Whitney: Goldman Will Ride the U.S. Debt "Tsunami"
By BusinessWeek staff
Old TV ads for a now-vanished brokerage firm used to intone: "When E.F. Hutton talks, people listen." Well, now influential banking analyst Meredith Whitney has Wall Street's ear, and her pronouncements on the sector can have a real impact on trading. Witness the events of July 13, when the analyst's favorable comments about Goldman Sachs Group (GS) and other big banking stocks helped spark a rally in the financial sector, and in the broader stock market.
Here, BusinessWeek presents comments from Whitney and other Wall Street strategists and economists from July 13:Meredith Whitney, Meredith Whitney Advisory Group
Our more bullish outlook on Goldman Sachs shares is deeply rooted in our sustained bearish stance on the U.S. economy and the state of U.S. financials at large. Specifically, we expect a tsunami of debt issuance from federal/sovereign, state, and local governments to fund woefully underfunded budget gaps. In addition, we expect corporate debt issuance to be at least 60% as strong as peak cycle levels, reflecting sizable debt maturity rolls. What's more, given fewer players in the market, not only is GS benefiting from market share gains on these products but more widely in the derivatives products.
To be clear, our reasons for liking GS stock today are drastically different from 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 gross domestic product. 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.Jan Hatzius, Goldman Sachs
As talk of another dose of federal fiscal stimulus surfaces, the U.S. economy is bracing for a fiscal drag from state and local governments. California's much-publicized woes are merely the most extreme example of a serious imbalance that pervades state capitols and city halls across the land. Although the federal package passed in February contained several provisions aimed at helping states and localities cope with emerging budget gaps, those gaps now look much wider. We reckon the federal help will offset only two-thirds of the $121 billion in budget gaps projected by state officials this past spring for fiscal 2010. In addition to plugging the remaining $40 billion to $45 billion hole, state officials are apt to face more downside revenue surprises over the next year.
Altogether, we think they will need to impose tax hikes or spending cuts of $80 billion to $100 billion, or 0.6% to 0.7% of gross domestic product. This range could be too low if the economy underperforms our modest expectations, or if local governments find that property taxes—historically a stable source of revenue growth—give way to falling home prices and/or mounting pressure for relief from beleaguered homeowners.Joseph Lavorgna, Deutsche Bank
We believe low interest rates will be less stimulative toward growth than in the past, because economic activity was not restricted by high interest rates going into the current downturn as occurred in past cycles, when the Fed lifted interest rates to excessive levels. Moreover, household leverage has never been as high during a recession as it is presently. Therefore, we doubt consumers, who have historically been the primary driver of economic recoveries, will be able to borrow and spend the economy out of its current morass. National economic figures often gloss over glaring regional discrepancies. As such, we find it instructive to evaluate conditions, such as consumer confidence, unemployment, and the housing market, on a regional basis as opposed to at the macro level. We find that confidence is re-weakening in many regions as the labor market further deteriorates and troubles in the housing market spread into regions that previously showed greater resilience.Tobias Levkovich, Citigroup
[A bi-monthly Citigroup] report process that studies all 24 industry groups has yielded very few changes. However, the review reinforced our overweight posture for the Insurance, Energy, Capital Goods, Diversified Financials, Transportation, and Software & Services groups, while backing up the underweight stances on the REIT, Pharmaceuticals & Biotech, Utilities, and Telecom Services areas. The Materials group is raised from Market Weight to Overweight. The Consumer Durable & Apparel group is being put on an Upgrade Watch; the major hurdle here remains valuation, though any positive development on the Housing Market Index would be beneficial to this homebuilder-sensitive segment of the market. The Auto & Components industry group goes to Market Weight from Underweight.
The Standard & Poor's 500-stock index should rally double digits in the second half of 2009, benefiting higher-beta areas. We are maintaining our 1,000 target for the S&P 500 and view pullbacks as opportunities to add to positions. Our clear preference is for investors to build up exposure in the industrial/energy/commodity complex given a likely positive inflection in production trends later in the year, supporting an earnings rebound.