Notorious banking analyst Meredith Whitney turned out to be right in her recent calls against being long the major banks and brokerage firms, although for the wrong reasons ahead of the latest sell-off that took place this week. Whitney’s call was about earnings power for the quarter and for what lies ahead in 2010 and the fresh weakness is mostly tied to added regulation goals that came from the White House yesterday. We wanted to give some pre-weekend thoughts about her take on the newest Obama attacks on the banking business model.
Goldman Sachs Group (NYSE: GS) and Morgan Stanley (NYSE: MS) were mentioned, as was JPMorgan Chase & Co. (NYSE: JPM). But this impacts every bulge bracket firm, whether bank holding company or large money center banks. This will also have ramifications for Bank of America Corporation (NYSE: BAC) and Wells Fargo & Co. (NYSE: WFC). Oddly, it could help many of the regional banks that we highlighted yesterday.
First, Meredith Whitney argues that President Obama’s latest attack will not be pretty for the banks. More importantly, she thinks that this will not be pretty for consumers either. Her views fly against the views from many others that the fallout would be limited to a few percentage of revenues and earnings.
Whitney does feel that the new regulation goals will go through in some form. We agree that is likely to occur, but something far watered down than the hard talk that was thrown out Thursday morning. Barney Frank heads the House Financial Services Committee and yesterday he said he would be against anything that would disrupt the markets in a rapid order. Any changes by his take need to be a multi-year event.
Our own take here is that this will create a bifurcated opportunity inside of hedge funds and inside of private equity as sectors. Take The Blackstone Group LP (NYSE: BX). This is a huge opportunity that might have less competition from the big banks, but it also limits their sources of capital and limits their ability to take on added partners in club-deals when the capital markets return back to a pro-private equity market. Shares were down over 5% late Friday but were only down 2% on Thursday.
This week was a game-changer. It turns out that Whitney was right in her recent downgrades on earnings estimates, but for the wrong reasons. The rhetoric will create a backlash on certain trading activities or at least on the scope. Stay tuned! Everyone else will be….
JON C. OGG
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