Monday, July 13, 2009

Meredith's Goldman and Banking Call

Yesterday's nice move in the market is largely being attributed to Meredith Whitney's upgrade of Goldman to a Buy as well as some positive comments she made about the short-term outlook for the banking sector. Meredith made a name for herself at Oppenheimer by being one of the first sell-side analysts to warn about the banks. She made a very good call, started turning up on CNBC regularly, left Oppenheimer, and started her own firm providing research on the financial sector. At the very least, we can call her savvy.

Americans are always in search of a new investment guru, and Meredith is one of the latest to wear the crown. Many have come before her, and all but a handful have flamed out. We all want to believe that one big call will lead to a steady stream of big calls, but the evidence just doesn't bear that out (remember Elaine Garzarelli). I suspect that when we are able to examine Meredith's investment recommendations over the next 10 years, we'll find that they were fairly average. In other words, I seriously doubt that she is the second coming of Warren Buffett (assuming Warren Buffett is in fact the first coming of Warren Buffett).

Back to her call. I listened to the interview and was underwhelmed. First of all, upgrading Goldman AFTER the stock had climbed nearly 200% from its low strikes me as a little late to the party. How can this be viewed as a timely or insightful call?

Also, many of the facts behind her call have been known for some time:
  • Less competition with Lehman gone. Hardly new news.
  • Goldman is big in the fixed income market, and struggling states will be issuing more debt. Widely known.
  • These stocks trade on a multiple of tangible book. Well, they were cheap on that basis months ago.
As for her short-term positive view of the banks, almost all of the benefits that she discusses are non-operating short-lived gains. She admits that the core earnings will remain generally punk. It's essentially accounting alchemy. We already saw this play out last quarter, and I imagine it isn't unexpected this quarter given the big move the financial sector has enjoyed.

This strikes me as a classic CYA marketing call. She begins by stating that "it's actually a bearish call, but a bullish call on the stock." She goes on to say that the financials could rally 15% (remember, they've already doubled from their lows). The fundamentals remain weak, but there are a lot of accounting issues which will help near term. Capital may get a boost near-term, but could turn down again a few quarters out. Put it all together, and there's something for everyone. It's the type of call which allows you to claim some success no matter what happens.

I don't know who Whitney's clients are, but if she's like most research shops, her clients include plenty of large institutional buy-side shops. Most of these firms are long-only shops. It isn't easy going back to your client base time after time and telling them she has no actionable ideas for them. At least now, she'll be able to "sell" Goldman.

One last side note. The reaction to her call is modestly distressing. It seemed we'd finally moved away from an environment where a personality (Cramer) could move stock prices by flapping his jaws. That would have been healthy. If investors were actually buying yesterday because of Meredith's call, this would be a step backwards. Bear markets tend to end with disinterest and loathing, not excited speculation.

The Market Rubbernecker is affiliated with Aspera Financial, LLC, a registered investment advisor. Please read the disclaimer on the home page of the Market Rubbernecker site.