Citigroup: Levitate Above the Frenzy

Includes: BAC, C, KBE, XLF
by: Jacob Jordan

In the brief (yet worrisome) storm of nationalization fears, trying to locate a market bottom, and waves of uncertain earnings releases, Citigroup (NYSE:C) is still standing. You absolutely cannot surmise the prospects of this stock based on the volatile movement between Lehman Brothers' (OTC:LEHMQ) collapse and the earnings release.

Unfortunately, many longs are subconsciously still judging the stock within the Lehman Brothers context. Citigroup could very well plummet to 2.50 or even 2.00, post-conversion. Vikram Pandit could be replaced (whether that is good or bad is for another post). BofA (NYSE:BAC) or JPM could come out with some horrible news that drives the price of Citi down. Citi may be one of the banks that require more capital infusion.

The point, however, is that it is the fears in the first paragraph that warrant the most concern. Those have subsided. If you are truly long, you will not become upset at a 5% or 10% sell-off (often due to invisible influences or manipulation). You will not engage in the misspelled, ALL-CAPS banter on message boards, where any idiot is willing to toss out random price predictions.

Of course, everyone wants to take profits as soon as they are able with a stock. Nobody likes to sit around and endure uncertainty before realizing gain--not if they don't have to. Now is a time to reevaluate your reasons for getting into Citi.

Personally, I got in because this is has historically been a ten, twenty, or fifty dollar stock. The risk to reward is attractive (if you have your life savings in the stock, you are not taking advantage of that ratio, by the way). Prior to the collapse, I did not have any favor or resentment towards Citigroup. So I am not guilty of falling in love with an investment.

Yet, I do think it is obvious that the company's long-standing government connections, brand-name reputation and global entrenchment justify the U.S. government's unique involvement (which does not signify a fervent desire to nationalize, fear-mongers). The Fed and the Treasury are honed in on Citi like a laser-beam--moreso than the other financial institutions. They did, after all, value Citi's expansive infrastructure enough so as to put their money where their mouth is. If full-blown nationalization were to occur, it would have already happened. The Treasury, Congress, and the Obama Administration could have rammed through a much more draconian program when the uncertainty and emotional shock was much more intense.

Instead, the Treasury/Fed/SEC allowed the CEO to release specific profitability announcements (albeit through "leaks"). Such announcements (e.g. Vikram Pandit's mid-March memo) only serve to lure more investors in. Vikram Pandit is probably not too keen on inciting an SEC investigation into fraudulent pre-earnings announcements.

Yes, there is always the possibility that something unforeseen can happen. An attack rivaling or exceeding the scope of 9/11 could damage the market, and bring the DJIA to 3500. However, I am not basing my general investment decisions upon such fringe occurrences.

Otherwise my portfolio in forty years will consist of a diversified assortment of pinto beans, ammunition, and gold coinage.

Risk is rewarded and punished. The higher the degree one takes on, the higher the gain or the more excruciating the pain. Citigroup managed to beat the earnings estimates amidst a flurry of uncertainty. Although not a good sign in a stable market, Citi is in the process of raising five to six billion in capital by selling off some of its Asian assets. Bank of America was compelled to take on bad assets (Merrill Lynch). The point is, the playing field is level amongst the financials. Generally, all of the financials are resorting to accounting tricks and have historically substandard TCE ratios.

Citigroup still has three months to go until its next earnings release. I am pretty certain it already has an inkling of what it will do with the cash it gets from selling its Asian branch. I am confident the sale is not informed by despair and desperation--it is most likely a component of something much larger in Citigroup's plans to restructure and demonstrate itself as still being viable.

Whenever that is accomplished, the big funds will move back in and drive the price even higher. Then comes the dumb mon... excuse me, the longs who had dollar signs in their eyes yet could not tolerate the stream of posts blaring "LONGS ARE SCREWED ON MONDAY!!!" There was one interesting post that mentioned something about "VIKRAM PANDIT HAS SWINE FLU???". Maybe that's why 22% of Citi shares are currently shorted? Maybe one of the financial anchors have an opinion on that.

The point is, you have heard it said "This is the worst financial crisis since the Great Depression. It is a once-in-a-generation event." I agree—although, I consider at the current market from a glass-is-half-full perspective. It is a once in a generation to buy stocks at ridiculously discounted prices. After the 1929 crash, it was years before the stock market lost its stigma and regained the public's participation. See the forest through the trees and calm yourself down.

Citigroup is definitely a speculative play in the short term--not because of the risk of failure, but the day trading manipulation could sear those who lack the long view. In the long term (at least a year, probably two, impatient ones), Citigroup will still be a household name close to or in the double digits, albeit the company will be much more conservative in its lending practices (along with its competitors).

While you wait, use the time and experience to further your understanding of investment and the mechanics of the stock market. You'll find that you're inoculated against 99.999% of toxic CNBC chatter, trading rumors, and message board posts. Good luck to all.

Disclosure: Author holds a long position in C