Did Oppenheimer Bank Cuts Signal The Bottom Is Near? (C, BAC, WB, JPM)

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Oppenheimer’s Meredith Whitney is currently the most followed bank and financial firm analysts on Wall Street.  We don’t normally like to review analyst calls that are not fresh calls from the same day, but what is interesting is that this latest spate of estimate cuts might be at least somewhat counterintuitive.

She made an influential call on Tuesday regarding several of the large money-center banks that showed some severe estimate cuts in Q1-2008 earnings.  But if you read into the data and compare what the Fiscal-2008 cuts look like compared to prior estimates you might look at this as though the bad news is getting less-bad.  At some point that becomes good news as far as Wall Street traders are concerned.

Citigroup (NYSE: C) Q1 losses are now expected to be -$1.15 EPS, down from prior targets of -$0.28.  She also now sees a slight loss for fiscal-2008 of -$0.15 EPS.   Whitney lowered her Q1 EPS forecasts on other money-center banks as follows:

  • Bank of America Corp (NYSE: BAC) to $0.35 from $0.92, but fiscal 2008 to $3.25 from $3.65.
  • JPMorgan Chase & Co (NYSE: JPM) to $0.70 from $0.86, but fiscal 2008 to $2.90 from $3.20.
  • Wachovia Corp (NYSE: WB) to $0.55 from $0.78 cents, but fiscal-2008 to $2.70 from $3.05.

Whitney did note that despite some 30 revisions lower to estimates since the end of 2007, she is confident that this will not be the last reduction in 2008 due to mark-to-market, weaker housing, and pressure on the consumer.  She also noted that the current credit cycle would be the worst seen in generations, and she still sees billions of more on CDO write-downs.

After 30 some cuts and looking at the current data-points we already know, a longer-term visionary and contrarian would say that if the worst hasn’t been seen then the at least the worst parts of the bad news have been seen.  That can’t be considered good news.  But on Wall Street the bottom fishers win by investing when the bad news that comes out keeps getting less-bad and less-bad.  By the time the all-clear signal is yelled many of these banks may have rallied 25% to 35%.

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Jon C. Ogg
March 26, 2008

Jon Ogg can be reached at jonogg@247wallst.com; he does not own securities in the companies he covers.