Why I'm Buying Citigroup Stock 32 comments
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Citigroup (C) bottomed when the broad market made its lows in early March. On March 9, Citi traded under $1. Less than two weeks later it was $3.80. Yesterday Citi closed at $2.69.
After the initial run, Citi has been held in a check by the arbitrage that accompanied the huge exchange offer with the holders of preferred stock. That exchange is now complete and this is what I have been waiting for to buy Citi.
The spread between the new Citi shares being issued (symbol C.wd) and the regular Citi shares has dropped to a range of 4-5 cents. Likewise, the synthetic Citi that could be created by shorting puts and buying calls is a similar 4-5 cents cheaper than regular Citi. The arbitrage should no longer put much downward pressure on Citi common.
I am aware of all the issues. The number or shares outstanding has mushroomed from under 6 billion to over 20 billion shares. Citi may still lose money this year and a profit next year is far from certain. There are articles about an energy trader who is apparently entitled to a $100 million bonus.
Make no mistake, this is a valuable franchise. Citi will readjust to its new reality, and you can make money buying the stock. Citi trades below tangible book value and a lot of the assets on the books may be worth more. The Smith Barney sale to Morgan Stanley looks good and Citi should receive additional payments.
Last fall I was in Russia and I had a Citi debit card. I saw a Citibank branch, went in with my debit card and got 5000 rubles in cash (about $175). I did not see any other branches of US banks. Just anecdotal evidence, but an indicator of the value in the Citi franchise.
I was waiting for the arb pressure to abate, and I think it has. I plan to buy Citi.
Disclosure: no position in C at this time.
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This article has 32 comments:
The objective data is the completion of the exchange offer which reduces arbitrage selling pressure. On July 15 the published short position in Citi was over 1.2 billion shares, an all time record for any stock. Much, but not all of that will be covered when the
C.wd becomes C. Some of the rest will be covered by buying.
Citibank does have the largest overseas operations, by far, of all U.S. banks. As the economies of the world recover, and commercial banking catches up with underwriting and trading, this should be very beneficial. Also, it's likely that the dollar will continue to depreciate, given all the printing and borrowing, so having a large volume of offshore business should translate into very favorable exchange rates.
From a Middle aged bright woman in California.
Welcome to America.
On Jul 28 04:57 PM whisperonthewind wrote:
> After having my investments decrease by 50%, I gradually started
> putting my money back into some of the worst offenders. Citi was
> one of those, just after it passed $1, and I've more than doubled
> my investment. I'll hold on, since I don't need that money right
> now, and fully expect to have it double (or more) again. Sure, it
> takes its dips now and then but I'm still more than double and that's
> a good thing.
On Jul 28 09:52 AM CDooge wrote:
> Hey, with keen analytical reasoning like this, let's bet the farm.
> After all, he was in Russia and actually SAW a Citibank machine and
> got totally foreign currency. OMG. And he is able to summarize a
> Newsweek article. He is also "aware of all the issues," so go for
> it America!
Worse case scenario, they issue more equity and or debt to recapitalize further. I'm not saying that you cant make money, only that strictly speaking their is no way to calculate the value of the franchise, whether it be negative or positive value.
Hey AIG had a great franchise too, and so did Lehman. If you asked a 100 people--Bankers and Pros--on Wall Stree in 2007, what were the chances of AIG or Lehman going down the drain this decade--you might have had one person say "maybe". The rest of the investment community would say--no way.
So beware the bulletproof and valuable "franchise" in the age of deleveraging.
I'm not talking about this specific post, but I always here people talk about Citi yet they have no idea how fractional reserve banking works. I turn on CNBC once in a while for laughs, and have never heard that term even SAID by anyone!
But hey, if you can understand all the items on their balance sheet as well as the terms of all the contracts they hold, and can cash flow Citi's Intrinsic Value far above the current market price - then cheer's to you for doing the hours upon hours of due diligence
JPM's derivitive position is more than 600 times its equity.
The government has made the decision that these banks are not going to fail. They will be nursed back to health. Getting C, BAC, and others healthy has created a situation where GS can make enormous profits.
We have seen this before, most recently in 1990. Many large banks were technically insovent but they returned to health. The stocks were great investments.
C is up 15% since my recommendation. If it is overpriced you can short it and profit.
I notice that even with the market down today the lower quality banks are rising: C, BAC, MI, FITB, etc.
BTW, I was in Russia too and they did not honored my CITI card, how did you manage it? And their exchange rates in Europe are pretty high.
We're not Citi bashers, per se. We're just a tad bit concerned at the fact that Citi's derivative exposure as a % of risk-adjusted assets exceeds 200% in an environment where the IMF predicts another 4.1 trillion in balance sheet writedowns before 2010.
There's also the issue of OptionARm resets coming due in 2010-2010 while the CRE market begins to retrace the early declines of the subprime mortgage debacle. If Citi's equity and bond underwriting fees were robust enough to feasibly mitigate the aforementioned factors, (like GS or JPM) then fine. Otherwise, Citi still faces substantial headwinds. Their global network, which is one of their biggest assets, can also be a liability as a result of exposure to Eastern Europe (Latvian currency peg devaluation). Balance sheet items are skewed by Federal Accounting Standards Board allowances allowing them excessive leeway in asset/liability pricing, which skews both asset prices and cash flow projections. There's also mounting credit card default rates to consider.
I think these concerns are quite reasonable.
On Jul 28 07:35 AM Angry Banker wrote:
> An appropriate article for a site which is supposed to be about investing.
> But be prepared for the Citi bashers to start attacking you soon.
Citi now has about 22 billion common shareholders, 34% of them the US Government. Citi just so happens to have separated itself into 1) a profitable enterprise comprised of its most solid and conservative operations, and 2) an RTC-style toxic fund. I specifically mention RTC because the government was involved in that one as well, in rather similar circumstances, and that fund was unwound profitably for the government.
Say, Citi spins off Citi Holdings to the government and retires 34% of outstanding shares. What kind of message would that send to the public? Would there be a stampede of short-covering? Given that this domino is all but set to fall, is it that hard to imagine this coming to pass?
I have LEAPs @ 5 for C. This trade will become VERY profitable if the above is even whispered, and C is valued like a conservative bank again.
On Jul 29 05:42 AM WorkerOnWallStreet wrote:
> Well said. The "experts" and "gurus" and "wizards" and "financial
> planners" and "brokers" and "managers" didn't recommend Citigroup
> when it was under $1. They won't recommend it today. They will wait
> till it gets to $10 (or maybe $20) and then put a "Strong Buy" label
> on it for the masses.
> Welcome to America.
>
> On Jul 28 04:57 PM whisperonthewind wrote:
That is exactly my point. I don't know about you but I like to invest in industries that I can understand. I like companies that can and will generate huge cash flows and or dividends. I agree with you that people will start pumping it should it go up 5 or 10x the current price. I prefer international equities - but that's just me.
BTW, it may indeed be the case that they are too big to fail, and that they have the implicit (or explicit) backing of the government.
But its non sequiter to suggest that because they have US backing, therefore its a good investment. That doesn't follow.
Remember Fannie Mae and Freddie Mac? They didn't "fail", but I wouldn't invest in them. A surviving company, particular a government backed bank while not technically "failing" can be dead money for decades. Japanese Banks are still recovering from their real estate deleveraging from 1989. Some of them are down 90%, yet they haven't "failed" because the governments backstopping them.
Worse case, Citi could be dead money for a decade or more. The point is, no one knows.
I observed on Monday that the spread between the C.wd and C had closed to around 4 cents. Likewise, the spread between C and synthetic C (short Aug 3 Put, long Aug 3 Call) had also declined to the same 4 cents.
At its peak, the synthetic long C could be created at a 40 cent discount to C. That was because the stock was not available to sell short or the borrow was very expensive. Arbs who were long the preferreds (at a large discount to the exchange value) were buying puts and selling calls to hedge. That pressure enabled the opportunity to buy discounted synthetic C.
The whole point is that when the C.wd started trading it took the pressure off the puts and calls because the arbs no longer needed the options to get short. When the hedge funds and others who had tendered the preferreds found out on Saturday that they had 100% of the tendered preferred accepted in exchange for C.wd, they were good to sell on Monday. The selling on Monday pushed the C.wd down and the C declined also, but the spread closed.
The bid to bid or offer to offer between the C.wd and C in the aftermarket session on Monday was 4-5 cents.
The closing of the spread told me that the selling pressure was off and that C was quite likely to rise. If this information was in Newsweek, I missed it.
you are a correct,,show me the money! there is no money in citi.
On Jul 29 08:26 AM Hyperinflation wrote:
> You don't have to be a Citi Basher to laugh at this article. How
> many here can understand Citi's balance sheet items as well as those
> off balance sheet? Can you cash flow it positive? This is speculation
> - wait till ARMS on residential loans reset, not to mention the very
> real possibility of substantial loan losses that will have to be
> taken on commercial real estate loans. It's funny to say they have
> a great franchise because you don't know what they have!
>
> I'm not talking about this specific post, but I always here people
> talk about Citi yet they have no idea how fractional reserve banking
> works. I turn on CNBC once in a while for laughs, and have never
> heard that term even SAID by anyone!
>
> But hey, if you can understand all the items on their balance sheet
> as well as the terms of all the contracts they hold, and can cash
> flow Citi's Intrinsic Value far above the current market price -
> then cheer's to you for doing the hours upon hours of due diligence
As a buy-and-hold strategy, however, you're buying Schrodinger's cat in a closed box. You don't really know what's in there- could be alive, dead, or some mind-boggling combination of both. The closest thing I've seen to fundamental analysis in any of these articles pushing Citi is 'oh its trading below book value'.
Maybe some of you guys will make a fortune off of Citi. After all, I've always kicked myself for not scooping up GS when they plunged below the IPO price, and I have buddies who went in on Bear Stearns Cos. at $2 and sold out at $10. However, I have radically different criteria for trading as opposed to buy and hold positions, and I wouldn't touch Citi other than on an intra-day basis.
If you want to call Citi a good long term buy, then show me the model.
My position is purely speculative, and is based on criteria that may or may not pass. I think if Citi Holdings is spun off in an orderly manner, the value will become apparent, IMHO. If not, I lose a small position. My hope is that the box is not opened by C, but by the government using their minority stake.
Good luck on your investments.
On Jul 30 08:48 AM Marli wrote:
> ...The first rule of investing is don't invest in what you do not
> understand. Citi's balance sheet is about as comprehensible as the
> Trading Citi based on technicals or black-box algorithms for short
> term profit is perfectly fine if you are a market-neutral quant and
> you intend to reap gains from volatility as opposed to specific market
> direction.
>
> As a buy-and-hold strategy, however, you're buying Schrodinger's
> cat in a closed box. You don't really know what's in there- could
> be alive, dead, or some mind-boggling combination of both. The closest
> thing I've seen to fundamental analysis in any of these articles
> pushing Citi is 'oh its trading below book value'.
>
> Maybe some of you guys will make a fortune off of Citi. After all,
> I've always kicked myself for not scooping up GS when they plunged
> below the IPO price, and I have buddies who went in on Bear Stearns
> Cos. at $2 and sold out at $10. However, I have radically different
> criteria for trading as opposed to buy and hold positions, and I
> wouldn't touch Citi other than on an intra-day basis.
>
> If you want to call Citi a good long term buy, then show me the model.
On Jul 28 04:20 PM Oakland native wrote:
> I'll pipe in. I bought a few months back, when the stock was $1.43.
> The day before, it was just under $1.00. I figured, what the heck,
> all of my money had tanked by about half, so why not gamble on Citigroup.
> I'm going to hold. I do have a stop loss order to sell at $2.00,
> just so I don't lose my money, but I can see this stock at $6.00
> within a year. Based on what? Hell, I don't know, but neither do
> the "experts." We'll all just have to see. By the way, my "gut" has
> gotten me great returns on many investments over the years. The reason
> I bought Citi was because earlier this year, Obama went on the radio,
> and said that there were bargains out there in the stock market,
> and to look at them. He mentioned Citi specifically because it was
> under $1.00. I thought it was worth the risk, but I do look at my
> investments as gambling at a certain level.
> From a Middle aged bright woman in California.
In a subsequent general market article I turned bearish and that call now appears premature.
Citicorp will then look rather strong, with fewer preferred to pay dividends on, and a healthy business model from which to profit. It would be as if it reorganized under bankruptcy protection, with none of the stakeholders getting wiped out.
On Aug 07 12:06 PM Gerry Sullivan wrote:
> Sold the Citigroup at noon. I will be watching it and would buy
> it back on a pullback. There is a possible reverse split and I would
> take advantage of any weakness to buy the Citi after that.
Very accurate predictions, better than the gurus, professional brokers and others mentioned above. Now, even Cramer, 2 nights ago recommended to purchase C. I already had it on my portfolio and I have many. Do you think it will reach the $12.00?.
Another question is, what do you think is the worst case scenario that could happen to a C stock holder like me?
Thanks!!!