Wednesday, May 13, 2009

Tug O' War

There's nothing like a good 'ole fashion Tug-O-War to get the competitve juices flowing, is there?

Yesterday we profiled Meredith Whitney, a former stock analyst at the investment bank Oppenheimer & Co. Inc, an insider who became one of Wall Street’s first bears when credit markets started to freeze in 2007. Early this week, after government evaluations of their financial health, she said banks are “grossly overvalued” and that "at a core basis, I would not own these stocks. Their business models are not going to come back."

Enter Bill Miller, fund manager of Legg Mason's Value Trust mutual fund. Miller is famous for having beat the Standard & Poor’s 500 Index for a record 15 straight years (before stumbling in 2006) and he proudly proclaims that financial companies are his favorite investment for the rest of the decade.

Now there's bravado for you! And if there is something investors love, it's confidence.

Miller is a self-titled 'value investor', someone who seeks the cheapest companies relative to earnings or assets. Last week he said, “financials have the biggest potential to outperform” and boldly named his favorite picks as San Francisco-based Wells Fargo & Co., Capital One Financial Corp., and New York-based American Express Co.

And faithful readers know how much the Whisperer has been picking on Wells Fargo of late.

So it is with great interest that we will watch the great Bill Miller and his stock market advice because, make no mistake, it is at stark odds with what the Whisperer has been saying.

Miller’s says his bets hinge on U.S. home prices stabilizing this year and an economy that performs better than projections from the Federal Reserve. Whisperer believes both will do the opposite.

To his credit, in the first three months of 2009, Miller bought about 3.77 million shares of Wells Fargo (who, btw, is the largest U.S. mortgage originator) and almost quadrupled his position in credit-card company Capital One, according to data compiled by Bloomberg and Legg Mason’s Web site. Miller also increased his stake in American Express, the biggest U.S. credit-card company by purchases, by about 22 percent.

With a maasive wave of foreclosures yet to come and a tsunami of credit card write-downs in the offing, what does Miller see that Whisperer does not?

Perhaps a lot.

Miller can currently boast tremendous success with his investments. Since March 31st Wells Fargo has gained 70%, Capital One 96%, and American Express 77%.

But as we saw in yesterday's post when we profiled Whitney, there is significant concern bank stocks will decline because the gains aren’t matched by improvements in their businesses.

“The underlying core earnings power of these banks is negligible,” cited Whitney, who quit Oppenheimer in February to start her own firm, Meredith Whitney Advisory Group LLC in New York. U.S. banks will likely return to “negative earnings” after posting first-quarter profits and the largest companies must sell assets after expanding at an unsustainable pace in the past two decades.

Furthermore home prices are likely to be down 50 percent from peak levels, which makes gains unlikely and a recovery in consumer spending (which accounts for 70 percent of the U.S. economy) may be undermined as banks and card companies slash $2.7 trillion in credit lines by the end of 2010.

It's a classic battle of viewpoints. What makes it so compelling is that the viewpoints are such polar opposites. And the impact from the winner will affect stock markets and real estate worldwide.

We do indeed live in interesting times.



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