Will Citigroup Go to the Teens?

Mark Hines made a great point on the impact of consumer credit delinquency in another article. I can't agree more.

What has happened since last August is very typical in the banking industry, and happens about every 5 years on average. Each time the headline is totally different. In 1987, it was the program trading. In 1991 it was S&L, 1998 belonged to LTCM and Asian crisis, and 2001 was the burst of internet bubble. This crisis revolves around the word "credit" which is the lifeblood of all financial markets and involves all parties and products.

Once credit goes bad, everything goes bad. When blood stops, everything dies. Without it, counterparty risk goes to infinity. Without it, there is no liquidity, no market, no pricing, and value of financial products goes to zero. This is why I agree with George Soros' statement and assessment that this is the worst financial crisis in 60 years.

It is not like the crises in 1987, 1991 etc. when we heard one shoe dropping and had to wait forever for the other one to drop. Those were more unique, isolated cases, regions and sectors. These days, we are hearing shoes dropping left and right across the board and globally. When it rains, it pours. A month ago, when everyone thought Lehman had dodged the bullet on subprime, who would have heard ARS (auction rate securities)? Then concerning Goldman, which had a nice profit last quarter, and was the infallible king of all kings, we are now hearing about VIE (variable interest entities) trouble, with possibly $11B writedowns for Goldman.

Who knows how many more skeletons are in the closet? What will be the next shoe to drop? By the time we finish this in a few years, it will probably rotate through and cover the whole spectrum of all financial products. Of all products, I still maintain CDS (credit default swap) is the most abusive one, and much bigger trouble is to come, due to layers of layers of unknown counterparty risk, impossible to unwind. As Warren buffet said "large amounts of risk, particularly credit risk, have been concentrated in the hands of relatively few derivatives dealers, who in addition trade extensively with one another. The trouble of one could quickly infect the others".

It is a slow-moving train wreck. There is no way Citi will make $2.91 this year. Actually, the latest 2008 earnings estimate from Meredith Whitney of Oppenheimer is $0.75, concerning which she even feels "optimistic". Who knows next year? Maybe still $3.66, but with a negative sign in front of it. By the way, Whitney's target for Citi now is below $16. A few months ago, I heard a few traders betting Citi will eventually go to single digit. That could be stretching it, but I still feel two of My "Ten Predictions for 2008" stand a good chance of coming true this year: a credit card delinquency crisis for banks and Citi going to the teens.

Disclosure: No Positions

Comments

[User 129002]

It would be nice to know what the authors equity position in C is. Disclosure in ones holdings would bring more credibility to this story.

[thomast2]

No position in C now. No long, no short, no option. If you want to see my portfolio holdings, you can go directly to vestopia.com/thomast All my trades and holdings are transparent.

[User 155391]

These dire predictions assume that the feds will sit back and let the banks and their millions of customers crater over the next year. It's already clear that there will be bailouts.

The only real cure will be a restoral of confidence in the markets. That will take time. The question to what degree government action can accelerate this process.

[Fat Arby]

You can't just simply guess what might happen to Citi based on the numbers. I remember when it merged with The Travelers; I was in stocks then and made a walloping amount in a day or two.

There's people who predicted the mortgage lenders downturn; there's folks who knew about AMBAC/MBIA . There's experts that will give you their advisories, albeit at a ridiculous price sometimes.

Sure, if you want to profit from this stuff, you really have to know what you're doing. Else, be well capitalized when your options turn to mush. ON the flip side, Citi IS a global company and they DO have a lot of funds interested in this stuff. It would be key to do the numbers, such as shares outstanding, market cap, preferred stock, and new issues coming out.
So, again, I wouldn't give a rat's a** if this co did go down the tubes. They once had the best customer service but at some point they treated me like I was a walking sack of so I want nothing to do with 'em.
But you all should keep in mind that they have a very diversified portfolio. However, if the economies in Asia do start to implode and writeoffs begin in HK and Shanghai too then perhaps they could start to lose market share. At this point with most Asian economies strong, I can't see them dipping below 20.
But , who knows...let's see, you could establish a vertical straddle strategy for $45 22.5/20 vertical put and $102.00 25/27.50 vertical call per contract, or 100 shares leveraged.
Go for it, but keep in mind that options lose value as time passes so if the stock goes sideways for a month you might lose at least 50% of the value if not more. In fact, a vertical is really time sensitive, so for a little extra you could go long.
best

[Fat Arby]

I meant, 'naked'.

[Newbee]

I think even if the FED comes in to help the banks, Citi and the other will not be just dancing off into the sunset. Like it's over anytime soon.
I believe there's more pain to come. Earnings?? with the losses and write downs they have had will have to be poor.
I liked the article Thanks

[jjason]

Thomas, Thanks for the article. I enjoy reading your posts because you are an informative writer. I forsee the same problems as in the real estate / S&L crisis that started around 1990. I had a home in Ct. at the time and watched it lose value. One of my friends told me it would take 10 years to recover its former value. It recovered in about 8 years. Fortunately for me, I was not over leveraged and did not have to sell my house. I think the housing crisis we are in could last just as long.