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Whitney's downgrade stings banks Add to ...

Oh, Meredith, you're at it again.

Star banking analyst Meredith Whitney downgraded U.S. investment-banking heavyweight Goldman Sachs to "neutral" from "buy" Tuesday. The move triggered selling not just in Goldman (down almost $3 U.S., or 1.5 per cent) but the entire S&P 500 financials sector, which is off 1 per cent Tuesday, among the weakest sector performances on the day.

Investors were rattled not just by the news but by its timing: Goldman, along with fellow U.S. banking big-shots JP Morgan Chase & Co., Citigroup Inc. and Bank of America, are all scheduled to release their quarterly earnings this week, starting with JP Morgan Wednesday morning.

Your remember Ms. Whitney, right? Two years ago, when she was still working at CIBC World Markets (she runs her own company now), she had the audacity to issue a scathing downgrade of Citigroup that questioned whether the bank had adequate capital. This now-legendary "emperor has no clothes" call woke the markets up to the massive unexploded credit bombs lurking beneath the surface of the U.S. banking industry, and made Ms. Whitney an international celebrity.

With that kind of resume, little wonder the market pays attention when she issues a downgrade. But in the Goldman case, Ms. Whitney's reasoning softens the blow considerably. It was nothing like the warning that the famed Citigroup call of 2007 represented; the "buy" call has simply run its course, at least for the time being.

Goldman's stock had surged 34 per cent since Ms. Whitney issued her "buy" recommendation in July, and last week it blew through her price target of $186 a share.

"We believe at current prices, the secret is out with respect to strong second-half earnings, and expect the company to beat third- and fourth-quarter estimates," Ms. Whitney said. "While we are fundamentally constructive on Goldman Sachs over the long term, we prefer to invoke a 'why be greedy' rationale and lock in profits at these levels."

That's about as good-news as a downgrade gets.

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