Mayo vs Whitney - Battle of the Banks

meredith whitneyThe new week began on a bit of a negative note, which could have been from some profit taking or the negative outlook on banks that was given by Michael Mayo, a former Deutsche Bank analyst. At one point, the market was down 150 points, only to retrace back up, as it has been doing lately, to close just down 41 points. We saw a very light day of trading, which is expected due to the spring break vacation week, as well as the short week of trading (remember, markets are closed for Good Friday). Either way, expect this volume to get lighter and lighter each day, as I even think the government will decide to take it easy this week.

So I am not expecting any game changing days this week. I'm guessing that we'll popcorn back and forth, but remain pretty stagnant at the same time. The market has become so use to getting some sort of influencing data almost on a daily basis, that it almost seems boring when just a normal day of trading occurs. I think the market needs a breather for investors to settle down, re-evaluate their positions and decide what is the best move for them to make.

Two well respected analysts gave their two cents on the future of banks. With earnings season being right around the corner and with all the continual changes being made in the banking sector, from new TARP funds to changes to Mark to Market, all eyes have been on financials as many are wondering if indeed these changes will start creating some liquidity. The two both had good points. Here were their different thoughts.

Meredith Whitney
For those that don't know, Whitney was a former analyst at Oppenheimer who was a front runner at predicting the bank crisis. She believes that banks should begin seeing profits for the 1st quarter, with the help of the recent Mark to Market change. She suggests staying away from shorting financials at the time, being as even though "fundamentals" haven't changed for the banks, capital ratios should get better. She does think that some banks will fail the stress tests that will come at the end of April, so that could cause some for some negative trading. She also believes that home prices will fall another 30%, as a result from a lack of liquidity in the market.

Michael Mayo
A more negative report was given from Mayo concerning the immediate future of banks. Mayo's earnings expectations for banks are well below most market analysts as he expects loan losses to rise to a level greater than what we saw during The Great Depression. He expects a "rolling recession" by different asset class. He believes that recent government intervention has been over hyped and that he expects loan losses to accelerate by 2-3.5% by 2010. He does feel that earnings should be better than the 4th quarter, but that we are transitioning from a financial crisis to an economic crisis.

I believe both make valid points. I tend to agree more with Mayo, as I also believe we will begin seeing this crisis much more on a macro level than just a pure financial level. This is when we will most likely begin to see more of the "All American" companies go under, unfortunately. Plus, being in the real estate business, I definitely understands when he talks of a "rolling recession" when referring to different asset types. Unfortunately, for commercial real estate owners, we could see trouble for 24-36 more months.

After the change in mark to market, I think it is pretty sure we are going to see an upward move for banks in their earnings reports. Now how investors react to earnings is the big question. Many are already discounting the reports, knowing that they may not represent "actual" numbers, considering the change in accounting. However, this unknown is what is keeping me from shorting financials anymore at the time being, as I feel things need to be worked out first. I do believe many banks have still yet to see their hardest times, but they may be able to glide a bit during the next little while.

Gold took another beating today, which just catches my attention even more. Another beating tomorrow in the gold sector will most likely lead me to pick up some GDX call options. Although, I do believe gold could suffer more the next couple months, a January expiration gives me plenty of time to see gold soar.

I expect tomorrow to be much like today, with not too much excitement. Low volume should keep things pretty moderate. If in fact some big moves are made, I will re-evaluate, but I don't see that very probable. These times remind me a lot of December and I continue to remind myself of the outcome for doubting fundamental data. Although it seems as if the market has nowhere to go but up as of now, there are still many pending problems which have yet to surface. I plan to keep my guard up and be ready. Morningstar is running a free trial on their tools, which I highly recommend trying, especially for charting: Morningstar - Valuable insights and innovative portfolio tools. Get the Morningstar advantage with a FREE 14-day trial membership!

So, I continue to keep a close watch on deflationary readings as well as technical indicators. Most are saying the rally has still got some steam left, so it will be interesting to see if bears can at least keep it down during this low volume trading week. Happy Trading.