Meredith Whitney, Oppenheimer's influential bank analyst appeared on CNBC to discuss what she says is a "grim" outlook for banks and spending. Click on the image below for the whole interview:
Here are some excerpts from the interview:
"The big banks are going to be on life support for at least 18 months, if not 36 months," said Whitney. "The big banks will not fail, but the big banks will not grow, in my opinion, for at least another two years."
She commented that TARP is being used to "fill holes," but does nothing to stimulate the economy.
"You've had massive asset deflation," she said. "There's more of this to come."
"Just over 70 percent of American households have credit cards, but over 90 percent of those households revolve at least one time a year, so they're using it as a cash flow management vehicle," she explained. "The banks now are starting to cut those lines back. That will impact spending."
In viewing most of the interview yesterday, she was definitely bearish on banks.
Her comments revolved particularly around US banks, which have seen a fundamental change in their business model over the last few months.
With such despair around the short-mid term outlook for US banks, maybe a prudent investor would consider buying now before they recover and sit on the nice big divvies until the share prices take off again.
Things to consider:
Bullish: take into account that with this yearâs write downs that future earnings should look pretty good, especially when the performing portion of the mortgages, for which they have taken considerable write downs start to mature.
Bearish: what if revenue declines to a point where the generous dividends have to be cut? Or if the recession is protracted causing a far worse mortgage situations and more write downs. As Canadians, we also need to take into account currency fluctuations. As the economies turn and demand for resources grows, we should see a increase in our dollar which will erode the growth we earn in US companies, as well, with all the stimulus( do you hear the printing presses running) what will be the effect on the US $ going forward.
Maybe an alternative is to buy some Cdn Banks, earn a healthy yield while we wait for the appreciation of their share price.
Tom,
There seems to be a suspension of disbelief about crippled fundamentals in the US banking sector. If consumers decide to su-spend their consumption in favour of thrift as a result of the cutting back of credit lines by card issuers, then we will have deflation. Its still early in the offing, but is starting to seem likely. For now, conditions are deflationary; we are not yet in deflation.
The biggest issue for the market is that the market's credibility is what has been severely damaged, and it will take a great deal of time to recover from that if enough people start to feel that way.
These problems were first identified in 2001, seven years ago, when some more forward looking people started recognizing that there were some serious problems looming on the horizon. For example, the late Sir John Templeton, decided in 2001 to get out of the equity market after some 72 years of being biased, because he did not like what he saw and could not understand, i.e. the size and mystery of the derivatives market. Bill Ackman, of Pershing Square, started to investigate monoline insurers, particularly, MBIA, because of irregularities in their capital.
Fortunately, Canadian banks are far better capitalized, at around 9% reserves, versus their US counterparts which are 5% capitalized. In the long term, Canadian banks should perform well, not only because they are being run more prudently, but because they will be recognized for it by large foreign investors endorsements, not to mention very attractive yields.