Friday, December 18, 2009

The Meredith Whitney Memorial NotMakingThisUp Trivia Quiz

Dec. 17 (Bloomberg) -- Meredith Whitney, the analyst known for correctly predicting Citigroup Inc.’s dividend cut last year, reduced earnings estimates for Goldman Sachs Group Inc. and Morgan Stanley through 2011….

If it’s Thursday, it must be time for Meredith Whitney to be downgrading something—at least that’s the way it seemed to us yesterday when news hit the tape that Last Year’s Star was making the tape once again, with another irrelevant bit of analyst-speak.

Here are the details:

The New York-based analyst, who runs Meredith Whitney Advisory Group, now projects Goldman Sachs will earn $19.57 a share in 2009, $19.65 in 2010 and $20.60 in 2011. Those were reduced from $19.95, $21.73 and $24.04, respectively. The 2011 forecast is 4.2 percent less than the average analyst estimateof $21.51 in a Bloomberg survey…

Why are these earnings changes irrelevant?

Well, for one thing, to make a 38 cent-per-share change in a round-numbers $20 per-share 2009 earnings estimate really isn’t worth the cost of preparing the press release.

For another, the implied precision—so Goldman is going to earn “$19.57” per-share? Why not $19.56? Or $19.58?—is the unfortunate by-product of Wall Street analysts not understanding that businesses are living, breathing, human organisms, not spread-sheet by-products.

Witness the dramatic drop in Whitney's 2011 numbers from the amusingly precise $24.04 per share—we’re talking about a financial enterprise with a trillion dollars in assets: not even Warren Buffett has a clue what 2011 will look like, let alone Meredith Whitney—to the equally ridiculously precise $20.60.

Speaking as a former member of Ms. Whitney’s club—i.e. Wall Street’s Finest—we’ve long thought analyst estimates should be limited to “Higher,” “Lower,” “Much Higher,” and “Much Lower,” and leave the faulty precision to the people who actually buy the stocks.

In any event, we write not to disagree with Ms. Whitney’s basic call: that the earnings outlook for Wall Street’s biggest investment houses may not be as perky going forward as it is right now.

But the reason is not that we see Armageddon ahead, as Ms. Whitney seems to do with every CNBC appearance.

It is simply that the earnings of Wall Street’s investment banks have almost nowhere to go but down.

Let’s look at a Bloomberg story on the subject, published the day before Ms. Whitney blasted her new, precise, earnings forecasts to a world on edge:

Wall Street’s $49.7 Billion Profit Tops OutlookBy Pete Young

Dec. 16 (Bloomberg) -- Wall Street earnings soared to $49.7 billion in the first three quarters of the year, exceeding the state’s forecast for all of 2009, New York Comptroller ThomasDiNapoli said…

That’s right: Wall Street made big bucks in 2009—bigger than even New York State dreamed a few short months ago.

Profits from the broker-dealer operations of New York Stock Exchange member firms…topped a November projection of $38.4 billion for the year, DiNapoli said in a report today. Wall Street lost $11.3 billion in 2007 and $42.6 billion in 2008, the comptroller reported.

And now for the Trivia Question:

What was the previous annual earnings peak for Wall Street broker-dealers, and in what year did that peak occur?

Winners will receive nothing but the satisfaction that they have not made it up.

Jeff Matthews
I Am Not Making This Up

© 2009 NotMakingThisUp, LLC

The content contained in this blog represents only the opinions of Mr. Matthews, who also acts as an advisor: clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.


Mark B. Spiegel said...

>>...the earnings of Wall Street’s investment banks have almost nowhere to go but down.<<

Don't forget that compensation is their single biggest expense. Would a Goldman MD making $3.5 million/year quit if his or her pay were cut to $2.5 million? In the vast majority of cases I'd say no, considering that the firm's name and resources are probably responsible for a huge part of that banker's "individual success". Having worked for a "no-name" firm, and a "name" firm, I can attest to this firsthand.

Jas said...

previous peak in 2000?

Jas said...

I think 2000 was close to $20B

Jeff Matthews said...

And we have a winner.

Believe it or not, Wall Street's already made 2 1/2-times its previous peak year earnings.

As Mark points out, of course, part of this is the fact that pay has been reduced so dramatically, while capital markets have been wonderful.

This, however, is precisely the flip side of the previous two years, in which pay was based on fictitious asset marks.


Anonymous said...

Mark is right. GS bankers may be top notch but the machine drives a lot of their business. The big shops used to pay huge dollars to steal GS people and it rarely paid off. Maybe they hired the wrong ones but my guess is they were not so great outside GS.

Anonymous said...

The reason you put to-the-penny precision in your forecast is to pick up the outside chance that you might hit the number and then look like the genius of all time.

Jeff Matthews said...

True, but most investors think the way you look like "the genius of all time" is picking a great stock!

I'm thinking of Charlie Wolf, who got Apple right in a major, major way at least twice in his career, which is pretty much all you need.

I don't recall Charlie obsessing about near-term to-the-penny EPS: I recall him spending more time on the broad potential of iPods and then iPhones.

That's genius.

Nobody ever went to college or retired early because they got the penny-per-share number right.


Anonymous said...

I was talking to a friend who has covered financial services as a buyside analyst for a long time recently. According to him, Meredith Whitney was a total joke of an analyst for years, mainly known for wearing clothing inappropriate for her age. It's amazing that we make analysts famous for making one call that just happened to catch headlines from the press. I for one, could care less what Meredith Whitney says about anything.

PhillipCharles said...

I agree with the logic of Anon's comment (pick a penny, look like a genius) but in addition, and what drives this behavior moreso is simply the fact there is a market for this sort of 'preciseness'. The exactness of it all allows the consumer of the analysis to feel reassured; the consumer is paying for the satisfaction of perceived certainty. These minute revisions portray an acute level of self- confidence and such is how the analyst differentiates herself.

The 'fallacy of misplaced concreteness' can be applied here; by making your projections more precise and your inputs more complex you are able to sell yourself and/or your clients on its legitmacy and, in this case, contributes greatly to its marketing potential. I would argue that this isn't about being correct in regards to future earnings, it is about creating a buzz in the here and now.