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Don’t Ignore Meredith Whitney’s Bullish Stock Market Call (XLF)

March 22nd, 2013

meredith-whitneyBen Gersten: Meredith Whitney, the prominent banking analyst known for making aggressive bearish calls, just made a strikingly bullish call on U.S. stocks.

She says the United States is the best place for investment and that it offers the highest returns, particularly after the mess in Cyprus has refueled fears of a Eurozone breakup.

“You have to be bullish on U.S. equities here because you have so much offshore money coming into the U.S. looking for someplace safe and sound,” Whitney said Monday on CNBC’s “Closing Bell.”

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“I have not been this constructive and bullish on the U.S. and on equities in my career.”

It’s a bold call that’s grabbed investors’ attention – much like her 2007 Citigroup prediction.

On Halloween 2007, Whitney released a report on Citigroup Inc. (NYSE:C) and said the bank was undercapitalized after being slammed by the subprime market meltdown. She downgraded the stock, which was trading around $42, to “Underperform.”

She was right. Less than a year later, Citi’s price had been halved and would eventually bottom at $1 in March 2009.

But Whitney missed the mark badly in her December 2010 prediction that the muni-bond industry would fall apart and suffer $100 billion in defaults.

So should investors pay attention to Whitney’s current bold prediction, or will it be off the mark like her muni-bond forecast?

Is Whitney Just “Talking Her Book?”

Money Morning Capital Wave Strategist Shah Gilani said Whitney is right to be bullish now.

While Gilani agrees with Whitney’s market call, he said she’s late to the bull party, which he called back in March 2009. He also questions the motives of Whitney’s prediction.

“I fear her catching up to what’s already happened makes her call itself vulnerable to a correction,” Gilani said. “Then again, like most analysts, she’s not stupid and could be counting on her own call getting a lot of publicity and the public believing that a former doom-and-gloomer has turned rosy on the future of equities. That could bring in sidelined investors and make her prophesy self-fulfilling – which is called “talking your book.’”

Gilani warns, Whitney’s market prediction might be ignoring the negative consequences that will come when the U.S. Federal Reserve stops or even decreases its quantitative easing measures.

“Now that massive intervention has staved off the worst, for the muni market and stocks, she may be wrong in calling for latecomers like herself to get up and start dancing,” Gilani said.
“The music has been playing and unless real global growth picks up to offset stimulus retrenchment [by the Fed], the record will stop playing and dancers will start looking around.”

Failing to account for the effect of Fed intervention hurt Whitney’s muni prediction. Gilani said Whitney was right about what could have happened to the muni market, but she was wrong not to hedge her bets.

“Whitney was wrong about the muni market, but that’s because she didn’t qualify her prediction with a few simple “but it won’t happen if’s,’” Gilani explained.  ”Such as it won’t happen if the Fed keeps pumping money and the Treasury keeps floating more and more debt to offset state and muni shortfalls, or if the stock market springs back and state and municipal retirement plans get propped up on paper.”

For now, Gilani said investors should ride this current rally higher, keeping protective stops in place.

“I am bullish too, but am cautious that a correction is still in the offing,” he said. “That said, I’m in, and getting all in as we keep going higher, but raising my stops all the time.”

Related ETF: Financial Select Sector SPDR ETF (NYSEARCA:XLF).

Money MorningWritten By Ben Gersten For Money Morning

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