Meredith Whitney Threatens Severe Deflation For Your Portfolio 81 comments
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We can blame $108 oil and Meredith Whitney for Thursday's drop, as both looked very scary to the majority of holdings. Oil stokes inflation fears, while Ms. Whitney threatens severe deflation for your portfolio: "The best-case scenario is that financial firms take the pain quickly and purge assets from their balance sheets. That could bring stock valuations down by as much as 50%, which would be enough so that you could legitimately buy long-term positions," says Whitney.
Make no mistake about it, Whitney is not saying another 15% down
from the 35% the financial sector has already fallen; she is saying
that the average bank, which was worth $100 last year and is now
trading at $65, is really worth just $32.50.
It amazes me that this woman is being treated as some kind of genius by the media, as she met her husband in 2004 on TV as she made a bearish call on Citi then, when it was trading at $50, a level that held for 3 years. So NOW Ms. Whitney is right and she is using her 15 minutes of fame to attack all things financial, single handedly causing a world-wide sell-off.
It should not be lost on readers that Meredith Whitney is an analyst for CIBC, the CANADIAN Imperial Bank of Commerce, a group that benefits tremendously from a weak US dollar and weak US financial markets. Her report on Citigroup cost the bank $15Bn in market cap yesterday, more than the $13.5Bn she predicts they will write down in her doom and gloom (and admittedly worst-case) scenario. With the bank trading at just 6 times earnings, it should take a loss of $90Bn to have that sort of effect but investors are in the mood to panic and Whitney is one very scary lady!
I find it very interesting that she is consistently referred to as an Oppenhiemer analyst on CNBC when that group was folded into CIBC a long time ago and I find it even more interesting that she is given the 4pm "last word" on the markets by CNBC, whose GE Capital parents are one of the last men standing with a boatload of cash and also stand to make Billions off a smack-down of the financial industry.
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This article has 81 comments:
We now know that these earnings were largely fiction. The dividend has been cut.
Someone coined the phrase "gathering pennies in front of a steam roller." That is what Citi was doing.
www.opco.com/public/ab...
Meredith Whitney, Oppenheimer & Co. on the banks - CNBC video clip - March 27 PM (30 seconds to load)
plus.cnbc.com/results/...@cnbc.com%26key%3DWcbq...
Warren Buffet warned years ago to be wary of investing in banks because they can easily hide huge problems. As a CPA who is somewhat familiar with bank accounting, I can tell you that he was accurate (as he usually is).
Right now, the financial industry is playing a game with their income statements in order to make their price collapse occur in slow motion over a couple of years rather than in a single panic-inducing drop which Ms Whitney is suggesting.
They are sending out earnings warnings on each other to slowly drive their price down and then producing income statements which "beat" those reduced expectations in order to prevent a total collapse.
All companies play this "lower the expectations and then beat them" game, but with mark-to-market accounting where "market" is a guessing game, the banks can pretty much name their bottom line to be whatever they need it to be. If their stock price is falling too rapidly, the banks will reduce their write-offs and beat the expectations.
That is why the Fed - and the banks - were desperate to prevent Bear Stearns from going bankrupt and having to sell their assets on the open market. Everyone in the industry knew they were worth significantly less than what Bear was showing (see Chase's market valuation of BSC) and a sale would have produced a KNOWN market value for mortgage backed securities rather than the INFLATED value all of the banks are carrying them on their balance sheets...
Definitely not insinuating that there's no issues in the financial sector here. However, assuming that the fed is successful in putting a bid on the underlying securities in the bank's capital base -- one has to ask, what then is the true level of writeoffs over the next 18-24 months. If it's lower -- then the stocks move up significantly. If not -- the Whitney's right.
I have a member site and do not often write articles focusing on a subject but I've seen my people in fear and panic over what I believe is a coordinated attack on the financials that may have some merit, but there is no NEWS here, just a lot of puffed up numbers based on extrapolating worst-case scenarios being thrown out as if they were facts.
Meredith is simply the pundit of the moment, willing to go on every TV station with a religious fervor and she will be summarily discarded as soon as the numbers come out to prove her wrong. There's one in every bubble on both sides of the trade and she is just the face of the moment for the financial bears.
There is no easy money to be made in going long financials, it will be a long and painful recovery but the short side of the equation is becoming a road to ruin and my job is to keep my people from making a mistake, either by bailing out on the shares that are down or, even worse, by thinking they should jump on the bandwagon and go short at what may prove to be the dead bottom.
Seeking Alpha should hire somebody who knows something about financials to screen the articles like this one before they go up on the site.
You sound more like a jilted lover than analyst.
SA editors should delete your account.
As for the comment that Canadian banks benefit from weak US capital markets, that makes no sense. Canadian capital markets are highly integrated with the US. The pain is shared. Just look at the share prices.
You better do some home work before embarking on ad hominem attacks in future. If you have issues with the research, that's different, but this was a highly igorant attack with no factual basis.
This is a bad article and should be deleted by SA editors or held up as an example of what they don't want to see on their website. As for your paying subscribers, I hope they do receive word of this article and take it as fair warning of the type of insight they can expect to receive from you.
I think I speak for many readers on this site that we would appreciate you not posting on SA any more. If you happen to against this sincere request, then you should have the decency to provide disclosure at all times in the future (although I won't see it as this will be the last article of your's I will have read).
Of course she was right, if you keep saying something is going to go down for 3 straight years it would be pretty strange if you were never right.
I will check that Oppenheimer CIBC thing but Forbes lists here as a CIBC analyst as does the Times and Businessweek but I do see the sale last November and will correct that in the weekend wrap-up.
In no way was I making fun of how she met her husband, it happens to be how she became famous for being down on Citi 3 years ago because it just so happens that she met her husband as part of a bull/bear debate on Citi and they got married and it's a story many people know, otherwise the bear call she made on Citi would have gone completley without notice at the time as it was 2 and 1/2 years early.
And I'm sorry you missed it Pad but the point is that market value should NOT equal book value and there is no sense to a sell-off of this magnitude based on even the worst-case projected losses.
Anyway, Citibank has earnings mid April so it won't take long to find out who's right. My group is heavy in C right now so our money is certainly where our mouth is and we also have XLF, AXP, GS, AIG and WM.
As for the CIBC link to Oppenheimer I also posted a link above that references their acquisition of many CIBC assets – of interest however is Oppenheimer Hold Co's Toronto HQ with a board that includes an interesting cast of characters including the likes of John Bitove (former caterer to the Greater Toronto Airport Authority). I do not agree with the author’s perspective on a conspiracy, but I have observed that many financial pundits appear to bite their tongues as they reference her analysis.
Of interest are her comments in the March 27 interview, which do in fact seem to contradict her comments from an earlier interview on March 17.
I have posted the links to both interviews below - they need to be copied and pasted into the address bar of your browser and take about 30 - 90 seconds to load. (Windows Media Player)
March 17
plus.cnbc.com/results/...@cnbc.com%26key%3DR7ik...
March 27
plus.cnbc.com/results/...@cnbc.com%26key%3DWcbq...
The reason? All of the rating agencies - not just Oppenheimer - are giving earnings warnings on Citi and with mark to market, Citi can pick a few more of their assets to write down and still easily beat expectations.
However, it's all a game. Long term, Citi is struggling for survival. I'm not sure where you're getting your worst-case debt scenarios, but GS just estimated home mortgage write-offs alone to be $460 billion (only a quarter of that has been written down so far) and other analysts I respect because they've proven right so far have projected that commercial debt writeoffs and credit card writeoffs will gradually push the total credit catastrophe to well over $1 trillion over the next 2 years.
Citi has a very unhealthy chunk of that slow-grinding catastrophe and advising your clients to go long on Citi because you think they've hit bottom only 8 months into a real estate collapse which will take years to unfold is a real good way to lose your clients...
www.philstockworld.com.../
If you're interested in the bull case on C with all the facts and figures. I don't disagree with the $460Bn figure, it's the number I roughed out last year when we went short on financials - it's just that we ARE at the tail end of that number with about $250Bn in write downs (not $115Bn) and even if we say C is on the hook for more than 10% of that $46Bn, it's out of $2.1Tn in assets.
When numbers get that large it's very hard to pull yourself back from $46Bn and say it's not a big deal but it's a $60Tn global economy that is more liquid than at any time in history and even $468Bn, although disruptive, cannot ultimately be destructive.
JMHO
I, for one, truly enjoy a thread like this one. It's highly entertaining and as usual, somehow informative. Secondly, it only proves there are bigger idiots than said contributor out there (a.k.a. Rainheavy2002) and lastly, it allows me to continually re-access stock/industry dynamics as the landscape continues to evolve...and our collective opinions is what makes a market (i.e. Citigroup closes at 20.81 yesterday)
Case in point when I call this thread informative, I learned a new expression today...."pump monkeys"...I am confused however, as such creatures are apparently found on CNBC...and all this while I thought they held the corner offices of mid-town Manhatten's higher floors (a.k.a BANKERS).
Here's what I learned about this whole banking mess earlier this week.....
1) investment bankers true function in life is to reduce taxes for the banks or to fix their problems..case in point the creation of AAA sub-prime loans (SIVs, CDOs....blah blah)
2) I also gained a new appreciation for LEVEL 2 and LEVEL 3 asset levels at the major investment banks...Level 1 stuff is simple enough to value and a simple Bloomberg screen will get you prices and you can value these very easily...the level 2 stuff doesn't trade, but other stuff out there which it resembles does trade and therefore the banks say they can place a fairly accurate value on these assets ... the level 3 stuff only relies on the math guys model/value because their worth is truly theoretical (i.e. fictional). This leads right into what ItsJustMe talks about in his comments...until we reach the other other side of the tunnel we can only speculate how much the banks will write down, and while they sit on their hands and prey that time corrects all their excesses, or that FASB repels market-to-market accounting principles, slowly but surely some of these assets are going from Level 1 to level 2 ...if not level 3 :) My personal opinion? Bear Stearns is but the beginning...Why? Right now the smart guys at GS, (I am sarcastic here in case you miss it) are sitting on level 2 assets valued at 1000% of their capital...much the same as BSC before it blew up on re-entry...MER is in a similar boat, and really it's unfair to point out these 2 because the top 10 investment banks pretty much all have these "wacky" ratios...but I try my best to continually point out that the GS folks are mere mortals...ah, I mean pump monkeys!
For those unfamiliar with the stuff I discuss at the end of my comment you can cut/paste this piece I quickly found this morning when I googled LEVEL 3 assets...wait a second, should I be suspicious this is a sponsored link paid for by the very pretty Openheimer analyst...hahaha...
Over and out!
www.bloggingstocks.com.../
I note you did not disclose whether you hold Citigroup or any of the companies you deman in your screed.
Didn't you hear Paulsen last week??? I will summarize. 'Because you keep submitting very crappy collateral to our new facility, we want to look under your kimono like we do all other banks who borrow Fed money. We do not trust you. Also, to all banks, please cut your dividend and raise cash now. You will need it and not be able to 3 months from now.'
The gig is up pumpers...you lied for years and now you are paying the price.
By the way, the worst pumper of all, CNBC, put Whitney on after hours so as not to crash the markets while they were open. They only allow pumpers on during the day. On days that look really bad or at the end of a quarter, they put Cramer on all day to try to effect the markets. He just sits there and speculates and lies trying to orchestrate a short squeeze. If it were not for short squeezes, he probably would never find a stock that rises, because until someone whispered in his ear in Aug, he swore up and down all this was contained and Downey Savings was worth $100, Countrywide $45, IndyMac $40 and WAMu $45.
You need to quit following the pumper crowd and get the bell around your neck off. You may make some money. Reality is here. You lost.
And, sell that WAMU position. I have been in the national mortgage arean based in CA for 20 years. WAMU does indeed have more bad debt that their $340 Billion asset base. What you forget, as do so many, is the majority of WAMU's loans are Pay Option ARMs, which are 100% toxic garbage where 80% make the minimum monthly payment and accrue negative amortization. Neg-am and falling home values in States such as CA, where WAMU is highly concentrated is a fatal combination. The upcoming 'Pay Option ARM Implosion' will make the 'Subprime Implosion' look like a good day. On top of the couple hundred million of these, most of the remaining balance sheet waste is Home Equity Loans (2nd mortgage), which are worth about 5 cents on the dollar right now and finally, the 3rd largest category is subprime.
WAMU or National City will be the first big-named bank to fail. Yes, they will get bailed out, but $2 a share will look generous.
That is correct. However, it is a HUGE percentage of their bottom line profits for many years to come. Did i mention the word HUGE? Over the last 5 years (2003 to 2007), Citi has reported net income of $83 billion dollars.
Now take your $46 billion in mortgage writedowns and add in an additional $20 to $30 billion in commercial and consumer writedowns due to the resulting recession and you have a bank that realistically hasn't made a profit in 5 years and is trying desperately to delay confessing that catastrophe to investors.
I happen to agree with you that our country isn't in a doomsday scenario because the overall banking system will survive a trillion dollar writedown. However, certain institutions like Citi and the investment banks own a much bigger share of that problem than other banks like Wells Fargo.
Quite frankly, I happen to disagree with Meredith Whitney that the troubled banks should just confess their losses all at once. I agree with both them and the Fed that it could spark a worldwide panic that would do much greater harm than good.
I see what Citi and the investment banks are doing with their long, drawn-out "disparage and then beat" income strategy and I would do the same thing in their shoes. Playing for time while they swallow their medicine is their only chance at survival and I'm sure the "Plunge Protection Team" is blessing it.
Ms Whitney is a thorn in their sides and heeding her advice could be catastrophic. But that doesn't mean her analysis is incorrect. Ignore her at your peril...
C is the only one of the financials we have a long-term position on with the 2010 leaps, along with the XLF, the others are short-term correction plays. As I said earlier, SA pulls a portion of my daily post and turns it into an article, I can't help that but there is a method to our madness investing in the financails as I only need WM to get to about $11 betwen now and April 18th to make 50% on our May $11 calls that we picked up for $1.40 thanks to Ms. Whitney and our Apr $7.50 calls that we bought on 3/17 for $3.30 came off the tablle this week at over $5.
Even though the $7.50s pulled back to $3, we now consider the short-term risk too high to get back in so we've moved out to a more cushioned position.
If you are a long-term investor, unless you are going to go into a hedged long-short position like we have on our leaps, I can't say I wholeheartedly would support any financial, as any single one can fail. But, if they all fail, as some of the bears would argue, then the value of C or WM will be the least of your troubles in this country and I'll be moving in with Orca, as his anti US bets should make him a very wealthy man.
All this discussion of forced liquidation etc is akin to someone going over your stock portfolio on a dip and forcing you to cash out. CitiGroup argues that a 50% write-down is sufficient as they are confident that they can hang onto the $25Bn in assets they want to keep on the books until they can realize a fair value.
Since it wasn't printed with the above article exerpt, I will point out that C's entire sub-prime/CDO exposure pre write-downs was $53Bn out of $2.1Tn in assets or 2.6%. As a bank, they expected those assets to be paid off over an average of 12 years with an average interest expectation of about 7%.
The $53Bn represents loans on 250,000 homes, only 4% of which are in foreclosure with another 18% in delinquent status. The other 78% of those loans are currently paying off their loans. I'm just saying it's a little bit of a stretch to go from that reality to the nightmare scenario that is being painted by the bears.
Could it happen? Yes, but we've flipped from bearish to bullish as we now feel the odds are very heavily favoring an upside from here.
As CuriousJC says, it's good to engage in a healthy discussion. I'll be checking into the POA issue again but last I checked with WM there were about $58Bn of paid option arms which had gone up to (because of clients opting to allow the prinicipal to rise) $1.3Bn. Of course in 2005 there were $71Bn of PAOs on the books but no one is in the mood to give WM credit for reducing the exposure by 10% a year are they?
If you are curious, you can go to my 1/21 member post that details my plan for saving the mortgage market:
www.philstockworld.com.../
Taking into account that the bank will be carrying forward a $30Bn tax write off and that they've reduced their dividend 41%, there may be some peril in either one of us ignoring the other's points!
If we subtract $80 billion in bad debts off their $2.1 trillion of assets, that leaves them with equity of $33 billion against 5 billion shares. In other words, a book value of $6.60 per share versus the current market value of $20.83.
Ignore total assets Philip. Banks love to measure themselves by total assets but the only things that really matter to a bank are equity, income and consumer trust. Citi is vastly over-valued on the first two and is desperately trying to salvage the third. And if they lose that battle, the first two numbers become irrelevant as Bear Stearns learned...
I used the last 5 years for comparison purposes to show you the income pain that is about to occur for the NEXT 5 years. The losses began coming off last year and they will come off this year, next year and the years after.
Also, dividends are paid out of equity and have no part in calculating income or loss. And yes, when they report their losses for the next few years, they'll get tax refunds from their previously reported profits. However, tax refunds are usually an irritating consolation for the investors who weren't expecting the depth of the losses...
Thanks to Phil for bringing this topic and accompaning discussion.
If banks didn't need their accountants to sign off on their financials...they wouldn't write down any of this stuff....the accountants basically act as their conscience, whether they like it or not. That's a good thing for them, because without there little chicken scratches at the bottom of the financials, investor confidence would be zero...and that would pretty much be the worth of their stock price...
I also agree that if they write it all down to fair value at once, now, then even those investors smiling because they own no banks will have a rude awakening (read armagedon). So this whole soap opera will be a very long process. The banks can't deleverage as fast as some analysts would like because they'll go broke...but that deleveraging thing is going to continue...
...So figure out how many assets will be left on the books by the time the pump monkeys deleverage their balance sheet from 20 to 10 times , then assume a ROE of 10 and not 20 which all this securitization has allowed, go with a P/E multiple of 8 and you'll have a pretty good guess of a solid entry point....now I'm just a broker, so can anyone make my life easy and do the math for me....
Somehow over the years, the markets have lost that forward looking insight and it's all one big fast money day trade. This is likely due to the excessive use of leverage, a long period of low volatility and most Wall St big money traders being too young to remember times other than the good times.
seekingalpha.com/artic...
and related to that this article referenced in one of the comments that follows Merkel's article
www.geocities.com/ecoc... from which the following quote by George Soros was taken:
"The generally accepted theory is that financial markets tend towards equilibrium, and on the whole, discount the future correctly. I operate using a different theory, according to which financial markets cannot possibly discount the future correctly because they do not merely discount the future; they help to shape it"
Hey Phil, if you can't deal with personal attacks, you should stop making them.
"...and just clarify that I am currently long the financials"
Really? And here I thought you were just attacking Whitney because you didn't like her. What's she cost you and your pals? A few million in fees? If you had half a brain and actually tried to understand her analysis you would have done your clients a great service by lightening up on C. Now trying to maintain some sense of fiduciary duty by resorting to tabloid-like tactics only shows how pathetic you are.
Man up dude.
My confidence in my financials shorts just went up a few ticks.
The only question remaining is how soon and how large the US dot gov enters the fray. I will sell (and not re-buy later) my SKF when the fundamentals have changed. The amount of bullish sentiment that remains on Wall Street is positively astonishing. People (maybe the PPT?) will still buy any good news. I am still waiting for a capitulation event. The dollar may provide one.
Another shoe to drop is this one: J6P stops sending his 401(k) good money after bad.
Evidence suggests that it is foolhardy to go against Whitney and for this board of directors. The next stop for this stock is $15 and soon!
Or do they perhaps know a little bit more and are they pricing the CDO mess to fair vailue, which is rubbish, and are they thus simply agreeing with Ms. Whitney?
Cart before the horse, this article.
On ignore now.
So is there an answer to this question? What do each of you think the FED and Treasury should do at this point in the down cycle?
While I do not support Hillary, I wonder if she is may be right about putting a freeze on interest rates for home loans for the next 5 years so that the re-sets do not take an additional toll of home foreclosures? Let's face it, bankruptcy and foreclosure will hurt consumer spending for years to come as well as cause the break up of countless families. I suggest maybe a freeze should be retroactive to 1/2007. This may hurt the banks and their shareholders, but who better to pay the price for the fraud on the public in promoting loans they knew were designed to fail?
Maybe some of the j6p crowd might survive to continue paying their way for the lovely homes they could not have afforded at the time of their purchase. By the end of 5 years, hopefully we will have seen the bottom of the recession, and maybe Joe will still have a job and can keep his home during the next 5 years of recovery. I am looking at a 10 year recession-depression from where we are now. What do you think?
Let me explain something, Phil.
Derivatives and mortgage-backed securities and all this other overpriced imaginary financial alchemy are mirages of dubious value.
India cannot eat collateralized debt obligations. The Chinese cannot power their factories on auction-backed securities. Nobody is making fertilizer, jet fuel, and electricity out of Citigroup's "products."
Oil is a finite, precious commodity that exists in the real world. Energy and matter are reality.
You, however, live in the shadow world of financial alchemy, conspiracy theories, economic propaganda, and random walks through meaningless charts - which is why almost every single thing you write is invariably, colossally, and astoundingly wrong.
The FACT is most "analyists" are all over the map and wrong just as often as they're right. Its a never ending snow job. In other words; BS. Nothing but pure BS and the rubes eat it up.
Where were all the "experts" nine months ago forcasting the serriousness of the subprime mess? What "analyst" back then foretold of Countrywide, National City, Thornburg or Bears? None of them, that's who.
Here's my free forcast for financial stocks:
We are already at or near a bottom and will bump along the bottom for a few more months, maybe to Labor Day or so. Then with little warning some event will trigger a major bull run where many of the financial stocks will gain back at least 20% in the ensuing six weeks or so, some as much as 50% by year end or no later than 1 QT of 09.
Since it is an election year the feds will "buy" a big chunk of the subprime paper or do something similar to reverse course. As usual most people will miss the early stages of the rally and get caught with their pants around their ankles. As ususal several fat cats will make a killing, Joe Average won't. Always happens. This cycle has repeated for over 200 years in every kind of market condition. Dumb people panic and sell low. Smart people know when to BUY low. The concept its so damn simple and often repeated yet few actaully follow it. How dumb is that?
That means Phill, your rant is fundamentally actually more dangerous to your stock position, than Whitney's comments. =D
All the efficient market hypothesis really states is that there is no profit to be made by using existing information to price a stock as, in theory, the stock is already priced "to perfection" based on the available information. Whitney's comments were not information at all, they were wild speculation with only a whisp of reality to make them seem plausible - what was efficient was either ignoring here if you already had the stock or jumping in (as we did) on the sell-off as the sheep who follow her kind of nonsense routinely jump out of planes without a chute.