What's Making Famous Bear Meredith Whitney so Bullish?

Meredith Whitney is just trying to change the world with her new book - not shake the global financial markets. She's done that before. But she's out of that business, and in fact, she says, she was never really in it.

The securities analyst has a new book, "Fate of the States: The New Geography of American Prosperity," which she tells U.S. News is "an attempt to educate people about the good things that are coming" for states in middle America. To be sure, she still sees fiscal problems as unsolved, but she says she is not making any new forecasts on the $3.7 trillion municipal bond market that funds the local and state governments.

Instead, Whitney says she is bullish about the prospects for the heartland of America and the rising U.S. stock market. She says investors can make money by finding companies with the most exposure to the long-neglected part of the country between the U.S. coasts. These companies will bounce back from the excesses of the downturn and see "decades of gains" as the region rebounds, she says.

"The smart money is already betting on it. Businesses are moving there. The smart money is already moving its feet," she says. "It's an equity play involving all of the sectors doing business there. Chemicals and manufacturers in the central corridor with proximity to cheap energy. Construction, transportation - they will all benefit."

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All that optimism is an apparent turnabout for an analyst who gained fame over the past decade for a couple of very gloomy forecasts on the market. In 2007, she issued a timely report that banks were much more exposed to bad housing debt than most people knew.

That prescient outlook proved to be on target. The New York Times said she may have been the one stock picker "who emerged intact from the wreckage of the financial crisis." Another forecast did not go so well. With her credibility high, Whitney appeared on "60 Minutes" saying something similarly gloomy about municipal bonds that she now says she was not prepared to say.

"I am not a municipal bond market analyst," says Whitney now. "I told them there were problems in the muni market. Fiscal problems, and there would be losses in the billions."

How many billion would be lost in munis, they asked? "I said, 'I don't know, hundreds of billions.'" With the magic of television, the impact was immediate. As a New York Times columnist wrote, "Instead of challenging this absurd figure, [CBS reporter] Steve Kroft just gave one of his crinkly-eyed, sorrowful shakes of the head, pitying all those bondholders." Not everyone was so understanding of Whitney, especially as the losses suffered by bondholders in that program's aftermath indeed mounted.

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Frightened investors pulled $25 billion from the muni market over the next few months, according to Lipper. The defaults Whitney forecast when she was "put on the spot" never added up to anything out of the ordinary, and the market more than reversed its losses and headed to new highs just a year later. She remained a regular on television and signed a book deal that her publisher promised would be "controversial." She declined an invitation from Congress to explain her views on the muni market. "It was never my intent to make a call [on munis], and I am not going to do it now," she says.

Instead, Whitney is adding a measure of circumspection to her new work, a change from the past when she was often outspoken on many issues. She emphasizes the seriousness of her new book's topic, the rise of the middle states, and steers clear of forecasting doom - but without entirely burying the fear factor, either.

"I know it's not that sexy," she says, referring to the topic of her new book, the state of the states' economies. "But it's an incredibly unsexy topic that really matters."

She wrote the book - her first - she says, because "I understood power and importance of what's going on in the states and wanted people to understand."

Whitney says people should know that there is some very good real estate out there to save and defend. She calls for privatization of education and other government-funded services, even security and police work. She says taxes and regulation "have to be cut" to foster the growth of business. The money states find from cost cuts and privatization must be reinvested in building infrastructure, bridges and schools and other public projects, as well as retraining workers for new jobs, Whitney says.

Economists say states made progress on cleaning up their fiscal messes, and some even have surpluses. But Whitney still has a relatively dire view. "We have reached a breaking point in some states," she writes in her book. "The money is gone." Stimulus spending will not help anymore, she adds.

Based on this view and other assertions, the book is being met with harsher criticism than some of her past forecasts. A Reuters reporter writes, "I would encourage readers to view it as the opinion of one analyst who has often been wrong." Forbes says the basic idea of people moving to the middle states is not supported by data. Bloomberg cited it for "a barrage of numbers, percentages, gross generalization, bald assertion and outright errors." The idea, the Bloomberg reviewer says, "sounds reasonable" but "the evidence is thin." Whitney's ideas, the reviewers say, are nothing new.

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"Reviewers are, of course, always entitled to their own opinions," she says when asked about the reaction. "But I continue to stand behind my book and the views expressed there within."

Her "middle states" idea, "based purely on dollars and cents, sounds reasonable," concedes Bloomberg reviewer Joe Mysak in an overall critical review. Whitney also sounds bullish in a way she never has in the past. That might not sell as many book copies as she might have with more "Black Swan" type gloom, and it's not likely to get her back on "60 Minutes" anytime soon.

But Whitney is not worried. Her career now is committed to the states. She says she has "no interest in politics" but will advocate her view as "a private citizen" who herself still lives in New York, not the great hinterlands she wants to change. She plans to work to improve the "fate of the states" for the foreseeable future, or as long as it takes for people to embrace transformation. "If you don't demand changes," she says, "you are going to suffer the consequences."