The Prophet Speaks…Again

About a year ago we dedicated an entire week’s worth of posts to famed Analyst Meredith Whitney. As a quick refresher, she was responsible for “the call” on Citi, where she (almost prophetically) predicted that Citi was in serious trouble. Following a quick rise to fame, she was subsequently dubbed the “Oracle of Wall Street.” She left her job at Oppenheimer and started her own advisory firm: Meredith Whitney Advisory Group, LLC (rolls off the tongue, no?). She even made Forbes.com’s Best Analysts: Stock Pickers list. Her new advice: avoid anything related to the financial industry.

She told CNBC on Monday that a small business credit crunch is on the way, following on the coat tails of upcoming financial reform bill (courtesy of CNBC, here’s the latest on that). She claims that two particular provisions of the bill are going to hurt the flow of credit: forcing banks to follow the state caps on interest rates, and capping how much a bank can charge a merchant for a credit card. Her reasoning is that banks won’t lend to certain states when they can receive better return in another, and that community banks will not be able to offer credit cards, restricting credit. Now these provisions were not designed to freeze up credit, but rather to protect consumers from excessive interest rates, and fees. Is it a “take one step forward, two steps back” situation? Probably.

In terms of commercial real estate, the ramifications of these two rules are quite large. Small businesses rely on credit cards and other small loans, of which community banks supply a surprisingly large portion (estimated 20% of all small business loans in 2009). A credit freeze would most certainly hurt builders and contractors, and of course it hurts any small business trying to get a loan for commercial property. Correlated to small business is the job market. If small businesses are having a tough time, then jobs will be lost. A higher unemployment rate leads to more mortgage defaults. More mortgage defaults lead to tougher conditions at the banks. Then we’re back at square one.

However, I do take what Meredith Whitney has to say with a grain of salt. Maybe more like a handful of salt. To me, labeling someone the “Oracle of Wall Street” is completely silly. Now I know (read: hope) she didn’t just throw darts at a board and then shout at the top of her lungs that Citi was going down because her dart landed on both the Citi and the sell sectors of the dartboard, but equity research is all about making educated guesses (hopefully really educated ones). Some days, no matter how much you think you know, you will not win.  Even in a bleak market, though, too many highly publicized sell-calls make you look like the harbinger of doom. This is where I question how much these provisions are actually going to impact the credit markets.

Now we get into a situation where a well-known analyst puts the mark of death on a stock (or sector), and we watch as people who trust that analyst sell the stock, and we watch its price plummet. Was the analyst correct, or was it the speculation that caused the drop? It should be interesting following the markets the next few months, as the financial reform debate closes (for now).

But that still leaves us without a solution to our predicament: do we trust Meredith Whitney or not? Well, if you look closely at the video, it says she is reporting from Utah. Secondly, she is married to John “Bradshaw” Layfield, former WWE SmackDown Champion, and regular panelist on Fox News. A mixture of Utah, pro-wrestling, and Fox News usually spells disaster, so perhaps we should be a little cautious regarding her stock picks.

In all seriousness though, I think she made a great call on Citi a while back. And although it was her most publicized pick, I’m sure it’s not the only one she’s hit out of the park. In the end, I guess the only take-away message is to hope for a more pronounced recovery soon, but to prepare for the “Oracle of Wall Street” to be correct again, and watch as the credit markets freeze with the passage of the financial reform.