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Meredith Whitney Threatens Severe Deflation For Your Portfolio

by: Philip Davis March 28, 2008 | about stocks: C / DIA / QQQQ / SPY    
Philip Davis

Philip Davis

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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:

  •  
    Mar 28 09:00 AM
    very onesided commentary. FYI, although Citi held their value in the 50 range for 3 years it was due to management manipulating their losses to hide this disaster. Looking at the potential losses in credit default swaps would make her predictions seem tame. How about putting the blame where it lays, with the CEO's that overlooked all this credit mess and collected HUGE bonus's while putting the average american home in default risk!!
    Reply
  •  
    Mar 28 09:00 AM
    She's right. Citi is covering over its coming losses, and when they severely cut the dividend, the price will drop rapidly. Wish it weren't so, but it is.
    Reply
  •  
    Mar 28 09:05 AM
    This is a pretty ignorant commentary. Can you truly make the conspiratorial case that Whitney, Oppenheimer/CIBC, GE, the Saudis, the Fed and whoever else are all in it to bring down the value of your stock portfolio? Don't forget your meds Mr. Davis.
    Reply
  •  
    Mar 28 09:08 AM
    Both previous comments are correct. Citi stock stayed in a range because of the reported earnings, resultant low PE, and high dividend yield which was considered to be very safe.

    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.
    Reply
  •  
    Mar 28 09:10 AM
    I don't buy the conspiracy stuff, but I agree that Whitney's stature at present is way out of hand. For that part of this article, I thank you.
    Reply
  •  
    Mar 28 09:21 AM
    Oppenheimer Closes Previously Announced Acquisition of a Major Part of CIBC World Markets’ U.S. Capital Markets Businesses

    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...
    Reply
  •  
    Mar 28 09:49 AM
    By the time the banks confess to all of the losses sitting on their balance sheets, Citi's profit for the last 3 years will be completely wiped out. I believe that would make Ms Whitney's 2004 statements accurate.

    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...
    Reply
  •  
    Mar 28 10:49 AM
    Do I smell an Oliver Stone movie here?? Phillip, stick to humor writing, real estate or at the very least, don't comment on capital markets. Anyone who missed out on the origination of all the lucrative CDO market is now licking their chops at the potential of saying "I told you so" ...to those that designed, marketed and sold these products. So guess where Mrs. Whitney fits in? Thats right, someone who had the call right, albeit for what may or may not be the right reasons. And as for blaming the dollars slide on the hot blonde with two first names...come on...really? CNBC and MW moving a trillion+ dollar market for more than a second? Thats what you're going with here? My guess is this is pure satire and you're somewhere chuckling out loud.
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  •  
    Mar 28 10:52 AM
    Yes, an otherwise obscure analyst who has been right consistently over the last year, appears to recognize that major additional write downs are coming. She's the only one saying it, against many other TV "pundits" saying the bottom is in, they were wrong,she was right and she's good looking enough to put on TV otherwise probably would not have been heard (Garzarelli in 87 anyone?) AND maybe have someone listen. I look forward to being able to by C at $12.
    Reply
  •  
    Mar 28 11:05 AM
    Wow, is Davis so underwater on his financial holdings that he has to resort to character assassination and conspiracy theories? I hope he doesn't actually manage money for anyone.
    Reply
  •  
    Mar 28 12:04 PM
    According to this logic, Ms. Whitney can rescue the World Financial System by making some positve comments on the banks. This is a woman who withstood death threats for speaking the truth. Is she the one we should be turning our anger upon? How about being angry at the Criminal banks and bankers. Demand a return of the bonuses.
    Reply
  •  
    Mar 28 12:08 PM
    The most interesting thing she mentioned on her interview on CNBC -- was that she wished that all the banks would dump all their mortgages because it would be so much easier for the analysts - rather than lowering numbers each time the ABX / CDX falls due to some fund dumping securities. She's made some good calls -- although I'm questioning the rationale for dumping estimates for mark-to-market losses especially when she herself realizes that over the long run, they are worth more. There was an excellent job done by Berstein in looking at the mark-to-market losses experienced by AIG -- highly recommend that people read it.

    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.
    Reply
  •  
    Mar 28 12:12 PM
    Sadly I do and I've been short on finacials for quite some time, this is an edited version of my comments on this subject but I have a very long-standing record of shorting the financials into last year's madness - I simply believe that the downside is now fully priced in and that the retail investors are now getting fooled again by the same apocolyptic nonsense that took the homebuilders below reasonable value.

    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.


    Reply
  •  
    Mar 28 12:35 PM
    Her appearance on CNBC was not until 4:15, after the market closed. So how did she affect Thursday's market? You think she is not credible? Her analysis has been confirmed by events that have included massive balance sheet writedowns. She has been far more realistic than the rabble of pump monkeys on CNBC, who have long claimed that the worst is over and its all contained.
    Reply
  •  
    Mar 28 12:44 PM
    Wow, did the author of this article really just equate a firms market value decline to the pending write-down to shareholders equity? as though market value = book value or something?

    Seeking Alpha should hire somebody who knows something about financials to screen the articles like this one before they go up on the site.
    Reply
  •  
    Mar 28 02:35 PM
    CIBC and Oppenheimer are 2 completely separate entities today. So Meredith Whitney IS with Oppenheimer...just one of many incorrect statements made in this 'article / rant' . You sir are an idiot.
    Reply
  •  
    Mar 28 02:37 PM
    your just jealouse what have you called or were you like cramer and the rest of the pumpers touting financials just a few months ago - oh wait you were
    Reply
  •  
    Mar 28 02:37 PM
    The fact that you drag how she met her husband into your analysis shows that you have been drinking too much kool aid.

    You sound more like a jilted lover than analyst.

    SA editors should delete your account.
    Reply
  •  
    Mar 28 02:39 PM
    Dude you have no Idea...check your facts Davis...CIBC sold their US Equity Division to Oppenheimer for a bag of rocks....So when a credible news entity such as CNBC says Whitney is Oppenheimer . Then take their word for it. SHE IS NO LONGER ASSOCIATED WITH CIBC
    Reply
  •  
    Mar 28 02:41 PM
    WOW. Oppenheimer bought back CIBC's US Operations some time ago. Meridith works for Oppenheimer. Period. Please print a retraction.

    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.
    Reply
  •  
    Mar 28 03:05 PM
    Wow, this author is clearly out to lunch as he couldn't get the basic facts in the story straight and made stupid references to this woman's personal life. God help anyone who listens to this fool.
    Reply
  •  
    Mar 28 03:10 PM
    Bravo to Phillip for unravelling the Canadian - GE conspiracy that obviously motivated Whitney's comments. Awaiting confirmation which will come through Michael J. Fox (whose character aspired to banking!!!) talking down the dollar on a Family Ties Reunion special on NBC.
    Reply
  •  
    Mar 28 03:12 PM
    WTF, I just clicked philstockworld.com the first thing I saw was a porn advertising banner. And I'm doing it at work.
    Reply
  •  
    Mar 28 03:34 PM
    This women is a bitch.
    Reply
  •  
    Mar 28 03:53 PM
    Dismal article at best
    Reply
  •  
    Mar 28 05:02 PM
    Mr Davis, you add to your nonsensical article with a further nonsensical comment? You deride her viewpoint, in contradiction to the fact she has been correct thus far, while confirming that you are and continue to be short financials? You question the facts she cites while fabricating conspiracy theories in order to counter her conclusions?

    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).
    Reply
  •  
    Mar 28 05:24 PM
    The above commentary is just another reason why I don't subscribe to the author's paid subscription service anymore.
    Reply
  •  
    Mar 28 05:25 PM
    This article is another example of why I no longer subscribe to Phil's Stock World.
    Reply
  •  
    Mar 28 06:50 PM
    I will look forward to his Dick Bove expose next week.
    Reply
  •  
    Mar 28 07:39 PM
    As a kid, my mother would often tell me that there was no such thing as monsters...but there are, aren't there Philip? Damn your blck heart Meridith Whitney!
    Reply
  •  
    Mar 28 10:02 PM
    I'm going to ignore the personal attacks and just clarify that I am currently long the financials as I think they are oversold and I will say again that this is 1/2 of an article that was edited out to make a specific post but yes, I think Ms. Whitney is an attack dog who is being used to pull down the financials.

    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.



    Reply
  •  
    Mar 28 10:55 PM
    I have followed and respected Whitney for her forthright comments and even posted a link to her CNBC interview from Thursday PM above. Tonight, Friday March 28, I happened to see her on a CNN special report on the mortgage crisis. Suffice to say I am now suspect of her motivations.

    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...


    Reply
  •  
    Mar 29 12:09 AM
    Uh, wouldn't CIBC's US$ demoninated assets take a beating through the US dollar devaluation? How exactly does CIBC World Markets make a killing off lousy US markets and US$? I mean, they could step up and short it, but if you're a Canadian bank, wouldn't you want your US$ assets to INCREASE in value relative to the Canadian $?
    Reply
  •  
    Mar 29 12:22 AM
    Philip, as I mentioned above, Citi's quarterly financials in 2 weeks will tell us nothing. Last week, I was long on Citi, this week I went short and I'll switch to long again before they report.

    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...
    Reply
  •  
    Mar 29 12:27 AM
    She didn't do anything to Citi -- they did it to themselves!
    Reply
  •  
    Mar 29 01:02 AM
    Well, I appreciate the alternate perspective and Vrspace's links are great. There is a follow-up article that will be available for free on Monday at

    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
    Reply
  •  
    Mar 29 03:34 AM
    Who cares if citi writes off another 100Billion?You and I will pay our taxes to bail them all out.Talk about legally raping the little guy!!!!!What happened?I'll tell you.They filled thier tractor trailers full of money and went to Disneyland.MAYBE WE SHOULD HAVE A 20MILLION MAN BOWEL MOVEMENT MARCH IN ALL THE BANKS AND THE HALLS OF WASHINGTON D.C.for taking lobbist money.This will let them know we think something smells!!!!!!!
    Reply
  •  
    Mar 29 04:37 AM
    Sir, let me add a foreign perspective. Five years ago I sold off my position in C and apart from recent trades on C and WM I haven't touched US financials since. I am not a genius but as an outsider I didn't get carried away in your great debt induced folly. "This time it's different" uh huh, well except it ain't. The USD has been telling the true story, for 6 years running, and I think you are deranged for applying old-school metrics to what is in essence a financial Chernobyl. I will not hold a US financial for the longterm until your main indexes bottom out, which will take many years, but I will trade. Frankly my opinion is you (in the plural) are toast. Eight is the digit to watch, being 8k on the Dow and 800 on the S&P. On a EUR basis you are already way below that number, €-Dow is 7,75k and €-S&P is 840.
    Reply
  •  
    Mar 29 07:22 AM
    ItsJustMe may I commend you on your letters. They are always brilliant.
    Reply
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    Mar 29 08:45 AM
    I've read some of Whitney's comments. I've seen BSC's ratings of other banks, and other bank's ratings of even more banks. And what I see is that as soon as those horrendous bad news comments are made, the sheep moan and groan and sell the stock. But if nothing was said, perhaps the drop wouldn't have been so steep, maybe it would have been a glitch, minor. Whitney isn't a God(dess). She doesn't know everything. She is doing no more than predicting, and anyone can be right some of the time. She just seems to be getting reactions because people WANT to believe that someone pretty and relatively young and FEMALE might know something all those dingy guys don't know. Well, I've got my salt ready. Grain, after grain, after grain. I'm keeping my financials.
    Reply