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Thomas Tan, CFA
Thomas Tan, CFA

Will Whitney Be Right Again?

May 19, 2008 | About:

You can see Meredith Whitney, an analyst at Oppenheimer & Co., talks with Bloomberg TV on Citi here, and she also issued a report where she lowered Goldman's, Lehman's, Morgan Stanley's and Merrill's earnings estimates yesterday.

In the report, she wrote "we are cutting our 2Q08, FY2008, and FY2009 estimates on the brokers by an average of 41%, 48% and 20% respectively, based on our outlook on the capital markets as well as sizable estimated revenue reversals from FASB 159."

As a result, Goldman went from $4.09 to $3.48 for Q2. Full year went from $17.35 to $14.65. Lehman Brothers went from $1.10 to $0.72 for Q2. Full year went from $4.43 to $3.45. Morgan Stanley went from $1.44 to 0.94 for Q2. Full year went from $5.85 to $5.00. Merrill Lynch went from $1.00 to $0.20 for Q2. Full year went from $1.15 to a loss of $0.45.

What is more interesting than numbers is actually her TV comment on Citi, with some of them listed below:

Citi is passing the point of fixing.

Citi has no earning power to support their dividend.

Citi is the most overvalued bank at Wall St.

Not even Steven Hawking can pull Citi out of this black hole.

The cuurent plan is almost identical to the one given by former CEO Chuck Prince about a year and a half ago.

Citi is 10 years behind to upgrade their infrastructure.

I agree with her on all. Like Whitney, I have been Citi bashing for a while. In "My Ten Predictions for 2008" article written last Dec, I picked Citi on purpose to reflect my bearish view on the whole banking sector, with target price in teens, since I also felt at that time that Citi was a safer bet than others due to its overvaluation. Of course, even I sensed risk of BSC's highly leveraged position comparing to their small equity, I didn't expect BSC would be totally out of business. To me, BSC is more like a hedge fund, hard to predict, but Citi is a global bank. Coincidentally, Whitney's latest target for Citi is also $16 as I remember if she haven't lowered it yet.

From the very beginning, my gut feeling has also been that Citi's board picked up the wrong guy when they chose Vikram Pandit. A quant guy good at selling structured products at Morgan Stanley's institutional sales doesn't provide the right fit for such a difficult turnaround job for a universal bank with everything under one roof. Like Lloyd Benson said to Dan Quayle "You are not JFK", I think Citi's board probably starts to feel now that he is not Damon James. Damon James is totally a different kind of quant guy, with heavy number crunching on business side. Pandit will be given a little more time and by end of next year, most likely he will be gone if not sooner. Then whoever the new CEO is will have to trash the universal model and break up the Company into pieces.

Regarding the whole investment banking sector, is the worst over as everyone now thinks? Not according to Whitney. "The credit outlooks and the loss assumptions for banks across the board are way too low," Whitney said. "The outlook for earnings across the board is going to be much worse than people expect."


By Thomas Tan, CFA : See his profile at Vestopia

About the author:

Thomas Tan, CFA
Charlie Tian, Ph.D. - Founder of GuruFocus. You can now order his book Invest Like a Guru on Amazon.

Rating: 3.4/5 (7 votes)


Thomas Macpherson
Thomas Macpherson premium member - 9 years ago
Damon James?
Commodity - 9 years ago    Report SPAM
What is a CFA ?

Has it made you rich in the market?

Does WEB have one ?
Dr. Paul Price
Dr. Paul Price - 9 years ago    Report SPAM
Damon James = Raymond James's pseudonym on E-Harmony.com

[so his wife won;t suspect he's messing around]
Cng700 - 9 years ago    Report SPAM

I take it from your comment that you are being sarcastic about formal education. I think Buffet and a lot of other Gurus do have formal education whether it is a CFA or not.

And judging by the way that Buffet attacks Accounting standards, I'm willing to bet he has a deep understanding of accounting. Probably better than most accountants.


Here is his reply to a recent questions:

Q: What is the more valuable area of academic study, accounting or nance?

Buffett: Accounting is the more valuable. It is the language of business… A number of CEOs donʼt understand accounting.
Traderashish - 9 years ago    Report SPAM

I have no cfa like the author of this post and no mba like web .I am an engineer so understand maths well. How do I develop understanding of the accounting and yearly reports?

So that I can make good investments decision.

( I have no desire to become an accountant. So please no thick MBA books)

Please leave your comment:

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