Meredith Whitney casts doubt on banks' bounce

'She was right once, and we'll see — her credibility is on the line'

By Boyd Erman
The Globe and Mail

Meredith Whitney, a financial analyst who predicted two years ago that banks were in trouble has made another call.
Meredith Whitney, a financial analyst who predicted two years ago that banks were in trouble has made another call.

Meredith Whitney still has the power to move markets.

Two years after making her name by predicting correctly that banks were in trouble and that Citigroup Inc. would have to cut its dividend, the financial services analyst is again causing investors to sell bank shares.

Ms. Whitney sent financial stocks across North America lower on Tuesday by cutting Goldman Sachs Group Inc. (GS-N192.285.052.70%) to "neutral" and saying she was "far less bullish" on other banking stocks in general. Goldman, the giant securities firm, had been the only bank stock Ms. Whitney rated "buy," but she said it had become expensive as the sector rallied.

She told clients of her firm that while she is "fundamentally constructive on Goldman Sachs over the long term, we prefer to invoke a 'why be greedy' rationale and lock in profits at these levels."

In the wake of her move, Goldman dropped $2.92 (U.S.), or 1.5 per cent, and banks were the worst performers among the 10 sectors in the Standard & Poor's 500-stock index, helping to pull down U.S. stocks more broadly.

Her power doesn't stop at the border, with Canadian banks also selling off.

That led to a decline in this country's benchmark stock index.

"Whitney's comments have an impact on people's psychology," said Terry Shaunessy, president of Shaunessy Investment Counsel in Calgary, which manages about $200-million (Canadian). "She was right once, and we'll see — her credibility is on the line."

With that kind of influence, thanks largely to the Citi prediction, Ms. Whitman has been branching out. About six months ago, she left her job at Oppenheimer & Co. to start her own eponymous firm in New York, and she has been broadening the scope of her predictions from just banks to the economy at large.

The phenomenon of a reputation built on one great call has a rich tradition.

Former CIBC World Markets chief economist Jeff Rubin did it by nailing a coming housing market slump in Ontario in the 1990s; after that, he became one of the rock-star strategists on Bay Street, always in demand for conferences and by clients. He has since left CIBC after writing a book based on another bold prediction — that a shortage of oil will lead to the death of globalization.

Ed Yardeni, once head of economics and strategy at Deutsche Bank, made his bones with one of the most accurate calls on the run in stocks in the 1990s. He now runs his own research firm and is a sought-after speaker and commentator. On his website, the "media highlights" section that spotlights articles on his greatest forecasting hits contains almost exclusively stories from the 1990s.

Ms. Whitney has worked hard to keep a high profile. She is a fixture on television, where her blunt tone makes her a good interview subject, and she's expanded her ambit from calling movements in bank stocks to broader investment strategy.

She is even writing opinion pieces in The Wall Street Journal, arguing on Oct. 1 that the credit crunch isn't over because small business owners can't get loans.

Ms. Whitney's personal life isn't exactly under the radar, either. She's married to professional wrestling star John Layfield, who had a bad-boy persona in the ring of a wealthy businessman. Outside the ring, he has been an on-air analyst for Fox News and CNBC. (He lasted only three weeks at CNBC before he was fired in 2004 after witnesses said he had made Nazi-style gestures at a wrestling match in Munich, which he later said were simply an attempt to rile up the crowd as part of his job as a "heel" — one of the bad guys in the wrestling world whose job it is to be reviled.)

However, for Ms. Whitney, like many who have been feted for the one great call, her record aside from the prediction that made her famous is mixed.

When she made the cover of Fortune magazine last year for her Citi prognostication, the story pointed out that in a ranking of stock pickers by Starmine in 2007 — the year of the call — she ranked "1,205th out of 1,919 equity analysts."

More recently, in a September Starmine ranking of the best analysts when it comes to generating profit with ratings on big U.S. banking stocks so far in 2009, Ms. Whitney ranked No. 2 on Citigroup. She didn't show up in the top five on any of the others, including Goldman Sachs.

October 14, 2009 — Return to cover.