Tale of the Tape: Bear vs. Bear

They’re bearish, and they’ve been right when others were wrong. Now, their predictions give a bleak and disconcerting picture of the economy and the road to recovery, but is anybody still listening?

Meredith Whitney and Nouriel Roubini are among the market’s most persistent bears. Even as traders approach the end of the year riding a rally that has lasted nearly nine months, Whitney and Roubini have held fast to their gloomy outlooks. Here’s what they’re saying now.

Whitney said last month that she hadn’t been so bearish in a year. "I look at the board and every single stock from Tiffany (TIF) to Bank of America (BAC) to Caterpillar (CAT) is up,” she said Nov. 16 on CNBC. “But there is no fundamental rooting as to why these names are up — particularly in the consumer space." That could be particularly troubling, considering traders are now facing the season that will make or break consumer stocks.

Financials are also headed for tough times, Whitney says. “The banks are still grossly overvalued,” Whitney said in a Nov. 19 interview on Bloomberg Radio. “People are expecting something great to happen in 2010 and I think they are going to be severely disappointed.”

Whitney says she expects a double-dip recession, which would mean one more significant decline before a full recovery.

If this sounds familiar, it’s probably because you’ve heard it multiple times from economics professor Nouriel Roubini, also known as Dr. Doom.

In a column published Nov. 15 in the New York Daily News, Roubini wrote that the worst is yet to come. (That was actually the title of the article: “The worst is yet to come: Unemployed Americans should hunker down for more job losses.”)

“As a result of these terribly weak labor markets, we can expect weak recovery of consumption and economic growth; larger budget deficits; greater delinquencies in residential and commercial real estate and greater fall in home and commercial real estate prices; greater losses for banks and financial institutions on residential and commercial real estate mortgages, and in credit cards, auto loans and student loans and thus a greater rate of failures of banks; and greater protectionist pressures,” he wrote. “The damage will be extensive and severe unless bold policy action is undertaken now.”

Two days later, The Globe and Mail published another column by Roubini under the headline “A tale of two American economies.” “While the United States may technically be close to the end of a severe recession, most of America is facing a near-depression,” he wrote, adding that small businesses appear to be a particularly dark spot.

(Whitney is also not optimistic.)

Why should you listen to them?

“On Oct. 31, 2007, she was right, and the world was wrong,” Michael Lewis wrote of Meredith Whitney in a commentary for Bloomberg. That day, Whitney accurately predicted that Citigroup would have to slash its dividend or raise capital and sell assets. From there, she predicted the demise of several financial titans and the unfolding of the financial crisis.

Roubini, for his part, forecasted multiple times the implosion of the U.S. housing market and a deep recession.

Of course, all prognosticators make their share of mistakes. “Anyone who thinks they’re going to get every call right is naïve,” says Jeff Saut, chief investment strategist at Raymond James.

Observers are quick to point out that Roubini was bearish well before the downturn and even as conditions started to improve. On March 14, just after the market hit its lows, he wrote: “Dear investors, do enjoy this dead cat bounce and bear market sucker’s rally," adding, "don’t wait too long until you jump ship while the financial Titanic hits the next financial iceberg....” The major averages have yet to retest those lows.

The market as a whole rarely cares too much about what anyone says, says Bill Stone, chief investment strategist at PNC Wealth Management. “It does what it’s going to do. Where everybody runs into trouble is the fact that at some point, whatever your view is, it gets priced in and it’s tough to make the turn.”

In this turnaround, the steepness of the curves – that is, the rate of the bounce – may have been just as important as the inflection points, or when the rally began. “The key to the capital markets [this year] was the speed at which the recession was lessening in intensity as we moved from the first quarter to the second, and as we moved to second to third,” says Michael Strauss, chief economist and strategist at Commonfund. “We’ve had a nice 60%-and-change bounce off the lows, and many of these eternal bears missed an interesting rebalancing opportunity.”

Whitney has given out only one Buy rating since assuming coverage at her new firm in February. Meanwhile, the KBW Bank index has risen 138% since March 6.

By July 13, when she upgraded Goldman Sachs (GS) to a Buy, its shares had already risen 103% since March 9. But to her credit, the stock rose 26% between her July upgrade and Oct. 31, when she dropped her Buy rating. Shares have fallen 8.1% since then.

Here’s a closer look at two of the market’s most vocal bears.

AGE
50

TITLE/POSITION
Professor of economics at New York University's Stern School of Business and chairman of RGE Monitor

EDUCATION
B.A., summa cum laude, in economics from Bocconi University in Milan, Italy, 1982
Ph.D. in international economics, Harvard University, 1988

MOST FAMOUS BEARISH CALL
Predictions of housing bust and impending recession, starting in 2005

MOST RECENT GAFFE 
Calling those who believed there would be growth in the second half of 2009 delusional, and warning the rally off the March lows was a “dead cat bounce.”

WHAT THEY’RE SAYING NOW
“While the United States may technically be close to the end of a severe recession, most of America is facing a near-depression.”

BEARISH BUSINESS SAVVY
Roubini was given the title “Dr. Doom” by the New York Times, and it stuck. The Doctor has gained world-wide acclaim for his doomsday financial predictions.

In 2009, Prospect Magazine voted him second on its list of the world’s 100 greatest living public intellectuals, and he made Time’s annual list of the 100 most influential people in the world.

Earlier in his career, Roubini served in the Clinton administration as a senior economist in the White House Council of Economic Advisers and later as a senior adviser to Timothy Geithner, the current Treasury secretary, who was then the undersecretary for international affairs.

WHEN THEY’RE NOT BEING BEARISH

Roubini finds himself the object of gossip sites from time to time for his social life. "So I live life to the fullest," he wrote in a Facebook message, reported by Gawker. "To paraphrase Seinfeld: Anything wrong with that?"

AGE
40

TITLE/POSITION
CEO of Meredith Whitney Advisory Group, LLC, a macro and strategy-driven investment research firm.
Former financial analyst at Wachovia Securities, CIBC World Markets and Oppenheimer.

EDUCATION
Graduated with honors from Brown University.

MOST FAMOUS BEARISH CALL
Whitney accurately predicted on Oct. 31 that Citigroup would have to slash its dividend and/or raise capital and sell assets. After that, she predicted the demise of insurers and financial firms and the unfolding of the financial crisis.

MOST RECENT GAFFE 
Perhaps waiting to upgrade Goldman until shares had doubled off the March lows.

WHAT THEY’RE SAYING NOW
“The banks are still grossly overvalued,” Whitney said in an interview on Bloomberg Radio. “People are expecting something great to happen in 2010 and I think they are going to be severely disappointed.”

BEARISH BUSINESS SAVVY
In 2008, Whitney was named one of The Wall Street Journal’s 50 Women to Watch, one of SmartMoney’s Power 30, and one of Crain’s 40 Under 40. Whitney was also named one of Fortune’s Top 50 Most Powerful Women in 2008 and 2009. Also in 2009, Whitney was named one of Time Magazine’s list of 100 World’s Most Influential People and was ranked the top investment analyst in her category by The Wall Street Journal.

Whitney left Oppenheimer in early 2009 to start Meredith Whitney Advisory Group, LLC, which describes itself as a macro and strategy-driven investment research firm. Her team covers large, small, and midsize banks, brokers, independent commercial and consumer finance companies.

WHEN THEY’RE NOT BEING BEARISH
Whitney is married to Fox financial analyst and retired WWE professional wrestler John "Bradshaw" Layfield.