Still Bearish About Banks? Time to Get Over It

Includes: IYF, KBE, XLF
by: Wyatt Investment Research

Probably the worst thing that could ever happen to a good analyst or strategist is fame. Former bank analyst at Oppenheimer Meredith Whitney made the remarkably prescient call that Citigroup (NYSE:C) would have to cut its dividend. That was October 31, 2007.

Citi stock had already fallen from above $50 to the $30's. And that fall by Citi, and the call by Whitney, marked the top of the market's rally out of the 2001-2002 recession.

At the time, nobody knew what was looming. I'm sure even Whitney didn't know just how bad the mortgage-backed crisis would become. So much was hidden and poorly understood. It was a perfect storm of leverage, falling valuations and hubris.

Meredith Whitney deserves plenty of credit for her call on Citi. Hers was among the first voices carrying the message that all was not well to be heard. She deserved a raise, too, but she took it to the next level...

*****I will never begrudge someone for taking their expertise out into the marketplace to try and make their own way. So I don't criticize Whitney for starting her own firm, based on her Citi fame.

But she has spent the last 2 years trying to reproduce her bearish call on Citi. And unfortunately, she's starting to look like a one-trick pony.

Back in the summer, when the "double-dip" of recession talk was en vogue, she jumped on board, saying that consumer spending had peaked and a double-dip for housing was coming.

Then, she released a rating report on states, saying that several states are insolvent and will need bailouts. That may be true. But any bailouts for states will not involve the kind of negotiation and uncertainty that accompanied the European bailouts.

Her continued bearish stance on banks has so far been wrong. Earnings have continued to be solid for banks and some of her bank price targets, like $7 for Bank of America (NYSE: BAC) are sensationalist and not likely to happen unless there is another serious shock to the U.S. economy.

*****Now, I don't have a problem with bearishness. There's nothing wrong with trying to find what's wrong with the economy, or with a company. In fact, this is an endeavor all investors should make. After all, if you don't know what the threats might be, you have no way to account for them if they start to become a reality.

At the same time, however, an investor (or analyst or strategist) must understand that the only constant is change. The market, the economy, the investment climate, whatever you want to call it, is dynamic. It changes. And a successful investor must change with it.

For instance, if you don't recognize that the Fed and the Treasury are actively supporting the banks, and have been since late 2008, then you're missing an important change.

Accounting rules were changed to support banks. And if you continue to treat the banks like the rules were not changed, well, let's just say you're probably not going to make any money on them.

And never, ever forget: the point of investing and analysis is to make money. Period. Being right is only significant if you are making money. Think of it like being "right" in your marriage. Does being right in an argument with your spouse make your life better? I'm thinking probably not. Even if you're right, "yes, dear" is usually a better response.

I can't help but think Whitney's clients would be happier if they had said "yes, dear" to Tim Geithner when he went all in with the banks. Could Geithner be wrong? Sure. Will it make your life better to argue with him? Not so far...

*****I probably shouldn’t just pick on Whitney. There are plenty of other analysts and economists who have been unwavering in their stance, against all evidence to the contrary.

Nouriel "Dr. Doom" Roubini is one. Niall Ferguson is another. There are plenty more.

There's an old saying that even a broken clock is right twice a day. And these unwavering bears will undoubtedly be right again sometime in the future. But there's no reason not go with the flow and make some money in the meantime.