Be Wary of Risk Assets and Citi's 'Profit'

Before we get into the NASDAQ (QQQQ) recent new high and our possible approach to the markets, let's shed some light on Citigroup's earnings. Citigroup posted a $1.6 billion "profit" this morning, after a $2.5 billion "gain" because their bonds are worth less in the open market (you read that right, worth less). Note the use of the word "possibility" in the Bloomberg story:

Citigroup posted a $2.5 billion gain because of an accounting change adopted in 2007. Under the rule, companies are allowed to record any declines in the market value of their own debt as an unrealized gain. The rule reflects the possibility that a company could buy back its own debt at a discount, which under traditional accounting methods would result in a profit.

The bank still faces speculation about its survival prospects, as reflected in the elevated prices for its credit- default swaps, a type of instrument that investors use to insure against a debt default. Citigroup’s credit-default swaps as of yesterday were trading at 557, up from 193 at the end of last year. By comparison, rival New York-based bank JPMorgan Chase & Co.’s swaps are trading at 174. Lehman Brothers Holdings Inc.’s swaps were at 322 a week before the U.S. securities firm filed for bankruptcy last September.

When a credit default swap moves from 193 to 557 (188% gain), it shows the market thinks the chance of Citigroup defaulting has increased quite substantially since January 1, 2009.

Our Approach To Current Bullish Conditions: This detailed article acknowledges the possibility of a bottoming process in some risk assets and stresses the need for patience.

This old Bloomberg article sites research that found "retests of bear market lows occur 86% of the time", which clearly supports remaining patient.

Disclosure: Author and CCM Clients have positions in SH.

Comments

[James Wilson:]

How many banks were at the hearing on mark to market ? And Citi is the only one to beware of ?

What a hoot.

Apr 19 05:46 AM

[notsosmart:]

be wary of anything financial.the scoundrels & crooks havent turned over a new leaf & become honest & ethical. playing with the #s will continue.the ponzi scheme hasnt ended it just morphed into taxpayer money being used directly & the dumb sheeples cant do a thing about it. all the teabags in the world wont stop the fleecing.

Apr 19 09:40 AM

[Ishortyou:]

well now that you took the mark to market accounting to oblivion, they can post their balance sheets at their discretion, so expect at lot of earning reports in the future, you can thank the bolsheivk socialist democrats for that, specially Barney Frank who are thinking ways to look good and stay forever in the government seats with a false sense of economy recovery.

Apr 19 10:06 AM

[drbob66:]

This is one financial stock that I'll just stay away from. Too complicated...

Apr 19 10:53 AM

[RiskReturnO...:]

In reading the detailed analysis, it seems like you believe the current nasdaq market (April 16, 2009) resembles nasdaq in Nov 2002. I'm intrigued by this analysis, and it would be great if indeed it turns out that way. I'm looking for the re-test of March '09 lows, to start building long positions (for the "long term").

However, is it possible that the March 2009 low corresponds to Nasdaq Sept 2001 low, so we may have another round of lower lows next year? I'm not a technician, but just wondering if that is all at possible. If I recall, GDP was positive each quarter in 2002, yet stocks keep going down. Most economists believe GDP will be positive in 2010, but I'm not sure about corporate profits!

Any thoughts?

Apr 19 11:26 AM

[capt Brian:]

Yes, I have thoughts, and they are not pleasant. AT ALL. In fact, I am, again, quite concerned about our (USA's) financial future. The hounds of hades are at the door. Am I nuts or the only one who is saying this? These final days have seen our financial wizards lead us to the slaughter that MUST happen soon, (like beginning by end of May).

By then, you need to have your debt paid down, and go back and read my other posts, [comments], I really am trying to have a good outlook, trying so see the reasons why I am wrong, and the more I read, [like this article], the more I am sure I right. \

Who will be right? I don't know, but, again, if you position yourself for the recovery, or the intensive care facility, then whatever happens you will be okay.

If you want, take a look at my comment stream, no sense in me just going over plowed ground.

Not gonna be a nice summer for those in stocks. I feel the market is dragging you in for another sucker punch, but what do I know.

I am betting that I will have a nice summer, and a nice vacation, and will not see my thinking proven wrong.

Capt Brian

Apr 19 01:06 PM

[basehitz:]

Chris, the analysis from historical context is helpful. dshort.com has posted extensive graphs during last 100 years, which I broke down to look for patterns common to market bottoms. Though all are different, what has happened recently, if it were THE bottom, would be an outlier by that analysis. So I keep studying. If I'm wrong, I'll admit it and buy. But not so far. and your analysis further corroborates that conclusion. Worthwhile read. BTW, oil is my #1 target as well. This week we get a bunch of driller reports. I hope they're dreadful, so I can add. But OIH is a slave to crude, which is a slave to SPX. I'm obviously partial to this outcome.

An added concern that could trump any of this analysis is our collective debt. We've never been in debt this much in our history.

ftalphaville.ft.com/bl.../

And our ability to work our way out of this is weak. Globally, we don't compare well in producing goods and services (besides financial engineering). Either way, I'm not sure US-focused companies will perform well. But oil and international drillers seem an obvious winner.

Apr 19 05:15 PM

[fatcat:]

We are living in a world of lies....take it for what it is...figure out a way to profit from it..

Apr 19 06:01 PM