Farrell: Whitney 'Shakes the Market out of its Lethargy'
It took a recommendation from the most bearish analyst around to shake the market out of its lethargy Monday. Meridith Whitney has been the hottest hand for the past few years and unbelievably correct in her bearish stance on the financial sector. With her upgrade of Goldman Sachs, the sector and the market woke up. But only woke up a bit. Volume, which has been anemic at best, was a discouragingly low 1.2 billion shares on the NYSE.
Consensus earnings estimates for Goldman have the company earning around $3.50 for the quarter just ended. The Divine Miss M sees a good bit more. Bank of America/Merrill Lynch jumped on the bandwagon with a Buy recommendation, and they estimate book value will grow to $113 in 2009 and $122 in 2010. Tangible book value, today's preferred metric, would see a similar move. With a forecasted 16% return on equity, BAC/MER (that's all a bit too much to say) feels the stock should trade at 1.6 times book and thus their target of $175.
But now that we have the raised expectations, I think the company has to up the ante by beating the higher expectations to continue to do well. While Whitney feels that the recent "mother of all refinancing" binges will allow a bunch of banks to do better this quarter, she emphasized this is a trading call. Well, the trading call worked, as the financials turned in a wonderful day, with the XLF up over 6%. But (and there is always a but) she sees unemployment rising to 13% (boy, I hope she is wrong on that), and the banks will re-enter their twilight zone as they cannot withstand such a high rate of joblessness without severe strain. The market chose to ignore that part of her forecast.
There have been remarkably few earnings pre-announcements this quarter, so we have been flying somewhat blind. There are a bunch of economic stats this week: both the Producer Price Index and Consumer Price Index on Tuesday and Wednesday, respectively; Retail Sales, Industrial Production, the Empire State and the Philadelphia Manufacturing Index; and Friday's housing starts. But the focus of the market will be earnings, earnings, and more earnings. Goldman plans to announce Tuesday, as do Intel and Johnson & Johnson . The buzz around Intel has been favorable, but Monday's forecast from Dell might cool the enthusiasm. JPMorgan, IBM (both Thursday) and GE and Bank of America (Friday) will all be key reports.
What was also impressive about Monday's rally triggered by Meredith's war cry was the market shrugged off the looming bankruptcy of CIT. CIT is not the biggest lender in the world, but it is to a lot of small companies that can't get credit elsewhere.
For the market to put on a positive (although on light volume) show in the face of that is pretty good. Maybe the market believes CIT will prevail and will avoid bankruptcy. I hope so. They got TARP money, and this looks more to me like a struggle for power among competing government agencies. A lot of small businesses probably will go under as well if CIT goes under, and I can't help but think there will be a market reaction to that.
I am still of the mind that estimates are too optimistic for the economic reality we are in, and the market might take some temporary heart from a Goldman or whoever coming through with good numbers. But I think the lower 800's on the S&P is in the cards.