Whitney Gets Bearish: Will She Be Right Again?

Nov.17.09 | About: Citigroup Inc. (C)

By Guy Adami

On Oct. 31, 2007 a little-known analyst from CIBC World Markets wrote a very dour piece about Citigroup (NYSE:C). The analyst -- named Meredith Whitney -- said Citigroup would need to cut its dividend or sell assets to avert what she thought would be a $30 billion capital shortfall.

Meredith Whitney ImageWithin the first 30 minutes of trading that day, Citigroup was down some 7%. Four days later, Chuck Prince resigned as CEO. For the most part, the analyst community brushed off Whitney's call and the resignation of Prince, but another analyst voiced similar concerns seven weeks later.

In January, Citigroup did cut its dividend and went out to raise more capital. Whitney was right--and not just about Citigroup

In an interview on CNBC Monday, Whitney said she is the most bearish that she has been in a year. "There is no fundamental reason for the recent rally in stocks, not only in the financial sector but also consumer," she said, adding that the banking sector is not adequately capitalized and will need to raise more money in the coming year.

But the comment that resonated the most with me was, "I don't know what's going on in the market right now because it makes no sense to me."

WFC Chart

I will say this: Few people took notice of Whitney's comments on Oct. 31, 2007, and that turned out to be one of the scariest Halloweens in recent memory. Since then, she has become the E.F. Hutton of the financial markets--when she speaks, I listen.

Then on Tuesday something else caught my attention. Janet Yellen, president of the San Francisco Federal Reserve Bank, said in a speech in Hong Kong that credit spreads are showing no indications of an asset bubble or overvaluation of U.S. equities. That may or may not be true, but I found it odd that a Federal Reserve official would comment directly about the stock market.

Also Tuesday morning, Jeffrey Lacker, president of the Richmond Federal Reserve Bank, said in separate address that "sluggishness in pockets of the economy should not deter the Fed from beginning to remove its extraordinary level of support." Lacker is an outspoken anti-inflation hawk and is a voting member on the Fed's policy-setting panel.

Standing alone, none of these are earth-shattering observations. But made collectively in a small window of time, they have piqued my curiosity.

I fall in the Whitney camp. I do believe that financials are overvalued at current levels. For trading, I have been looking for interesting shorts almost as much as interesting longs in the space.

Disclosures: I have a long position in Citigroup (C).