Whitney Gets Bearish: Will She Be Right Again?

By Guy Adami

On Oct. 31, 2007 a little-known analyst from CIBC World Markets wrote a very dour piece about Citigroup (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.

Within 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."

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).

Comments

[Michael2343]

I am with you.
The only thing the Fed hates more than a bubble is a bubble that everyone suddenly knows is a bubble.
I think the worst they ever called it was "irrational exuberance" and that was during a boom, where they had the purview to raise interest rates.
Now they can't without doing other damage.
Oh and its "piqued".

2009 Nov 17 06:51 PM

[j-dub]

You are in the Whitney camp yet you own C? It could be Whitney's poster boy for insolvent, undercapitalized banks.

That's kind of like being a conservative republican yet voting for Obama, no?

2009 Nov 17 07:00 PM

[unremitting]

In the government, there is an art and understatement in releasing information about what's going on inside and outside the gov't. Meredith received a lot of criticism (putting it mildly) for her correct and prescient analysis. Adami is absolutely correct to wonder about "What's next?" because the figures just don't add up. J-dub, you can be long a stock and trade around it e.g.with short calls and collars etc thus changing your delta and vega. Adami doesn't have to sell the stock just because he's a little more bearish.

2009 Nov 17 07:26 PM

[4leafclover]

Paulson & Co., the hedge fund firm run by billionaire John Paulson, expects Bank of America Corp.’s stock to almost double in the next two years.

2009 Nov 17 07:32 PM

[ari5000]

given low interest rates that will last forever, constant stimulus from all global banks... the destruction of the dollar....

and the complete neutering of accounting rules so that Citigroup and other banks never have to book losses... I don't see a big financial blow meltdown.

M. Whitney is 'right' in that there's no 'good' reason for the market to be rallying. But there are plenty of bad reasons why it is. Saying she has "no idea" just kind of shows how clueless she is. But I feel her pain.

2009 Nov 17 07:43 PM

[davidbdc]

Don't think she'll be right or wrong this time around. I get the feeling that profits are improving at most companies and if that carries into 2010 stocks aren't overvalued nor undervalued. And since I don't foresee an incredibly strong recovery we'll probably spend some time above where we are now (=she's wrong) and some time below where we are now (=she's right).

I avoid the financials and stick to dividend paying companies......which makes the gyrations of the market on a day to day basis much less relevant.

2009 Nov 17 07:52 PM

[tommiegun]

Whitney was 13 years old during the recession of 1980, yet the other day she spoke of how hard it was to get a job then!

Just because she guessed about a financial crisis resulting from the real estate bubble, that does not make her an oracle.

Most likely, just as she embellished the employment problem in the early 80's, she has once again stretched the truth about the degree of the banking/economy recovery collapse, W shaped recovery.

If you really watch her talking you'll see her try to get a reaction from her host as she says something totally "off the wall".

2009 Nov 17 08:09 PM

[gal]

Meredith Whitney made one very correct call back in 2007 but like many others (ie Henry Blodgett, Elaine Gazerelli, Dr. Roubini, Bob Prechter), she overstayed her bearish position and virtually missed the entire bull market in financial stocks in 2009. Yes, she turned bullish on GS for a week or two after it had a 150% move up but what's that among investors. Now, she's not turned bearish but merely restating an existing position and extending to the entire market, something she is even less competent in than bank stocks. So, rather than giving her credibility, you should be condemning her for treading into an arena she is not capable of serving.

2009 Nov 17 08:38 PM

[uhuh]

Meridith is awesome. Many readers forget back in april 09 she told readers to stop shorting banks. Thats about as bullish as she got.
Many people like to bash Meridith ,Roubini or Prechter but they are the best !

2009 Nov 17 08:38 PM

[mbi4ever]

Meredith is a tool used by GS, Buffet and Co.
Stay tuned.

2009 Nov 17 09:11 PM

[User 496826]

"Whitney Gets Bearish: Will She Be Right Again?"

Yes .... Eventually

2009 Nov 17 09:14 PM

[slam stocks]

Whitney did prophetically predicted C downfall, but what has she accomplish since this time? She left the bank to open her own consulting practice. To now claim banks are overpriced after they've increased by 400+% from their March lows, she totally missed the rallies. Where were the upgrades and the statement below is somewhat of a firm downgrade?

"I don't know what's going on in the market right now because it makes no sense to me."

She made the right call 2 years ago and achieved very little since this time. This statement doesn't give me much confidence in her abilities with anything she says. The financial sector will be shaky, but will recover over time. Long on BAC, GS and JPM.

2009 Nov 17 09:43 PM

[tommiegun]

Dude, if you really believe Whitney, why aren't you selling you're position in Citi?

Maybe you really believe the John Paulson's equity fund. . I'm with Paulson and I am long in Citi.

I first bought Citi on March 6, 2009 at $1.02 against Whitney's proclamation.

2009 Nov 17 09:49 PM

[StockTraderGuy]

She is right to be bearish. But the stock market does not need a reason to go up. Or to go down. Normally, the worst news come with the market bottom, and the best news appear at the top. Thus expecting news, earnings to guide the way is only true during a trend but does not show the turning points.

Earnings do not drive stocks:


Social mood does direct stocks, and it can turn down anytime now.

2009 Nov 17 10:10 PM

[StockTraderGuy]

Prechter did not miss the rally. He said bottom would come around March 10 and soon after that he said DOW will be 9K to 10K in an up down up wave. So far he hit bulls eye.

2009 Nov 17 10:11 PM

[The EconomicJoker]

Whenever the Fed starts talking it's usually best to do the opposite. So if there's no 'bubble', protect yourself because they're really is.

2009 Nov 17 10:12 PM

[Paul Harper]

in a nutshell, if the Fed feels compelled to comment, there is always an accompanying whiff of BS in the air.
currently 50% cash, the remainder is in ADR & international ETF, my only US play at present is UDN


On Nov 17 10:12 PM The EconomicJoker wrote:

> Whenever the Fed starts talking it's usually best to do the opposite.
> So if there's no 'bubble', protect yourself because they're really
> is.

2009 Nov 18 02:08 AM

[isurfmb]

Meredith is that PPT word stuck somewhere inside trying to get out. Heck even Paul accuses executive order #12631 of buying the market, BOJ bought the Nikkei outright twice. Hey Golden Sacks after recieving govt. money through the AIG CDS bailouts, just reported record profits from their trading depts., and they weren't trading baseball cards. Oh yeah, I almost forgot, PPT has now been renamed by our press as the Plunge Prophylactic Team due to its secretive and slimy excrementive nature.

2009 Nov 18 02:27 AM

[eztradin]

The overall market is overbought. Near a 70 RSI on the DJIA. I would look for a pullback on the market anywhere from 300-400 points here soon. Look at a three month chart, and it normally pulls back in that range.

Overall, I believe Whitney is right on the money. There are no fundamentals attached to this current run. It primarily has been pushed up by a declining dollar, and propaganda less risk in assets vs. the dollar is a better choice.

However, the biggest push has been based on hope, and Bernanke's thought that the recession is over. Has Bernanke ever got anything right? He said the housing demise was over while Paulson was around. How long ago was that?

There are already major hints that this Christmas selling season will be very poor. The warnings are out there, and the sales are already on before Black Friday. There are many retailers in big trouble including SHLD, M, and TLB.

With unemployment climbing, retail sales limbering, housing in a crunch, car sales being hammered, credit card and housing delinquencies rising, the FDIC in a hole, Fannie and Freddie basically bankrupt, and hundreds of banks ready to fail, I see
this market way overpriced; fundamentally unsound and in a train wreck.

This market is setting itself up to get derailed heavily over the next several months.

2009 Nov 18 02:37 AM

[ain't no fortunate son]

OK Guy, here's your short if the chart works:

Rolling top or H & S top, looks like a small bear flag into the 50 EMA the past few days, major MACD negative divergence dating back to August 10

stockcharts.com/h-sc/u...

2009 Nov 18 08:31 AM