Is Meredith Whitney Right About Citigroup?

You can see Meredith Whitney, an analyst at Oppenheimer & Co., talking with Bloomberg TV about Citi (C) here, and she also issued a report in which she lowered Goldman's, Lehman's, Morgan Stanley's and Merrill's earnings estimates last week.

In the report, she wrote "we are cutting our 2Q08, FY2008, and FY2009 estimates on the brokers by an average of 41%, 48% and 20% respectively, based on our outlook on the capital markets as well as sizable estimated revenue reversals from FASB 159." As a result, Goldman went from $4.09 to $3.48 for Q2. Full year went from $17.35 to $14.65. Lehman Brothers went from $1.10 to $0.72 for Q2. Full year went from $4.43 to $3.45. Morgan Stanley went from $1.44 to 0.94 for Q2. Full year went from $5.85 to $5.00. Merrill Lynch went from $1.00 to $0.20 for Q2. Full year went from $1.15 to a loss of $0.45. What is more interesting than numbers is actually her TV comment on Citi, with some of them listed below:

• Citi is passing the point of fixing.
• Citi has no earning power to support its dividend.
• Citi is the most overvalued bank at Wall Street.
• Not even Steven Hawking can pull Citi out of this black hole.
• The current plan is almost identical to the one given by former CEO Chuck Prince about a year and a half ago.
• Citi is 10 years behind in upgrading its infrastructure.

I agree with her on all points. Like Whitney, I have been Citi bashing for a while. In "My Ten Predictions for 2008" article written last December, I picked Citi on purpose to reflect my bearish view on the whole banking sector, with a target price in teens, since I also felt at that time, Citi was a safer bet than others due to its overvaluation.

Of course, even though I sensed risk of Bear Stearn's highly leveraged position compared to its small equity, I didn't expect BSC would be totally out of business. To me, BSC is more like a hedge fund, hard to predict, but Citi is a global bank. Coincidentally, Whitney's latest target for Citi is also $16, and I recall she hasn't lowered it yet.

From the very beginning, my gut feeling has also been that Citi's board picked the wrong guy when they chose Vikram Pandit. A quant guy good at selling structured products at Morgan Stanley's institutional sales doesn't provide the right fit for such a difficult turnaround for a universal bank with everything under one roof. Just as Lloyd Benson said to Dan Quayle, "You are not JFK", I think Citi's board is probably staring to feel he is not Damon James.

Damon James is totally a different kind of quant guy, with heavy number crunching on the business side. Pandit will be given a little more time, and by end of next year, if not sooner, he most likely he will be gone. Then whoever the new CEO is will have to trash the universal model and break up the Company into pieces.

Regarding the whole investment banking sector, is the worst over, as everyone now thinks? Not according to Whitney. "The credit outlooks and the loss assumptions for banks across the board are way too low," Whitney said. "The outlook for earnings across the board is going to be much worse than people expect."

Comments

[charles solie:]

Whitney is to C, as Tail Gunner Joe was to the commies. He knew how to stay in the spot light and run with it, until it all came down around him, and by that time there were very few positions available for tail gunners. Notoriety on the street, with all the hig priced tallent, not to mention longevity, is as difficult as standing on the mound with an ERA of 17.3. If you find yourelf surrounded by good players and your ERA is well, not so good, then you need a gimmic. Her gimmic is obviously C and the fact that she predicted the didivend cut (however not the percentage). To he honest, when the price of a stock is halved, and it dividend reacts inversley, you do not have to hire the world's most imminent mathamaticians to figure out what is going to happen. It was not genius, forsight, it was common sense. In fact she probaly heard from the guy at the hot dog stand.
While the sky has some low clouds, it is not falling, and running around telling people that it is for their own personal aggrandizment is sell fullfilling and irresponsible.

2008 May 20 06:33 AM

[Archman Inv...:]

I do not know Ms. Whitney personally. Prior to this string of successful calls on C, she was a regular on Fox, Bulls and Bears t.v. show.

This current success she is having right now, I think, is more of a "right place at the right time" scenario, more than anything else. Hey, good for her, everyone deserves a chance to make a name for themselves.

However, she called a "bottom" in housing 20 months ago on TV, was very adamant about it. She was 100% dead wrong, and had anyone bought a house or stock back then based on that assumption, you got killed.

She, like most "Wall Street" people, came on TV, threw out all sort of recommendations, most of which are just guesses, and can leave the studio knowing she is in no way responsible for the outcome.

I do find it a bit silly that Wall Street treats her like just some sort of no name analyst, when clearly she was a known figure prior to all this, having been on TV for over 2+ years already.

For her sake, lets hope she knows when her welcome has been overstayed, and she goes out on top. Then she can be looked to as an "expert" for the rest of her days, even if she never does a "remarkable" thing again.

Just ask Elaine Garzarelli.

2008 May 20 07:11 AM

[Edward Janeck:]

Whitney has been right on. I wrote about her today at TheInvestingSpeculator...

2008 May 20 07:46 AM

[fxtrader07:]

it's easy to make bold predictions on some discussion board in the www. it is much harder to do that in public when your reputation and your job is at stake, ultimately.
that just for those geniuses who bark at whitney that she "probably heard from the guy at the hotdog stand"
sticking to her theme and continuing to call for further trouble for banks may be common sense and she may not be the only one to do so. however, among the analysts out there i have seen only a handful having the courage to do this. most hide in consensus estimates and "the worst has passed" nonsense

2008 May 20 08:58 AM

[LoveShorting:]

I am just glad that I am not alone as a committed C short. Thanks.

2008 May 20 09:20 AM

[citivet:]

With all the naysayers out there I'm glad I'm long on Citi....I was long and bought more back in the early 90's when everyone predicted its FAILURE...not breakup... even with my gains cut in half with the recent turmoil the stock is still up 1000% from that time. You need patience and stamna (and yes a little luck as was Whitney...right place..right time..right move but with prescient and patient foresight.)

2008 May 20 09:32 AM

[buyitcheap:]

Agreed Whitney is having her Garzarelli moment to be sure. Question is, outside of Bear, is Citi the firm that Jeremy Grantham alludes to in his newsletter where he predicts that one large bank will fail. I had thought he fulfilled that little prophesy with Bear Stearns, but could Citi be ripe to fall again?

2008 May 20 11:08 AM

[Citibanker:]

Unlike the Confederacy, Citi will rise again; but the sum of its parts will be the trail it will take and Pandit will be among the many in the blood bath to come. We are at bottom, friends: time to buy!

2008 May 20 11:13 AM

[fxtrader07:]

@Citibanker: what do you think, how many bad loans does citi still hold that have not yet been marked down? e.g. the value of land against loans made over the past 3-4 years? helocs? consumer loans?
and what do you think, will loan defaults and delinquincies rise as the economy slumps - just look at how municipal govts (and soon state govts) have to cut back massively and lay off people because property taxes etc are not flowing in anymore?
do you really believe, this has been included in any recent writedown at any big bank? certainly not!
what most people overlook is that the second round is starting now: the impacts of a deteriorating economy with an overstretched consumer on baks' loan portfolios, revenues and earnings
citi may not fail, granted, but with dilution and earnings compression you will probably get a decent chance to buy in the low teens again - if not lower

2008 May 20 11:31 AM

[C.elder:]

this Whitney continues to be a one-trick-pony.Maybe she got turned down for a job at Citi in the past,and as everyone knows "hell hath no fury as a woman scorned" .But lest you all think she is intelligent or something,this is the SAME Whitney that was telling investors a year ago (april 2007) how GREAT a company called Bear Stearns was !
Funny how no one points that out to her.Hey whitney why should we pay ANY attention to what you say when you got it so wrong on Bear Stearns?This is also the SAME Whitney who completely MISSED that Bear stearns was going into the tank the week they went into the tank.So I am afraid that she haas been way off the mark on the single most important event in the financial sector-the collapse of Bear Stearns which happened under her nose,but she didn't see it.
Anyone have a list of her other fails,or is everyone's memories too short?

2008 May 20 01:12 PM

[charles solie:]

We could as her hot dog guy.

2008 May 20 06:29 PM

[charles solie:]

And how come she is not speaking up for herself. Could it be a confilct of interests with her potential Fox "news" contract.

2008 May 20 06:49 PM

[whisperonth...:]

Is this the same Whitney that everyone seems to think is GOD? Hmph. Not in my book. I personally think she just got lucky. And luck runs out, eventually. To make people forget her mistakes, she rates companies lower. She also claimed that Citi would lower THIS dividend below the 32 cents, and so far they haven't... we'll find out soon though, won't we? Meredith, are you watching?

2008 May 20 10:08 PM

[TA:]

Thomas Tan once again pumping his 2008 10 predicitions everyone else already said, proving he knows nothing but follows the crowd really well.

Meredith is a lucky fool who was in the right place at the right time.

Two years from now no one will remember or care and she'll be back at her crystal ball just trying to get one more prediction correct before she retires or quits.

2008 May 21 04:01 PM

[Robert Browne:]

Meridith Whitney will be remembered 100 years from now long after Lehman, Merill, Fanny and Freddie are long forgotten. Its December 9th now and I am hoping the penny or cent has dropped Mr. Tan!!!!

2008 Dec 08 08:41 PM