Global Earnings Downturn Only 25% Done - Citi

Investors must arm themselves as they prepare to battle the bear in 2009 with economists forecasting a synchronized global recession.

While developed economies may flirt with outright deflation, Citigroup’s equity strategy team expects it will be avoided. However, the global earnings downturn is only a quarter of the way into its forecast 50% peak-to-trough decline, according to the firm’s chief strategist, Robert Buckland. He also said consensus bottom-up forecasts are probably 30% too high for 2009.

After the worst year since 1931, Citigroup (C) thinks global equities look cheap in absolute terms and even more attractive against defensive assets like government bonds. In fact, the strategist said the current debate about equities versus credit misses the point. Anything corporate is preferred over treasuries, he noted, as “valuations certainly favour corporate assets over government assets right now.”

As a result, indices are expected to be protected from the barrage of negative news flow. So while Citigroup is resisting the temptation to be too bearish at current levels, particularly given how compelling valuations look, valuation alone is not enough to produce a meaningful equity market recovery. A stabilization in the fundamentals is required and credit markets remain in disarray. Weak sentiment, particularly around earnings season, will also likely make finding a base more difficult.

“This battle between dire fundamentals and cheap valuations will be the defining theme of 2009,” Mr. Buckland wrote in an outlook report. “We think that neither will win out over the year, but it will be a volatile ride.”

Valuations have Citigroup preferring Europe to Asia due to potential earnings disappointments, while remaining neutral in the U.S. It continues to favour defensive sectors over cyclical ones. Given the fact that financial stocks are further into the earnings downturn and no longer have the worst earnings momentum, the sector was upgraded to neutral.

Nonetheless, to be able to call a meaningful turn in global equities, Citigroup feels we need to be closer to the bottom in the corporate earnings cycle. “On our forecasts that is more likely to happen in 2010,” it said, adding that 2009 may be a trading range year. “So don’t sell after a 30% fall and don’t buy after a 30% rally.”

Comments

[User 265729:]

We are in for a MAJOR CATASTROPHE!

Nobody, from the talking heads at CNBC, to the Obama administration can explain to me exactly how we will turn this economy around to any levels of recovery, or even maintain the current depressed levels.

When you have an economy that is based on nothing except the abuse of credit from places like Citi, and massive amounts of consumer spending based on loans leveraged by an asset class (real estate) that rose year over year at incredible levels in a bubble and now it's all gone...

How exactly is this going to get fixed? Are you going to get a Pet Rock and have them appreciate at 50% a year? Then you can give Pet Rock equity loans so we can go buy SUV's and purchase a bunch a junk from China?

Really, we have a very serious problem that may bring our country down with it within a year or two. Obama would need to spend $1 trillion or more a month or more to keep the status we are at now, absent bubbles and Pet Rocks. It isn’t going to happen and his plan isn’t going to work. His $500 rebate may pay the credit card interest on most cardholders from now until they get the check in their hands. If they do spend it at WalMart the money goes to the producers in China with a small cut for the box store. Neato!

Hope and hype are not going to pay the bills or put food on the table. Our economy has serious structural problems that nobody cares to address...

Everything is an opportunity if there are sound fundamentals to base the purchase of any stock. If this were true, however, why does the government have their nose everywhere? Short answer: Our economy is f***-up.

Jan 08 04:29 PM

[HiSpeed:]

Equities are NOT cheap yet - earnings still need to be ratcheted down much lower from here.

Once they are, we see SPX is actually very expensive here at SPX 900s, the P/E is in the 20s (once earnings are adjusted down which IS where they are going)! SPX in 500s this year seems like a reasonable, realistic target.

The idiots we call 'analysts' are once again, very wrong. Who on earth PAYS these people to make such bad calls?!?

Jan 08 05:31 PM

[Jason Rines...:]

We just had a major catastrophe. This is a W shape with 1st leg down. I forecasted -20% GDP peak to trough on this bad boy starting in March 2008, you can search lots of previous comments to confirm. 9% GDP has come off in 2008, 3% coming off in Q1. Believe indices will take another plunge after earnings reports end of this quarter and then a rebound as reinflation is attempted which would last a year, perhaps two before we begin seeing the effects of the manipulations. Probably see oil and other energy go ballistic and trickle down effects, leading to another market crash and positive feedback cycle. But I cannot say for sure, much of what is being tried on this scale (reinflation) is experimental.

Geopolitics and wars could reshape our country with a new name for a Republic but a nation such as the U.S. is not going to outright collapse because of this crisis.


On Jan 08 04:29 PM curbs-in wrote:

> We are in for a MAJOR CATASTROPHE!
>
> Nobody, from the talking heads at CNBC, to the Obama administration
> can explain to me exactly how we will turn this economy around to
> any levels of recovery, or even maintain the current depressed levels.
>
>
> When you have an economy that is based on nothing except the abuse
> of credit from places like Citi, and massive amounts of consumer
> spending based on loans leveraged by an asset class (real estate)
> that rose year over year at incredible levels in a bubble and now
> it's all gone...
>
> How exactly is this going to get fixed? Are you going to get a Pet
> Rock and have them appreciate at 50% a year? Then you can give Pet
> Rock equity loans so we can go buy SUV's and purchase a bunch a junk
> from China?
>
> Really, we have a very serious problem that may bring our country
> down with it within a year or two. Obama would need to spend $1 trillion
> or more a month or more to keep the status we are at now, absent
> bubbles and Pet Rocks. It isn’t going to happen and his plan isn’t
> going to work. His $500 rebate may pay the credit card interest on
> most cardholders from now until they get the check in their hands.
> If they do spend it at WalMart the money goes to the producers in
> China with a small cut for the box store. Neato!
>
> Hope and hype are not going to pay the bills or put food on the table.
> Our economy has serious structural problems that nobody cares to
> address...
>
> Everything is an opportunity if there are sound fundamentals to base
> the purchase of any stock. If this were true, however, why does the
> government have their nose everywhere? Short answer: Our economy
> is f***-up.

Jan 08 06:03 PM

[{5U}:]

Citi is in deep sh1t They can't be too bearish but want to be just bearish enuff to ask for more government hand outs

Citi is so sh1t1

Jan 08 06:47 PM

[Jared Schne...:]

I think people have been too optimistic about the beginning of 2009. Being that we are not even half way through the recession, I think we should be cautious as we might reach a new market low in 2009.

Go with a Inverse ETF like DXD that goes up when the market declines. Find value stocks later, be cautious now.

Jan 08 07:05 PM

[nmelendez:]

Who pays them? The same idiots that put their money in mutual funds and those who like to donate their money to you and me.


On Jan 08 05:31 PM HiSpeed wrote:

> Equities are NOT cheap yet - earnings still need to be ratcheted
> down much lower from here.
>
> Once they are, we see SPX is actually very expensive here at SPX
> 900s, the P/E is in the 20s (once earnings are adjusted down which
> IS where they are going)! SPX in 500s this year seems like a reasonable,
> realistic target.
>
> The idiots we call 'analysts' are once again, very wrong. Who on
> earth PAYS these people to make such bad calls?!?

Jan 08 07:06 PM

[discov:]

Citi and other banks give these overwhelmingly overly optimistic reports because it's what they hope happens, not because it's actually a likely scenario based on reality.
tinyurl.com/8nxn9h
Ryan

Jan 08 07:45 PM

[prudentinve...:]

"This battle between dire fundamentals and cheap valuations"

To me at least, this is an oxymoron.

Jan 08 08:05 PM

[Joe Rodney:]

"When others are greedy, get scared. When others are scared, get greedy."

Jan 08 10:17 PM

[stockguru32:]

Ha, citi is right for once. There in trouble though... see here at crashmarketstocks.com

Jan 08 10:22 PM

[Larry House:]

Interesting piece interesting comments. The ideas of what is going to happen run from the economy will soon snap back because of all the money flooding in, the economy will avoid a deep disaster but will flatline for perhaps years, or the economy is shot and we are heading for an economic ice age of Biblical description. I have my opinion just like everyone else, but I have no idea what will happen. I am deeply concerned that it is the later possibility. My experience goes back over 50 years, and I have just never seen a time that felt like this. We have had recessions before and a couple of really bad ones. I had been married only a few years, and we had our first child when we went through an oil embargo, price controls, the departure of the gold standard, and hyperinflation. The lowest credit card interest was 23-25%. Challenging times. Many people then thought the dollar would collapse and the government would have to own up to being bankrupt. Thirty-five years later, we may be just about there.

The big difference to me with the present circumstances is that I think consumers are changing their attitudes about "things" and are beginning to alter their life style. I don't think people will go back to borrowing every dollar they possibly can. I think we may see the banks with money to lend and few takers. I think people are tired of credit card companies and bankers with ice water instead of blood. I think people are disillused with stocks and perhaps bonds as well. Is it really worth it? I think people are going to rediscover living. I think we are seeing the death of "Greed is good."

So, for me, I am not chasing stocks. I think some stocks are worth holding, but I want safety first, and I will be happy with a modest return. I also hope I am wrong and that the economy is just a few months away from a robust revival, but I just don't see it.

Each investor has to decide for himself/herself. I just think the evidence is overwhelming that we face some life-changing economic conditions. There is no quick fix; there is no easy fix; I just pray there is a fix, but I doubt very seriously if government can solve our problems. Good luck and God bless.

Jan 09 12:27 AM

[Anthony Alfidi:]

How can Citi prefer Europe to Asia when Europe's banks are in even worse shape than U.S. banks? European companies will be even more starved for credit. Mr. Pandit may have given those marching orders to Citi's equity strategy team because he thinks he'll have better luck raising his next round of capital in Europe.

Jan 09 12:50 AM

[Fitz919:]

When Citigroup talks...consider the source, and their agenda.

If you want to make real money and have time for very focused day-trading, check out the new Triple Leveraged ETFs. Here are some statistics from some research I did yesterday. Each of these covers 18 days worth of data from Dec 10 through Jan 6. This is the average swing between the low price and high price for each of those 18 days.

FAZ Financial Bear 3X 14.37%
FAS Financial Bull 3X 14.11%

TZA Small Cap Bear 3X 13.31%
TNA Small Cap Bull 3X 12.52%

They are all trading a few million shares each day. If you were to catch just a 5% gain each day, you will double your money each month. If you have a margin account you can use the margin to more than cover the cost of Capital Gains taxes or even the 35% top tax bracket if you are a mark to market day trader.

It doesn't matter if the market goes up or down, you always have a bull, or a bear going up, you just have to stay very focussed. When it rises, let it run until you grab your gain. If it goes into reverse, you sell at market price instantly.

These are fast movers, so you can't leave your screen once you buy one. But the market rarely runs in one direction more than 3 hours. Take your restroom or food breaks only after you have sold your position.

Mark to market people can deduct their losses from the gains, everyone else will have to throw their losses away because of the wash sale rule.

Jan 09 01:00 AM

[bcncv:]

I have trouble buying the argument that earnings will fall by 50%. I'm sure that earnings will continue to fall, but by half? That's a stretch. Being such an arbitrarily round number is also suspicious.

Now I'm not foolish enough to try and predict the stock market, but this sounds suspiciously like those predictions of oil at $200 and Google at $1,000. It's more likely an analyst looking for some sensationalism rather than a rational analysis.

Jan 09 01:52 AM

[bosun.j:]

If Citi is saying it one should look to the underlying reason. That is if you still care to gamble away your future.

Now is the time to secure what you have go to high ground and wait for the tsunami to recede.

Pigs get fat. Hogs get slaughtered.

Jan 09 03:20 AM

[bigtime99:]

"Buy when there's blood in the streets" - old Rothschild family saying
"Be greedy when others are fearful and fearful when others are greedy" - Warren Buffett
Keep the doom and gloom coming people...

Jan 09 12:32 PM

[bobbobwhite:]

Follow the money, always. 6000 years of human history should have taught us to be smarter and to make better decisons, but no, as we are all still cavemen at heart and unable to evolve using experience as a genetic modifier. That inability will be our undoing as a species.


On Jan 08 05:31 PM HiSpeed wrote:

> Equities are NOT cheap yet - earnings still need to be ratcheted
> down much lower from here.
>
> Once they are, we see SPX is actually very expensive here at SPX
> 900s, the P/E is in the 20s (once earnings are adjusted down which
> IS where they are going)! SPX in 500s this year seems like a reasonable,
> realistic target.
>
> The idiots we call 'analysts' are once again, very wrong. Who on
> earth PAYS these people to make such bad calls?!?

Jan 09 01:07 PM

[bobbobwhite:]

Good common sense from a person with enough age to have some wisdom. Remember the time when everything was run conservatively by greytops, all the way into the 1970's? When the "kids" took over in the 80's and began running everything in their naive slant of viewing it, that is when it all started to unravel as most had no idea of what they were doing, Ivy League MBAs notwithstanding. Most of what we are now facing has been built in the last 30 or so years, under "kid rule".

Time to get the greytops back in charge again for more stability and wisdom(will never happen, all is lost).

The above is a moderate attempt at some humor, I must admit, but a lot of it is bedrock true, IMHO.



On Jan 09 12:27 AM Larry House wrote:

> Interesting piece interesting comments. The ideas of what is going
> to happen run from the economy will soon snap back because of all
> the money flooding in, the economy will avoid a deep disaster but
> will flatline for perhaps years, or the economy is shot and we are
> heading for an economic ice age of Biblical description. I have my
> opinion just like everyone else, but I have no idea what will happen.
> I am deeply concerned that it is the later possibility. My experience
> goes back over 50 years, and I have just never seen a time that felt
> like this. We have had recessions before and a couple of really bad
> ones. I had been married only a few years, and we had our first child
> when we went through an oil embargo, price controls, the departure
> of the gold standard, and hyperinflation. The lowest credit card
> interest was 23-25%. Challenging times. Many people then thought
> the dollar would collapse and the government would have to own up
> to being bankrupt. Thirty-five years later, we may be just about
> there.
>
> The big difference to me with the present circumstances is that I
> think consumers are changing their attitudes about "things" and are
> beginning to alter their life style. I don't think people will go
> back to borrowing every dollar they possibly can. I think we may
> see the banks with money to lend and few takers. I think people are
> tired of credit card companies and bankers with ice water instead
> of blood. I think people are disillused with stocks and perhaps bonds
> as well. Is it really worth it? I think people are going to rediscover
> living. I think we are seeing the death of "Greed is good."
>
> So, for me, I am not chasing stocks. I think some stocks are worth
> holding, but I want safety first, and I will be happy with a modest
> return. I also hope I am wrong and that the economy is just a few
> months away from a robust revival, but I just don't see it.
>
> Each investor has to decide for himself/herself. I just think the
> evidence is overwhelming that we face some life-changing economic
> conditions. There is no quick fix; there is no easy fix; I just pray
> there is a fix, but I doubt very seriously if government can solve
> our problems. Good luck and God bless.

Jan 09 01:19 PM

[polishlogician:]

I agree, though you might be better advised to stay in the ETF's for about a week or so (just looking at past trends, decide for yourself, i.e., don't necessarily day trade at this point, unless you love to do that with options) but don't stay in them "too long" as a straight buy, as there are many explanations on this site of the 'eroding' profits of ETF's that get compounded with NAV's computed daily. Now, what's the exact entry and exit points to take advantage of volatile market, well if I knew that I'd pry never tell, and if I did tell, I wouldn't even believe myself, but overall, I agree with your comments, it's a smart play. And I've done very well so far with 3x bear and bulls.

On Jan 09 01:00 AM Fitz919 wrote:

> When Citigroup talks...consider the source, and their agenda.

>
>
> If you want to make real money and have time for very focused day-trading,
> check out the new Triple Leveraged ETFs. Here are some statistics
> from some research I did yesterday. Each of these covers 18 days
> worth of data from Dec 10 through Jan 6. This is the average swing
> between the low price and high price for each of those 18 days.

>
>
> FAZ Financial Bear 3X 14.37%
> FAS Financial Bull 3X 14.11%
>
> TZA Small Cap Bear 3X 13.31%
> TNA Small Cap Bull 3X 12.52%
>
> They are all trading a few million shares each day. If you were
> to catch just a 5% gain each day, you will double your money each
> month. If you have a margin account you can use the margin to more
> than cover the cost of Capital Gains taxes or even the 35% top tax
> bracket if you are a mark to market day trader.
>
> It doesn't matter if the market goes up or down, you always have
> a bull, or a bear going up, you just have to stay very focussed.
> When it rises, let it run until you grab your gain. If it goes into
> reverse, you sell at market price instantly.
>
> These are fast movers, so you can't leave your screen once you buy
> one. But the market rarely runs in one direction more than 3 hours.
> Take your restroom or food breaks only after you have sold your position.

>
>
> Mark to market people can deduct their losses from the gains, everyone
> else will have to throw their losses away because of the wash sale
> rule.

Jan 09 06:38 PM

[Fitz919:]

I would never ever hold a position overnight. I've learned the hard way that you get burned over and over. I've had a margin call, I've had stocks be cut in half overnight, I've been stuck in a stock or ETF for months at a time, because the value went down substantially, when I could have been making money every single day...day trading.

You are looking for exact entry and exit points. They develope in real-time right in front of you. I lay out my screen with 5 charts. From left to right: USO FAZ FAS QQQQ DIA. That's Crude Oil, 3x Financial Bear, 3x Financial Bull, Nasdaq 100, and the Dow. I will buy FAS when I see that it is rising along with QQQQ, DIA, and most importantly USO. If all 4 charts aren't rising I don't buy. When those 4 charts are falling, I buy FAZ. As soon as you buy, you set up a market order to sell. If it starts going the wrong way you sell instantly, if it's going the right way, you wait and capture a gain. If you paper trade using this simple approach, for several days, you will be shocked at how much money you can make, but you will also develop a hair trigger for minimizing any losses. Paper trading will prove to you what I've just said.

Probably the sweetest thing is using margin when day trading. If you never hold a position overnight you'll never pay a cent in margin interest, you'll never suffer a margin call, and you'll be paid interest 365 days a year. I'm using 75% of my margin capability on every single trade. It's free money! It's more than enough to cover the taxes.


On Jan 09 06:38 PM polishlogician wrote:

> I agree, though you might be better advised to stay in the ETF's
> for about a week or so (just looking at past trends, decide for yourself,
> i.e., don't necessarily day trade at this point, unless you love
> to do that with options) but don't stay in them "too long" as a straight
> buy, as there are many explanations on this site of the 'eroding'
> profits of ETF's that get compounded with NAV's computed daily. Now,
> what's the exact entry and exit points to take advantage of volatile
> market, well if I knew that I'd pry never tell, and if I did tell,
> I wouldn't even believe myself, but overall, I agree with your comments,
> it's a smart play. And I've done very well so far with 3x bear and
> bulls.
>
> On Jan 09 01:00 AM Fitz919 wrote:

Jan 10 01:24 PM