In Defense of Ms. Whitney

Meredith Whitney came on strong yesterday in an interview with Maria Bartiromo, saying the market was overvalued and she had no idea why it was rising. I quote (roughly) "I am the most bearish I have been in a year." Ms. Whitney, in the past, has been a banking analyst with keen insight into housing, the cause of bank troubles. And banks led the market down, so the call is a natural since her view of housing and the banks is based on math, not hope, and it is probable the banks will lead the market down again.

She was immediately attacked by the man who never met a stock he did not like at some time or another - Jim Cramer - the world's worst stock picker. His attack not only lends credence to her views, it proves this is a trader's market that can only escape fundamentals for so long.

I met Ms. Whitney on a fateful day - the day she broke the bank stocks soon after she put out a report on Citicorp in October of 2007. Our conversation in the green room at Fox had me do my own research on the large banks - I had been recommending shorting the home builders and sunbelt banks since February of 2007 in my service, ChangeWave Shorts, and her passion and data convinced me the money center banks were next. She is what we all need - an agnostic - a fundamentals driven analyst. She was then and she is now -- and, over time, fundamentals did not lie - they drive stocks and markets.

In her interview with Ms. Bartiromo she pointed out facts known and ignored on Wall Street:

• Consumer credit continues to contract - credit lines are down $1.5 trillion, contraction is accelerating again and this will have a demonstrable impact on consumer spending this holiday season and the future.

• Home ownership is still at 67.8% of households as opposed to the pre-bubble, historical norm of 65% - I believe the real number is 63% - it does not matter, more and more people are going to become renters in the coming years. This means more foreclosed homes, more inventory, a continuing fall in consumer wealth. She did not say when housing prices will stabilize - I am a super-bear on this one and nationally I do not see real stability until the period between Q4 2011 and Q2 2012. She did mention that less than 1% of temporary loan modifications have resulted in successful permanent loan modifications.

• The Fed is now the mortgage market - they are the only buyer of mortgage backed securities (MBS) - and when they end their program, which is supposed to happen soon, rates will go up as there will no buyers. The money on the sidelines that may or may not be appearing in gold and in the stock market is certainly not coming back into mortgages for homes.

• The value of bank stocks will go back to tangible book value and that is not going to be nearly as high as expectations on Wall Street due to a weaker 2010 than expected. Banks also need to raise capital to pay back the TARP and cover future losses. Banks exposed to the consumer market are most needy and at risk as investments.

• Ms. Whitney expects a double dip recession - a W shaped, as I have called for as well.

The critics are already all over her and the market barely moved after her comments. Even supportive critics seem to willfully ignore the obvious going on around them. I have three close family members out of work and two three with reduced hours. My Saab buying neighbor just bought is daughter a Kia. My annual holiday trip to New York is going to be in a borrowed apartment, not a hotel. My credit lines have been pulled - fortunately I do not use them - and I had trouble getting a car lease because the lines have been pulled, reducing my credit score, even though I have never missed a bill payment in thirty two years of holding credit cards. A former neighbor - a real estate broker - who built a new home around the corner on one of the most desirable neighborhoods outside of Washington DC just rented her unsold, prior home for several years - a vote on her view of the market. And so on.

I am not unbiased -- my subscribers made unspeakable amounts of money in 2007 and 2008, first on the home builders and banks, then on the banks and the market, and the irrationality of the current market has cost them since I stick with fundamentals. And it took me too long to realize the government and the Fed would do whatever it takes -- fake stress tests, eliminate mark to market accounting rules, change regulatory treatment of commercial real estate loans and so on - to keep the big banks from failing as there was no more money to be had from Congress. Use this as a basis for going forward -- the big banks will not fail but the government is out of money, including the willingness of the Fed to stretch its balance sheet barring a major financial meltdown.

Back to Ms. Whitney - I hate when people call her Meredith as if they were friends, the same way they called Michael Jordan "Michael" as if he were a next door neighbor - listen to her even if the market is not - right now. The market rallied in July based on her comments - even then she said only the second half of 2009 would be good for the banks not 2010, and unemployment would hit at least 13% but no one listened. They need to listen now. Bottom line: traders need quicker trigger fingers if they are long and cash needs to be ready to short the money center banks most exposed to the consumer - BAC, WFC, and C - and over time the market in general.