Greenspeak: Our Weekly Strategy and Commentary Update
We wrote a piece early this week regarding Citigroup and the franchise value. There is clearly a disconnect between Citigroup and its most critical regulator. The fact that a bank after three years generating positive financial results doesn't have the Feds confidence is concerning. I suspect this comes down to what Citigroup is as an institution is. To be Citigroup you have to be big - that is there value proposition - making the globe small for institutions seeking to business in multiple regions and countries. There is just no other way. Citi has done there best to do everything else. Domestic retail - outside of NYC is a failure. Investment Banking - Can you spell CDOs - major fail. Asset Management - How much did they pay for Old Lane? Fail.
This puts Citigroup on a collision course with regulators determined to get away from TBTF. The other banks who rely on retail branches, investment banking, and traditional commercial banking we see the business model succeeding whether TBTF or not and can be easily salvaged in pieces.
While it may be painful for Citi shareholders foregoing dividends and share buybacks until 2015, if they do execute and pocket another $5Billion+ in earnings, the Fed will be under intense pressure to approve a plan next year, otherwise risk losing credibility.
The NASDAQ steep decline this week reminds us that there is Beta. The market valuations may have gotten away from us in the higher risk market sectors. The NASDAQ, Biotech, and Russell 2000 all underperformed. The money seems to have found a home in large cap names with the DJIA modestly positive. (NYSEARCA:DIA) Don't look now but some of the beaten down telecom's like AT&T (NYSE:T) and Century Link (NYSE:CTL) are on the rise. We expect this trend to continue as the Fed and rates will remain at the forefront of investor's concerns - the safe established names are the place to be.
Ten Things We think we think
1. Darden's (NYSE:DRI) management is in real trouble. Most investors give management the benefit of the doubt as activist's show up looking to make a quick buck and move on. Darden could not have handled this situation worse canceling analyst meetings and refusing shareholder votes.
2. Citigroup is like the Buffalo Bills of the 1990s (We wish Jim Kelly the best) consistently a great franchise but just cannot some to get there. Its obvious the Fed just doesn't like their global super bank model. Time to hunker down and get the risk management infrastructure in place. If they fail again after pulling in $5 billion in profits the Fed's test won't have credibility.
3. Elon Musk is walking a fine line in the political arena in the dealer model debate. Tesla (NASDAQ:TSLA) generates a substantial amount of revenue, about 10%, from environmental credits sold to other manufactures. A public battle with statehouse politicians and those things can suddenly be altered or go away. It's interesting this debate pits the environmentalists alongside free marketers.
4. The Ukraine situation continues to make headlines. Odds are a resolution is near and will cause little disruption in the short-term. Long run Europe, therefore global markets, has an issue with Russia and its likely this isn't the last time they will flex their muscle. Europe needs to take steps to reduce their economic dependency on Russia, especially energy.
5. Facebook's (NASDAQ:FB) acquisition strategy is starting to resemble my kids in an electronics store. I hope I'm wrong but they may buying what's "cool" rather than what's commercial.
6. Blackberry. When you say this word in year people will assume you mean the fruit. This company and brand is dead.
7. Herbalife. At this point we have two media hungry activists engaged in an all out battle. Is it really about the value of the company anymore?
8. Michael Lewis's book on flash trading is sure to be a great read.
9. Biotech was pummeled this week. Expect a few large pharmaceuticals without drug pipelines to start sniffing around.
10. The pace of housing starts amazes me. Eventually population growth has to catch-up with the low housing production but the question is when and maybe as importantly has housing changed away from the McMansion to urban living, if so which builders win?
Enjoy the week and stay rational and exuberant.
Disclosure: I am long C, DRI, T, CTL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.