Monday, April 21, 2008

Meredith Whitney Strikes Again!

Meredith Whitney pulled out her sword again today and decided to slay a few more financials. Today her targets were Wells Fargo and Citibank(her favorite punching bag).

The Wells Fargo call was surprising to me because she hasn't talked about them very much. I love her analysis because she is honest and she calls them like she sees them.

Most analysts won't make tough calls like this because they play the game with Wall St. realizing that some may be future clients. Its also in everyone's best interest on the street to keep the music playing and push stocks higher. This results in more money for the pigmen!

Anyway, back to her call on Wells Fargo call. From Bloomberg:

"Wells Fargo

Wells Fargo retreated 65 cents to $29.75. Whitney cut her recommendation on the shares to ``underperform,'' saying the stock has ``significant room for multiple contraction in the event of anything unexpected, and in this case an unexpected reserve build.'' In a note to clients, the analyst reduced her 2008 per-share earnings estimate for Wells Fargo to $1.20 from $2.15. Whitney previously rated Wells Fargo ``market perform.''

My Take:

Thats about a 40% haircut on earnings estimates for 2008. Thats a big number. Most analysts have praised Wells Fargo for being more conservative with their lending during the housing bubble and avoiding subprime.

I think what is starting to catch up with Wells is the fact that they did many loans in California where prices are imploding. Many of the jumbo/alt-A loans that they did out there are doomed and this is where Wells Fargo is going to feel a lot of damage down the road IMO.

One thing to take notice of here. If a smart bank like Wells Fargo's earnings are being cut by 40% in 2008 then where does this leave the reckless lenders for the balance of the year?

I thought this recession was only going to be in the first half of the year? Yeah OK.


Meredith's favorite target. Here is her call on Citi:

"Citigroup Inc., the biggest U.S. bank by assets, may cut its dividend for a second time this year as losses escalate, Oppenheimer & Co.'s Meredith Whitney said.

Whitney tripled her 2008 loss estimate to 45 cents a share and reduced her 2009 profit estimate to 90 cents a share from $2.50. The New York-based analyst was one of the first to gauge the depth of the global credit crisis, predicting in October Citigroup would slash its dividend to preserve capital. The bank cut its dividend by 41 percent in January, the first reduction since the early 1990s.
``The company has seriously constrained earnings power,'' Whitney wrote in a report today. Citigroup also may have to ``seek additional capital from outside investors.'' Citigroup spokeswoman Christina Pretto declined to comment."

My take:

It looks like the dividend is toast according to Meredith. In addition, the losses in 2008 will be triple her previous estimate! This is how fast this debt bubble disaster is flying out of control. Meredith Whitney has previously stated that she needs to keep revising her targets because she can't keep up with the stunning rate of losses. Now her 2009 estimates on Citi have been cut by over 50%.

Home loans are defaulting much more rapidly then anyone could have ever imagined. S&P reported today that the default rate on HELOCS from 2006 went from 6.51% in Februaary to over 11.45% in March. In thirty days the default rate almost doubled!! This is how fast things are deteriorating.

Its amazing that the market only dropped about 25 points today considering the amount of horrifying data that came out. Equities have priced in a second half recovery. Meanwhile, Meredith Whitney is busy cutting 2009 Citi estimates by over half.

I will bet with Whitney on this one. She has continued to be accurate with her calls while Wall St. continues to underestimate the scope of what is happening. Debt defaults are happening all over the place: Housing, credit cards, HELOCS, auto loans. We partied like rock stars for 20 years and now its time to pay the piper.


Anonymous said...

Hey Jeff,

What do you think are the options to pull us out of the abyss? Or rather avoid a long and protracted downturn? I'm trying to be as agnostic as possible but just can't seem to find any engine to levitate us out. Evidently, the market believes there is indeed such a safety net but for the life of me, i can't find it.

Jeff said...


I understand what you are saying. I have a hard time seeing how we get out of this as well.

The first thing IMO that needs to happen is the pain of a serious recession. I think this is unavoidable at this point but its the first step towards working your way out of the abyss.

Recessions are viewed as being healthy in economies. They bring prices back in line. Housing and gas will drop as demand for them drops.

The problem is the Fed and Wall St. will try to avoid one at all costs and usually this makes the downturns worse. Ironically its the fastest way towards a recovery.

In terms of equities not moving, everyone always thinks there is a safety net during a downturn until the reality of fundamentals hits. Reality hit in 1999 and we dropped 50% on the S&P.

Reality is about to hit again and Wall St. always goes down kicking and screaming on the way down when it does. Try to tune them out and have a diversified portfolio with cash on the sidelines.

In terms of how we get out of the abyss? Wall St. always finds another game to play and I am sure they will again. The housing game got us out of the tech disaster.

I am guessing some type of alternative energy game is next. Itulip thinks this is the next game/bubble that will pull us out.

We are a resilient country and we have seen markets like this before.

Unfortunately I don't see any way out of this without one doozy of a recession and lets just hope its not worse.