to be impressed by the respect and notoriety she has garnered. She was brought on as a guest host on CNBC’s Squawk on the Street, which enabled her to broadcast her opinion on Goldman and other banks to a large audience. The regular show hosts, always with an eye towards stock market futures, noted that her bullishness was a catalyst to bring the futures market into positive territory. As I watched this morning, I marveled at the public relations machine that she has become, for herself. As earnings season is nearly its apex, she has chosen to make her first bullish call on a company at the same time that she is co-hosting one of the most popular business shows on television. Furthermore, she was bold in her predictions, not simply calling for an earnings beat but a big surprise.

She may be right, and she certainly has had an impressive record when stepping out onto a limb. However, recently Whitney has missed the rally in financials over the last few months, as we wrote about in a blog in mid-May that she still wasn’t buying the rally (Fool Me Once…Bill Miller Faces Off with Meredith Whitney Again). Goldman is now 12% higher than it was when we last wrote about her, but there is nothing wrong with changing your opinion as the data dictates. Whatever the reason that she has all of a sudden gotten bullish on Goldman, we tend to be skeptics of anyone that can move the market with her opinion. She has raised the bar for financial earnings, especially that of Goldman, so investors may need to watch out for profit-taking if the results don’t live up to the analysis.

The Whitney Whiplash

Comments

[David White:]

Who is to say Meredith Whitney was wrong about not buying bank stocks? The credit card default rate is going up with increasing unemployment. The commecial real estate market is imploding. The single family home real estate market is still in trouble. Banks will be hurt badly by all of these things. Meredith Whitney's talk about staying away from banks may turn out to have been a great call. The market often moves against logic. My sense right now is that there has been too much optimism about the recession ending this year. It still might. It might wait until 2010 (possibly even 2011). It is very hard to say. There are also the banking problems with loans to developing countries, which will see still higher default rates. As an exmaple, Venezuela still owes oil service companies billions of dollars. It has not announced any plans to pay soon. With the oil prices much lower, I don't see the light at the end of the tunnel on this one. There are many more examples.

Give Meredith Whitney credit for finally overcoming her prejudice against "bank" stocks to recommend GS, which is really not a "bank" stock of the same type. There are a few other "investment bank" type stocks that may do well. However, there are a lot of "banks" that are still failing. CIT is an example. In fact, the government may bail it out in order to prevent another Lehman like credit crunch. Still 57 or more banks have already failed this year. How can anyone say that is good? How can anyone say the industry is strong?

Add to this the fear of a huge impact from swine flu. The British Health Minister announced today that the UK may see up to 100,000 new cases of swine flu "per day" by the end of August. We have only seen about 100,000 total cases worldwide so far. That is only the UK he was talking aobut. If a pandemic of this order emerges throughout the world, it will have a serious economic impact. It will have a serious economic impact if it only emerges to that extent in the UK. The vaccine is now not supposed to be ready in the huge quantities needed until the end of the year. That may be too late to prevent a lot of economic devastation.

Jul 13 06:30 PM

[dcb:]

any calls in a clearly manipulated market are silly. as a general rule as the maket goes down if you use the bollenger bands (20,2) at each 20 point there is a bounce. at the last 20 point there was a bounce. there was a bounce at the 15/2 point also. it is not rocket science. this bounce can go to about 910 and not alter the down trend. we hit 890 and went to 930. now we hit 870 and that would be 910 before heading down.

if you look at the pattern today was the former day that went to 920.

I fuc... hate all this analysis. you have manipulation and then after the fact attempt to describe a rational reason for the movement. when the market isn't manipulated give me a call and we'll figure something out. Until then analysis is meaningless.

Jul 13 07:11 PM

[dcb:]

treasuries hit s new low today, so the bond market is saying something different than the stock market. why?
bond market says further trouble ahead, and this is bounce. I have no idea of that is true, but when something moves and lacks confirmation I wonder. Also bonds move stocks, not other way around (usually)

Jul 13 07:14 PM

[Ryu Mei Co:]

Note to self: Find out M. Whitney on the air CNBC interview and prepare to buy in large quantity of whatever she said for a short term trade.

Jul 13 07:49 PM

[Urbane Gori...:]

I think we can now call what happens when Whitney speaks it a 'Whit-lash'...

Jul 13 07:59 PM

[Donkey Kong:]

Agree there is a disconnect between what bond markets are saying vs. equity markets. In general, bond investors are much more savvy than equity investors. Bottom line - you can't have plunging US Treasury yields with a soaring stock market.


On Jul 13 07:14 PM dcb wrote:

> treasuries hit s new low today, so the bond market is saying something
> different than the stock market. why?
> bond market says further trouble ahead, and this is bounce. I have
> no idea of that is true, but when something moves and lacks confirmation
> I wonder. Also bonds move stocks, not other way around (usually)

Jul 13 08:56 PM

[logicalthought:]

I believe the word that you're looking for to describe what Whitney currently has is "fame". If her prediction turns out to be wrong, it will be "notoriety".

Jul 13 08:56 PM

[doubleguns:]

Whitney was very bearish on unemployment and housing she only was bullish on GS nothing else. GS is going to do well because she saw all of the activity they are involved in (PPT work) and knows they will make money as a result of that.

Bearish sentiment remains for her. Fools only listened to what they wanted to hear and they may regret that. Especially if she comes back to slap cramer up side his little bald head for calling her a turncoat and benidict arnold. She did not say she wad now bullish. Cramer was cheerleading like a fool saying now that she turned it proved she was wrong. I see her clarifying what she said soon and then the market may correct once it realizes what she did say.

Jul 13 09:01 PM

[ain't no fo...:]

I don't see what the furor is all about re: Whitney. I think Trader Mark sums up in an article he did today detailing the major reasons why Goldman blows out earnings, and in fact I find it surprising that anyone would NOT think GS will have a huge beat - they OWN the markets through their proprietary "manipulation" (ie front running) code, and monopolistic position as the sole source supplemental provider of liquidity thought the NYSE's SLP program after all:

Per Trader Mark: "Goldman Sachs (GS) - what more can be said, Goldman has basically cleared the path to prosperity for another generation or two. All major competitors have been destroyed or weakened measurably... transplants live throughout national government... the world is their oyster. All they need to worry about is insiders apparently taking some of their HAL9000 code and trying to get rich off it.

This could be an epic quarter for Goldman - record breaking issuance of stocks - especially financials, in Q2; massive issuance of bonds as credit markets are re-opened; massive dominance of weekly program trading. They are everywhere and as fewer competitors remained, their spreads (fancy word for profit margins) widened. I expect a monster beat; it is just a matter of "if it's in the stock"."

What AMAZES me is what else Whitney said today, that nobody seems to be paying any attention to:

1. That the improvements in financial services in general are short term, and that her intermediate and long term calls have not changed, and that BAC might be good for a 15% pop ("but that's all, 15%").

2. That she sees no improvement at this time in the overall economy OR in the consumer, that they're still in very bad shape.

3. That she STILL EXPECTS 13% unemployment thru 2011 (or perhaps 2012, I forget), that she isn't ready to commit to 14% yet, but she will now commit to 13% (previously she was only estimating "low teens."

Think about that - 13% unemployment over the next two years. Does anybody think banks or ANY sector is going to make big profits under a scenario like that? As I recall, the worst case scenarios of the so-called stress tests don't even come remotely close to factoring in unemployment figures like that.

Oh, yes, one industry will do well: pawn shops/collections agencies, always one of IBD's favorite industry groups.

I have another separate but related comment I will make below.

Jul 13 09:02 PM

[ain't no fo...:]

Does this ever happen to you?

You take out a small starter SHORT position in a stock on Friday and decide that with the market looking like yesterday's breakfast you'll hold over the weekend.

You wake up Monday morning and turn on the TV to CNBC as you start to brew your morning coffee. You fire up the PC and note that S&P futures are up a point or two. Its now 8:00 a.m. eastern.

Suddenly, you hear good old Joe and Becky and Carl ooh'ng and aahh'ng and generally orgasming as Meredith Whitney puts out a buy on Goldman and suggests BAC is the most undervalued of the bank stocks. The S&P futures start moving and you decide to cover your small starter short position just to be on the safe side since it just jacked up 50 cents in about two minutes.

By the way, you have an online brokerage account with one of the largest financial services companies in the world, and have been using it for pre-, post- and regular hours trading for 3 or 4 years. NEVER in that time has your pre- or post- market trading capability been "down" for any reason whatsoever. NEVER ONCE.

So you put in the order to buy to cover and off it goes. You're then relieved to see on Time & Sales that the stock price has just traded down through your limit, and you wait for that "beep" and red button to blink in the lower corner of the screen, signaling a confirm, BUT NOTHING HAPPENS!

Then the stock trades down another nickel and STILL NO CONFIRM! You check the open orders and see that the order for some strange reason is still open. How curious.

Meanwhile the market's moving up on Whitney's interview, despite some rather dreary pronouncements about unemployment rates in the next 2 years.

So you think maybe you should cancel the order and re-enter it. But your system won't let you cancel, and a message you have never ever ever seen before flashes, that your order is a "pending open" order and cannot be cancelled at this time. Which means you can't cancel it, which means you can't re-direct another order to another ECN to get the trade done because the "pending open" order has primacy and has those short shares all locked up. You're invited to call your broker to discuss the matter.

So you call the broker and after an uncharacteristic 10 minute wait in queue your broker explains that the ECN your order was routed to, namely ARCA (one of the largest ECN's in the world) is DOWN. DOWN! For the first time in 3 or 4 years that you've used this very same ECN to trade pre- and post-market , ARCA is down, meaning that you and as many as tens of thousands of other retail traders can't trade the news that Meredith Whitney is making on a market-altering announcement.

Talk about timing! What a coincidence! Why, if you were a conspiracy theorist, you'd almost think it happened on purpose.

Does that ever happen to you?

Because I have a hunch it will. Very soon.

Jul 13 09:33 PM

[ed233:]

I think there is a message from Ms Whitney. Her reasons for recommending GS she says are drastically different reasons than those previously underlining her recommendations for and against over the past decade. Perhaps she is saying indirectly that GS is benefiting financially as a result of a preferential position vis a vis with that of the government. Certainly other people have made similar charges in the recent past. There is no doubt that if you are connected there are many ways to profit substantially when the interest rate is available at zero percent. LOL Looking after your money.

Jul 13 09:55 PM

[Alan Young:]

@ dragon:

I had a very similar experience once (ONLY once) at Schwab. They apologized and credited my account with the execution as of the time it entered their system.

But that was when THEIR system was off-line, for some reason. If ARCA is down for 10 minutes, that's a lot of trades-- I don't see how any one brokerage, no matter how customer-friendly, can remedy that.

BTW... if you are covering a short, why not just enter a new order and buy shares?


On Jul 13 09:33 PM wpdragon wrote:

> Does this ever happen to you?
[,,,]
> you have an online brokerage account with one of the
> largest financial services companies in the world, and have been
> using it for pre-, post- and regular hours trading for 3 or 4 years.
> NEVER in that time has your pre- or post- market trading capability
> been "down" for any reason whatsoever. NEVER ONCE.
>
> So you put in the order to buy to cover and off it goes. You're then
> relieved to see on Time & Sales that the stock price has just
> traded down through your limit, and you wait for that "beep" and
> red button to blink in the lower corner of the screen, signaling
> a confirm, BUT NOTHING HAPPENS!
>
> Then the stock trades down another nickel and STILL NO CONFIRM! You
> check the open orders and see that the order for some strange reason
> is still open. How curious.
>
> Meanwhile the market's moving up on Whitney's interview, despite
> some rather dreary pronouncements about unemployment rates in the
> next 2 years.
>
> So you think maybe you should cancel the order and re-enter it. But
> your system won't let you cancel, and a message you have never ever
> ever seen before flashes, that your order is a "pending open" order
> and cannot be cancelled at this time. Which means you can't cancel
> it, which means you can't re-direct another order to another ECN
> to get the trade done because the "pending open" order has primacy
> and has those short shares all locked up. You're invited to call
> your broker to discuss the matter.
>
> So you call the broker and after an uncharacteristic 10 minute wait
> in queue your broker explains that the ECN your order was routed
> to, namely ARCA (one of the largest ECN's in the world) is DOWN.
> DOWN! For the first time in 3 or 4 years that you've used this very
> same ECN to trade pre- and post-market , ARCA is down, meaning that
> you and as many as tens of thousands of other retail traders can't
> trade the news that Meredith Whitney is making on a market-altering
> announcement.
>
> Talk about timing! What a coincidence! Why, if you were a conspiracy
> theorist, you'd almost think it happened on purpose.
>
> Does that ever happen to you?
>
> Because I have a hunch it will. Very soon.

Jul 14 01:49 AM

[ain't no fo...:]

Alan, good comments/questions.

I wasn't po'd at my broker, they've got a very strong group of people handling the particular platform I use, and I didn't expect any remedies from them. My observation on that point was simply, without coming right out and making accusations on these boards, that it would not surprise me at all based on the clear manipulation going on in these markets that an ECN going down and restricting order flow at the precise time that big news coming out about one of the biggest of the manipulators was suspicious, to put it mildly. I've seen too much this past two years to ever again trust in the integrity of these markets, and for an ECN to go down like that, thereby restricting retail orders, it would allow a much more uncluttered market for certain institutions to go in and do their thing.

On your second point, I thought about buying shares as an offset, but I generally go for the simpler solutions. Buying shares would have had me entering a second order (which would not have been filled either as it turns out, so just a wasted effort since there was no notification online that the ARCA system was down) and I would still have had to go back to my broker to find out what was going on, but this time I would have TWO unfilled orders in what would have been a very imperfect arb attempt. It was a fast market in many stocks then, and I had the idea that I would have a possibility of taking losses on BOTH trades if things turned again. So, I was trying to get OUT of the hole, not dig a deeper one.

In the future, I may just use directed trading and go with a different ECN... the one that I KNOW was working yesterday.


On Jul 14 01:49 AM Alan Young wrote:

> @ dragon:
>
> I had a very similar experience once (ONLY once) at Schwab. They
> apologized and credited my account with the execution as of the time
> it entered their system.
>
> But that was when THEIR system was off-line, for some reason. If
> ARCA is down for 10 minutes, that's a lot of trades-- I don't see
> how any one brokerage, no matter how customer-friendly, can remedy
> that.
>
> BTW... if you are covering a short, why not just enter a new order
> and buy shares?

Jul 14 09:17 AM