Tuesday, April 14, 2009

Mike Mayo: Another bank analyst buried in his bias


I know Mike Mayo personally. His son went to the same pre-school as my daughter and he's a good guy with nowhere near the colossal ego as Meredith Whitney. However, he seems to share her problem of being buried in the bottom-up approach to stock analysis. Such intense number crunching often leads to missing the big picture, especially when basic conditions change.

What Mayo, Whitney and other analysts fail to realize is that lending, asset performance and earnings are all pro-cyclical and the economy is now starting to stabilize. The market already knows about the "bad assets" on the books of banks. What the market is perhaps not discounting fully is the fact that an improving economy will cause assets to perform better, lending to rise and earnings to increase. (A rising tide floats all boats!)

Mayo issued a, "Short all banks" recommmendation on April 6. Since then the Philly Bank Index (BKX) is up 25%.

Last month in an interview on CNBC, Meredith Whitney was asked whether or not government stimulus would have any effect on the economy. She pretty much dismissed it and continued to focus on bank assets, remaining extremely bearish. In fact, she issued a "Short Citigroup" recommendation when the stock was trading at 2. It has more than doubled.

Bottom line is, bottom-up stock analysis is fine, but you have to know when conditions are changing and a BIG element to any economic forecast is what's shaping up in terms of fiscal policy.

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