A line has been drawn in the sand, and anyone with an interest in banking stocks will have to pick a side.
On the one side is Bill Miller, chief investment officer of Legg Mason, who is famous for beating the Standard & Poor's 500 Index for 15 consecutive years until 2006. Miller considers financials to be on sale and has been waiting and hoping they will rebound.
On the other side is Meredith Whitney, a former Oppenheimer & Co. stock analyst who called banks "grossly overvalued" in 2007 and accurately predicted a much more extreme recession than most of her peers. Whitney has become a celebrity in the investment community for her bearishness, and recently left Oppenheimer to start her own firm.
Miller has been loyal to financial stocks even as they continued to slide, and has been betting everything that they will recover quickly. In April 2008, he mistakenly called the bottom in financials, and his unwavering faith in Bear Stearns, Freddie Mac and American International Group have caused him to lose more money since 2006 than 99% of his peers, according to Morningstar.
"Financials have the biggest potential to outperform," Miller said recently.
Whitney thinks banks will return to negative earnings after they post their first-quarter profits because their gains don't mirror improvements in their businesses. "The underlying core earnings power of these banks is negligible," Whitney said.
Investors are torn over who to believe. Just about everybody wants banks to recover, but most aren't as confident as Miller that a recovery will come soon.
"It could be Bill is right and the vast majority of banks will earn their way out of this," William Stone, chief investment strategist at PNC Financial Services Group Inc.'s wealth management unit, told Bloomberg News. "But if the economy takes another nosedive and the adverse feedback loop begins again with a vengeance, then maybe it's Meredith."
"[Miller] made massive best in institutions that were wiped off the face of the exchange," said Frederic Dickson, chief market strategist at D.A. Davidson & Co. "I'm pretty much in Meredith Whitney's camp on this one. She's been dead-on in identifying the problems in the banks. I'm hoping for the economy's sake and banking's sake that I'm wrong."