Bloomberg has an article today describing the famed value fund manager Bill Miller is extremely bullish about financial stocks, which are his favorite investment for “the rest of the decade.” Meredith Whitney, who rose to super stardom by being the analyst at Oppenheimer (OPY) who predicted that credit market crisis back in 2007, has a very different view of financials at the moment. The opinions of these two certainly carry a lot of weight in the industry and the could not be more different.
Recently, Miller who manages the Value Trust for Legg Mason (LM) has been the one with egg on his face. After an unbelievable streak of 15 straight years of beating the benchmark, his fund took a nose dive of epic proportions as he was blindsided by the economic collapse. He took major bets that the crisis was overblown and took positions in AIG (AIG), Freddie Mac (FRE) and of course both companies were effectively nationalized in September. He also lost big on Bear Stearns, and it was clear that Miller had underestimated the trouble in financial sector. These major moves brought the cumulative return of his fund way down even after the years of great performance, as the anyone who bought into his fund between July 1997 and October 2008 have lost money. Of course the fund has enjoyed a nice run thus far in 2009, outpacing the market yet again thus far.
Well, Miller has gone on record recently stating that he is diving head first into financials again, with his favorites being Wells Fargo (WFC), Capital One (COF) and American Express (AXP). A total of nineteen percent of the Value Trust’s portfolio is in financials, which is certainly an overweight position. Miller is of the opinion that banks will be able to earn their way out of this mess and because of this they are poised to deliver great returns as they have been so beaten down in the last two years. His positions are tied directly to the U.S. housing market with the largest mortgage originator, and furthermore, he has made bets on consumer credit assuming that fears over defaults are overblown. Clearly, a rebound in housing and a turnaround of the unemployment rate would be huge for financials and Miller’s portfolio.
On the other side of the coin, Meredith Whitney, now of Meredith Whitney Advisory Group, has come back into the headlines saying it is far too early to pop the champagne that the bear market is over. She believes that banks will return to negative earnings, possibly as early as next quarter. Because of this she believes that financials are grossly overvalued after the huge rally in the last two months.
She sees a vastly different macroeconomic picture from Miller, as see points to consumer credit and commercial real estate as the next hurdles to a recovery. Recent history would suggest that Whitney has been incredibly sharp and a leader in identifying the problems in many major banks. Miller has the experience edge though, as he started his streak of 15 straight market beating quarters before Whitney had finished her education. One of the two has to be wrong and we see a legitimate argument could be made for either position, but it is clear that Miller has more to lose at this juncture as his reputation has taken a major hit over the last few years. It would seem to us to be a good idea to lay a little lower and not stick your neck on the line for financials yet again. Its funny, that the positions held by these two market titans really hasn’t changed very much in the last few years in all that has taken place.