Given the spate of rumours, proposed solutions, analyst opinions and unsubstantiated bullish calls governing Citigroup (C) this weekend, there is no doubt that Friday’s close ($3.77) sets the tone for extreme volatility in Citigroup’s stock this week. There is good money to be made (and lost), and it is therefore important that investors prepare their trading strategies prior to Monday’s opening bell.
Those arguing in favour of accumulating long-term positions under $4 are essentially assuming that (a) the dramatic decline in Citigroup’s stock price has created a dividend-yield potential of 12-14%, (b) the too-big-to-fail proposition will force the government to quickly organize a support package, and (c) in a worst case, the sum of Citigroup’s parts is appealing enough to justify a $10-plus stock price in forthcoming weeks.
The problem is that none of these assumptions have actually been mathematically tested; certainly nothing logical is in the public domain. The dividend-yield theory is based on another flawed assumption: that, after making loan-delinquency provisions in a worsening recession, there will be any dividends to pay in the first place. Government intervention is indeed on the cards today; but the chances are that any rescue package will establish substantial future dilution for existing shareholders, if not wiping out equity value altogether. And, vague, brand-name focused arguments apart, there is no evidence to conclude that the sum of the value of Citigroup’s individual businesses is higher, or more sustainable, than a valuation of Citigroup’s diversified business model.
All that said, there is every reason to believe that the steady flow of news leaks and podium flourishes (by lawmakers and regulators) will encourage buying of Citigroup’s stock in the early part of this week. Each rally above $5 should be utilized to short Citigroup, with aggressive put option purchases if we do see $8 or higher.
The sell-on-rally call is also a logical response to the fact that while the fate of Citigroup’s domestic portfolio relies heavily on the shape of family incomes (impacting credit cards, housing and day-to-day consumer spending) through 2009, Citigroup’s foreign subsidiaries and affiliates are now struggling to maintain anything close to 2008 asset valuations in the midst of unprecedented global uncertainty. To be fair to management, Citigroup has disclosed the risk originating from the emerging markets in its latest SEC filings.
The problem with the buy-Citi argument is not that levels below $3 (or $2 for that matter) will represent an excellent investment window into a “Buy America” business model or otherwise; rather, it is the time horizons offered by the bulls which are in question. Buying at $2, for example, to sell at $4 within the space of a few short days (or hours) may well be advisable, and profitable. But it is critical to recognize that financials like Citigroup, General Electric (GE), Goldman Sachs (GS), Bank of America (BAC), JP Morgan (JPM) and Credit Suisse (CS) have not advanced materially in the deleveraging process, particularly in view of the “unknown” domestic and foreign risks within the context of a recessionary environment which takes new turns with each passing day.
Five-year and 10-year time horizons, therefore, are based more on hope than on any rational considerations. To reiterate the perspective here, this writer has been of the view that equity markets are not in the midst of a downturn with strong cyclical overtones.
On the contrary, what we are confronting today is the dire need (a) to redefine assets across the world, (b) to identify those asset classes which were created artificially (via easy credit), (c) to figure out the true extent to which deteriorating conditions in the developing world will adversely influence valuations in the industrialized nations and, finally, (d) to ascertain whether the flurry of deficit-induced stimulus packages in an Obama administration will generate 2.5 million quality jobs, or simply cause a degradation in US government credit which will, perhaps by mid-2009, be scrutinized under the state-capitalism umbrella.
Disclosure: Author holds short positions in GS, GE, CS
