The Bear here is Meredith Whitney, who says that bank stocks will return to negative earnings in the second quarter. That’s a big and very specific call that is very much out of line with the consensus. In an interview with Maria Bartiromo, Whitney says she did foresee the recent rally in financials, but that it has been overdone and is not supported by fundamentals.
On the other side of the coin, you have Bill Miller who believes that financials will be a good place to be over the next decade. You may remember that Miller had a disastrous 2008 after beating the S&P 500 for 15 years on the trot. This year, he is up again due to a powerful rally in the financials.
The returns on Legg Mason’s Value Trust mutual fund depend on Bill Miller being right about bank stocks and Meredith Whitney being wrong.
Miller, who beat the Standard & Poor’s 500 Index for a record 15 straight years before stumbling in 2006, says financial companies are his favorite investment for the rest of the decade. Whitney, the former Oppenheimer & Co. stock analyst who became one of Wall Street’s first bears when credit markets started to freeze in 2007, said banks are “grossly overvalued” after government evaluations of their financial health.
The stakes are greater for Miller, 59, who lost more money in the past three years than 99 percent of rival managers by owning Bear Stearns Cos., Freddie Mac and American International Group Inc., according to data compiled by Bloomberg and Morningstar Inc. Whitney, 39, proved prescient by telling her clients to avoid Citigroup Inc., Wachovia Corp. and UBS AG, which lost at least two-thirds of their value last year.
“It could be Bill is right and the vast majority of banks will earn their way out of this,” said William Stone, chief investment strategist at PNC Financial Services Group Inc.’s wealth management unit, which oversees $96 billion in Philadelphia. “But if the economy takes another nosedive and the adverse feedback loop begins again with a vengeance, then maybe it’s Meredith.”
I come down on Whitney’s side of things but I am nowhere near as bearish as she is. I think the clarifications in FAS 157-e regarding mark-to-market will cushion banks from huge losses. If you add in a fat spread due to subsidized borrowing, I would think Q2 will be another relatively good quarter for the financials.
Bloomberg parses Whitney and Miller’s view in the accompanying video below. Take a look.