A Primer for Trading Citi This Week

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

Comments

[mik123:]

I don't see one analyst stating to sell any of the big three financials. In fact I have seen Dick Bove and Mayo say buy with price targets 3-6 times Citigroups current price. These are two of the top 3-4 analysts who rate the stock. Mayo came out Friday after the close and said the minimum value would be $9+ .
Citigroup and the other two are only in this predicament because of Paulsons decision last week to abandon the whole purpose of TARP - to purchase troubled assets. When he made the announcement, he said some of the same original banks will now need additional injections. What is he waiting for. Citigroup, Bankamerica,JP Morgan, lost up to half their value with Citigroup being the worst. If you eliminate short selling, Citigroup would rally. What's happening is you have a huge amount of short selling and at the same time their buying cedit default swaps. Watch what happens to the stock if the SEC re-instates a ban on short selling on financials. Christopher Cox of the SEC has a conference call Monday regarging this. Citigroups financials are actually better than Bankamerica and JP Morgan since both purchased companies with very bad financials. These are the three largest financials in the United States. Once Citigroup gets through 2009, it will get back to earning 25 billion per year. At 10x earnings that's a 250 billion market cap which is 12.5x the current market cap. 12.5x the current price takes it to $47 a share. Investors who bought GPU after Three Mile Island at $3 ended up getting 20-30x their money. It takes guts when it looks questionable. You don't panic because profiteers are trying to destroy the stock so they can make a quick buck. Nothing has changed with Citigroups financials in the past month when the President of the United States, Fed chairman Bernacke, FDIC chairwoman Sheila Bair, Treasury secretary Paulson all agreed that Citigroup would takeover Wachovia.Go to the FDIC's website and read the Sept. 29th press release. They were obviously healthy enough then. Citigroups financials will begin to improve quickly with gas prices cut in half. Eighty percent of the country lives paycheck to paycheck. With your average couple paying $50 less per week in gas, that's $2,600 extra for mortgage and credit cards that wasn't there in August when it was still $4 a gallon. Consumers only had this price break for the past 8 weeks. If the price of gas stays down, that's huge for them

2008 Nov 23 01:15 PM

[Greg Pinelli:]

Everyone who invests (ie, speculates) is a profiteer. I don't know of anyone who does this who considers them a lossateer. In any case...Citi is NOT going to fail or even come close. By the end of the week it will have cut thru a 40% swath..but the author makes a salient..and prudent..point. If Citi goes above %6 this week..and it well could..I'd sell shares in hand or short.
My take..it whipsaws between $3.50 and $6.50 for a week or two...longer term..it's a huge winner with a late 2009 price of $15.......

2008 Nov 23 09:54 PM

[jasonjim:]

Ban short selling for a year and bring back the uptick rule. It is not rocket science for crying out loud. Cox must be an idiot not to do something to settle the markets down. Or does he want to see Citi go down the tube like Lehman. Cox should have been fired months ago for incompetence.

2008 Nov 23 10:46 PM

[dfrhodes:]

Ban short selling to settle the markets? clearly you have no idea what your talking about. Banning shorts alway INCREASES volatility

www.guardian.co.uk/com...

2008 Nov 24 02:10 AM

[nyorker:]

"Ban short selling for a year and bring back the uptick rule."

Highly unlikely.

This market right now, is in the midst of "Wealth Transfer".

Wealth being taken from retail (all of us) to the hedge, institutional and big brokerage funds.

Call me crazy, but these guys need to replenish their empty "pots".

The Government knows full well what banning short sales and reinstituting the uptick rule would do.....thats why they have NOT done it.

Not till the big boys are done "cleaning" up.

Heck, if Russia can SHUT their markets down, our government could reinstate the "uptick" rule quickly.

IMHO, maybe wrong, but thats what it looks like to me.

2008 Nov 24 07:14 AM

[JohnLL:]

I don't see anything published by Seeking Alpha where the author does not have a personal profit agenda for spreading rumors and faulty analysis. I would expect to see articles like this on a Yahoo message board, but to validate crap like this with a publisher's name so the short seller can spread negative analysis for personal profit is just criminal.

2008 Nov 24 07:52 AM

[sr9web:]

Looks like those who bought C Friday 11/21 and sold Monday 11/24 did just fine.

2008 Nov 24 05:55 PM