Meredith Whitney's Goldman Sachs Call: A Little Late?

My frequency of posting has diminished lately, mainly due to the fact that nothing of much interest seems to be happening (at least from my perspective). I always err on the side of posting less rather than writing just for the sake of doing so without having much to say.

Stocks rose smartly Monday after renowned banking bear Meredith Whitney (now at her own firm) actually had positive things to say about investment banking giant Goldman Sachs (GS), upgrading the stock to a “buy” and raising her price target to $186 per share. GS shares are trading up 7 points to $149 each.

While the market is making a big deal about this call, we have to remember that everyone knows Goldman Sachs is firing on all cylinders lately, so this should come as no surprise. Getting in the stock ahead of earnings (especially on an up seven point day) may backfire for some people Tuesday (GS reports earnings Tuesday morning) who are getting excited about Whitney’s bullish note.

Frankly, the best time to get into Goldman was when the stock was down a lot (you know, when Warren Buffett bought a 10% preferred from the company and got equity warrants). As you can see from the chart below, GS shares had a huge move down, and even before Monday had made a ton of it back already.

While Whitney’s call looks late to me, she has taken earnings estimates well above consensus, which makes the stock by no means expensive even at $149 per share. Whitney’s 2010 profit estimate is nearly $20 per share, so there is no reason the stock couldn’t trade higher from here if she is right. Still, I would have loved this call had it come when the stock traded below $50 near its low, or even after a double to $100. Now it has already tripled.

In terms of the large commercial banks, Whitney appears to be hedging her bets (probably because deep down she knows that the worst is behind us for the banking sector). She is bullish near term (thanks to a booming mortgage business), but bearish long term. This seems like a hedge because, if anything, logic would dictate one being bearish on banks in the short term (while the economy is still in the dumps), and bullish longer term (because the recession is certain to end).

Part of her long term bearish view is the fact that she thinks the unemployment rate is going to reach 13-14 percent. It seems odd for a banking analyst to be making predictions like that. Not that economists are any good at forecasting the jobless rate (they’re not at all), but to think the unemployment rate will rise another 4% from the current 9.5% seems overly negative to me, especially given the source. After all, many people are expecting positive GDP as soon as the third quarter of this year.

All in all, I think the market is placing too much importance on Whitney’s comments yesterday morning. Not much has changed, really. We already knew Goldman was printing money, mortgage refinances are doing well, and that the economy was still rather poor. It seems like Whitney is making both bullish and bearish comments at the same time to cover her bases.

As a result, I don’t think there is much to go on from her views at this point. Unless you think the economy will never recover (and the unemployment rate will hit 13 or 14 percent), I would just buy your favorite bank stocks at attractive prices and hold them for a few years. There is still plenty of money to be made in the sector if you have patience.

Full Disclosure: No position in GS at the time of writing, but positions may change at any time.

Comments

[Schweizer:]

MW is a bear and got a better price to short the market with this bull trap move Monday. Well played Meredith.

GS is also setting up to be the next Enron, and will be dissolved before this is all over with. Banksters of the worst kind. Just watch.

Jul 14 07:35 AM

[Archman Inv...:]

I dont have anything against MW. She has been at the right place at the right time, and who wouldnt want a chance to capitalize on all that fame and fortune?
Again I ask, why not upgrade at $100?
Why wait until the day before earnings (knowing that free taxpayer money used for trading to make ALOT of money) to upgrade?

As always mom and pop america are late to the party. Anyone can see on a chart that the pros are going to be selling into any strength here as average americans buy, thinking they are missing the train.
Sorry, I am just telling people what they need to hear, not what Wall Street wants them to hear.

compdivplan.com

Jul 14 07:51 AM

[morph366:]

What is good for America is very good for Goldman Sachs - but does the vice versa apply as well?

Jul 14 08:39 AM

[hasbeard:]

Hi,
How much do you think average Americans have been participating in the market lately?


On Jul 14 07:51 AM Archman Investor wrote:

> As always mom and pop america are late to the party. Anyone can see
> on a chart that the pros are going to be selling into any strength
> here as average americans buy, thinking they are missing the train.
>
> Sorry, I am just telling people what they need to hear, not what
> Wall Street wants them to hear.
>
> compdivplan.com

Jul 14 08:53 AM

[107Sid:]

While MW deserves some credit for yesterday's move in GS, numerous other analysts also anticipated the good earnings, most of whom reached the conclusion before MW. Amazingly none of the media seems willing to acknowledge that a front page article talking about GS's big profit improvement in the New York Times probably had as much influence as MW's call. I guess they are reluctant to give any credit to a competing medium.

Jul 14 09:33 AM

[Old Trader:]

As I understand it, MW's report was actually fairly negative about the bank sector, generally speaking. I was actually somewhat bemused yesterday, as I reflected on the difference between MW's take on the sector, going back to the start of the "crisis" to the outlook of Dick Bove, arguably the "dean" of bank analysts. He was calling C (and BAC, if I remember correctly) a "buy" all the way down.

Jul 14 10:38 AM

[swaps:]

GS is still under its $250 high of a few years ago.
I say again, why buy a company that gives much of the capital gains and profit to employees, leaving crumbs and much of the risks for shareholders?
GS paid out $16 billion in bonuses two or three years ago, then had to raise more than that from TARP and Buffet. Only being run for the short term.
These guys are incredibly smart and they are using their brains to enrich themselves first and foremost. Let them fund themselves.
Investors in GS are being used, but think they are now Wall Street pirates too.

Jul 14 10:40 AM

[seekingnorm...:]

Interesting - I've had the same thoughts re: GS (i.e. so, the rest of the banks are below average?). Having said that, it could merely be wishful thinking as I'd hate to be labelled stupid (relatively stupid compared to a GS employee.


On Jul 14 07:35 AM Schweizer wrote:

> MW is a bear and got a better price to short the market with this
> bull trap move Monday. Well played Meredith.
>
> GS is also setting up to be the next Enron, and will be dissolved
> before this is all over with. Banksters of the worst kind. Just watch.

Jul 14 02:28 PM