I am recommending you buy Citigroup (NYSE:C) which is significantly undervalued with great prospects for the future and sell or significantly reduce your exposure to gold ETFs, specifically the SPDR Gold Trust (NYSEARCA:GLD), Market Vectors Gold Miners fund (NYSEARCA:GDX) and the ProShares Ultra Gold (NYSEARCA:UGL).
Why Buy Citigroup?
Citigroup offers a traditional contrarian buying opportunity. There has been a defensive rotation away from bank stocks in reaction to a lot of uncertainty regarding the implementation of Dodd Frank Regulations and some substandard economic news. Jamie Dimon of JP Morgan Chase (NYSE:JPM) challenged Bernanke after his recent speech stating, "Has anyone bothered to study the cumulative effect of all these (regulations)" - that it could be the reason it's taking so long for credit and jobs to come back? Bernanke essentially says no: "It's just too complicated. We don't have quantitative tools to do that ... There is going to be some trade-off here." Dimon went on to say that “on top of all this the banks are about to be hit with higher capital requirements and approximately 300 new rules.” Dimon seemed frustrated. This was the first time a major player in the banking sector put such a question to the Fed in public. This could mark a turning point for the future prospects of bank stocks.
Moreover, Citi recently performed a 1 for 10 reverse stock split which was an outstanding event for the stock. The move simultaneously shook out weak hands in the stock due to the low share price and trading volatility, hence the 20% drop in the stock share price from $50 to $37. Furthermore, this made the stock available to mutual funds and institutional investors who frown upon buying stocks trading under five dollars, hence the recent bottoming signals and upward movement in the stock.
Jeff Harte, an analyst with Sandler O'Neill, said on CNBC’s Fast Money Halftime Report he thinks looking out beyond summer we’ll have clarity on a lot of the things people are uncertain about. We'll also find that much of the economic slowdown we're currently seeing is due to Japan being offline, he said. After all, Japan is a major manufacturing center. So overall, the trends should improve in another four months or so. So long as you can suffer the near-term pain, Harte said investors should consider buying the banks now. Harte likes Citigroup because it's least exposed to the struggling U.S. consumer, where a lot of the financial regulation will soon kick in. It's also most exposed to the fast-growing emerging markets. Please review the below chart of Citigroup provided by CNBC.
Why Sell Gold?
Gold has been on a tear over the last year. I believe this is a crowded overbought trade. Furthermore, I believe the Fed has inflation risk in hand and is preparing to end the QE2 program. This will strengthen the dollar and subsequently reduce the value of gold. It is only a matter of time before the big run up in gold craters much as it did in the early 1980s. If you would have told a group of gold bugs in 1980 when gold experienced a very similar parabolic spike to nearly $1,000 that 12 years later in 1992 gold would be trading at approximately $250 per ounce (only one-fourth of the value), you would have been laughed out of the room. Nonetheless, these are the indisputable facts. It seems the Silver ETF (NYSEARCA:SLV) has already begun to unwind. The SLV has had a torrential drop from a high of nearly 50 to the low 30s in a matter of days. The current move in gold and the way people are acting regarding gold brings back memories of the 1980 move to me. I surmise many people trading in gold today may only have read about what it was like. Fortunately (or maybe unfortunately) I was trading during the euphoric run up in gold. I say unfortunately because I’m dating myself, but I did not join the gold bug party then either. Furthermore, I can say for the better part of the last three decades I’ve felt pretty good about that decision. Please review the chart below and note the similar parabolic move upwards in gold now and in 1980. Parabolic moves are inevitably unsustainable. Please review the historical chart of gold below.
As one of my idols, investing guru extraordinaire Warren Buffett famously said:
"Look," he said, with his usual confident laugh. "You could take all the gold that's ever been mined, and it would fill a cube 67 feet in each direction. For what that's worth at current gold prices, you could buy all - not some - all of the farmland in the United States. Plus, you could buy 10 Exxon Mobils, plus have $1 trillion of walking-around money. Or you could have a big cube of metal. Which would you take? Which is going to produce more value?"
I’m siding with Buffett, where do you stand?
Information was gathered from CNBC, Yahoo Finance and respective company websites. Based on the current market conditions I would suggest scaling in to any position to reduce risk. I believe Citigroup is currently undervalued and provides a significant opportunity for long term investors.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in C over the next 72 hours.