The Whitney Whiplash

After four straight weeks of market declines, the stock market has soared on Monday in anticipation of major earnings releases. The broad market indices are trading about 2.5% higher, and the biggest gainers have been the stocks in the finance sector. The financial sector, as tracked by the SPDR for the financial sector (XLF), has steadily climbed throughout the day and was up 6.5%. The news that is propelling these gains comes from superstar analyst Meredith Whitney of Meredith Whitney Advisory Group LLC, who has initiated a “buy” rating on Goldman Sachs (GS) ahead of tomorrow’s earnings report. Of course there are other stories we are watching today, but none has had the same weight that Whitney’s bullish call has. It appears that Whitney’s opinions have the ability to move the market.

For anyone still unfamiliar with Meredith Whitney, she had a successful career as an finance analyst at Oppenheimer (OPY). She was one of the first to see the leverage bubble was on the cusp of bursting, as she boldly predicted that the problems at Citi (C) are far worse than most thought. In the summer of 2007 she predicted that Citi would have to cut their dividend. Since then, she has benefited from this notoriety and has started her own firm after leaving Oppenheimer in early 2009. This bullish call on Goldman is her firm’s first “buy” rating on any of the eight bank and finance stocks that she covers. Her analysis claims that Goldman is, “going to surprise big to the upside,” tomorrow on the strength of huge revenue from fixed-income, currencies, and commodities businesses. Whitney thinks that Goldman’s results will come in well ahead of a consensus view of analysts calling for EPS of $3.65.

The crux of Whitney’s argument is that the U.S. is issuing so much debt right now that Goldman will be a beneficiary by the shear volume of issuances. With news today that the federal deficit has passed $1T in the first nine months of this fiscal year, we have a hard time arguing with that sentiment. A portion of her note,

“To be clear, our reasons for liking GS stock today are drastically different than any we have had recommending the stock on and off over the past decade. In the past, GS shares were a great play on equity markets and expansive global GDP. While that may still hold true down the line, our thesis today is that we expect GS to be the key competitor in some of the most unpredictable markets: government, corporate and municipal debt.”–Meredith Whitney

We will know soon enough whether Meredith Whitney is correct in her assertions about Goldman, but you have to be impressed by the respect and notoriety she has garnered. She was brought on as a guest host on CNBC’s Squawk on the Street, which enabled her to broadcast her opinion on Goldman and other banks to a large audience. The regular show hosts, always with an eye towards stock market futures, noted that her bullishness was a catalyst to bring the futures market into positive territory. As I watched this morning, I marveled at the public relations machine that she has become, for herself. As earnings season is nearly its apex, she has chosen to make her first bullish call on a company at the same time that she is co-hosting one of the most popular business shows on television. Furthermore, she was bold in her predictions, not simply calling for an earnings beat but a big surprise.

She may be right, and she certainly has had an impressive record when stepping out onto a limb. However, recently Whitney has missed the rally in financials over the last few months, as we wrote about in a blog in mid-May that she still wasn’t buying the rally (Fool Me Once…Bill Miller Faces Off with Meredith Whitney Again). Goldman is now 12% higher than it was when we last wrote about her, but there is nothing wrong with changing your opinion as the data dictates. Whatever the reason that she has all of a sudden gotten bullish on Goldman, we tend to be skeptics of anyone that can move the market with her opinion. She has raised the bar for financial earnings, especially that of Goldman, so investors may need to watch out for profit-taking if the results don’t live up to the analysis.

The Whitney Whiplash

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