Avoiding Death, Citigroup and Taxes

Well, two out of three, isn't bad, right? On Friday, December 14, I made a very painful decision to sell Citigroup Inc. (C) at a loss of 35.5% (accounting for dividends). Certainly at this price level Citigroup looks like a bargain basement, high dividend paying value stock that I should be buying. However, as the year end approaches, a door is closing on the opportunity to offset some of the capital gains I have generated this year.

Yes, I am an ardent believer in maximizing income by minimizing taxes, but why am I selling C specifically and not some of my other holdings that are currently in the red? Well, the answer is rather simple; however it involves a combination of factors:

1. Information that came out over the past several months exposes weaknesses in Citigroup's corporate, risk and financial controls and materially affects my fundamental view of the company. My analysis of C in July assumed a worst case maximum 6% exposure of Citigroup to consumer mortgages and I discounted this revenue stream entirely when valuing the company. What I, like all the others, missed at the time, is that Citigroup had much more exposure to these mortgages through SIVs. No digging through the financial statements could have possibly revealed this – they were all of balance sheet. How could have the higher echelons within Citigroup allowed for such vulnerability and risk taking? If a man on the street (yours truly) has for years recognized risks associated with real estate market declines coupled with a surge in popularity of newfangled mortgages, surely so did the professional risk managers at Citigroup! Which points to an obvious and quite troublesome conclusion that C has bigger corporate problems with internal communication and controls.

2. Many other financial stocks have lost just as much of their value since the summer and Citigroup can be easily traded in for one of the other down beaten financials to preserve my portfolio’s industry balance. One idea that came from Vitaliy Katsenelson, a Certified Financial Analyst whom I interview for the upcoming January issue of Odesskiy Listok, is to buy stock in a regional bank, instead. One of the ones I looked at, Keycorp (KEY) pays a rich dividend, trades at a very low valuation and holds very little consumer debt. In the current market environment, I judge that to mean less downside risk and quicker price recovery.

3. A catalyst for a significant rise in Citigroup’s stock price is unlikely to appear within a month, so I should be able to take a tax loss now and buy back C at the same depressed price level next year. C is a very large US corporation and it is highly unlikely to go out of business, even if it takes more direct help from US government to keep it alive. However, because C is so large, it will take time to determine what is broken and how to fix all the problems. For this reason, it is likely to follow and not lead other financials in stock price recovery action.

4. I can get a much larger tax reduction this year by selling Citigroup than other stock in my portfolio. My losses on C are greater, so by selling this single position I can get a greater tax reduction than by selling 4 other short term losing positions. Thus, this strategy is at least more efficient.

What are some other “F” stocks in my portfolio waiting to be sold before the year end? Deceivingly (and funny enough), they too begin with a “C” and soon enough you will find out why I plan to liquidate Chromcraft Revington (CRC) and Cirrus Logic (CRUS) at such ridiculously low clearance prices!

Disclosure: none