Since the market bottom of March 2009, the S&P 500 index has risen about 140%. Over the past year, we've seen gains of about 26%. It's been an extraordinary four-year run; one of the best in US history, and the past year has been particularly hot. Unfortunately, there are many problems lurking beneath the surface. Given the risks and current valuations, I view the market as being a bit "overheated" right now.

On the macro front, we seem to be entering a brave new world. The US Federal government is addicted to fiscal stimulus, and we haven't had a balanced budget since 2000. What's more frightening to me is that the broader economic profession has re-classified these huge budget deficits as 'not a stimulus' because we're not increasing the rate of spending growth fast enough.

Likewise, I'm becoming increasingly concerned that the Fed doesn't understand when it's time to apply

Citigroup (C) is in the Danger Zone this week and earns my Dangerous rating. Citigroup's stock has posted an impressive 20% rise thus far in 2013, but the stock's current price is simply out of touch with reality. As the market bulls continue to look to rising interest rates as a sign of future strength for Citi, they ignore the fundamentals of the market and of Citi's weak profit history.

Dangerous Fundamentals

Even before the financial crisis, Citi struggled to create value for investors. Figure 1 shows that Citi's return on invested capital (ROIC) has been below its weighted average cost of capital (WACC) in every year since 2000, which means Citi has not had positive economic earnings any year in this century. Citi is the only one of the Big Four financial institutions with this ignominious distinction.

Since 2000, Citi's after-tax profits (NOPAT

This report is one of a series on the adjustments we make to convert GAAP data to economic earnings.

Reported earnings don't tell the whole story of a company's profits. They are based on accounting rules designed for debt investors, not equity investors, and are manipulated by companies to manage earnings. Only economic earnings provide a complete and unadulterated measure of profitability.

Converting GAAP data into economic earnings should be part of every investor's diligence process. Performing detailed analysis of footnotes and the MD&A is part of fulfilling fiduciary responsibilities.

We've performed unrivalled due diligence on 5,500 10-Ks every year for the past decade.

Non-operating items in operating income are unusual gains that don't appear on the income statement because they are bundled in other line items. Without careful footnotes research, investors would never know that these non-recurring income items distort GAAP numbers by artificially raising operating

Top Stories
Markets nervously await the FOMC. U.S. stock futures were higher and European shares mixed at the time of writing as investors awaited the outcome of the FOMC's two day policy meeting, which is due to start today. All the focus is on whether the Fed will announce the winding down of its bond-buying program. Yesterday, U.S. shares fell on FT speculation that the taper was drawing near, only for them to recover after reporter Robin Harding cast doubt on his own predictions.

U.K.: G8 makes progress on tax reform. British Prime Minister David Cameron will lead talks on the exceptionally thorny topic of international tax reform at the G8 summit in Northern Ireland today. The discussion will focus on the key areas of transparency, tax havens and multinational tax avoidance. "We have made more progress in the last 24 hours than people have had

Shares of Citigroup (C) were down almost 4% last Tuesday as an analyst by the name of Charles Peabody argued Citi could fall by as much as 50%.

The catalysts for this decline, he stated, are the relentless strengthening of the dollar relative to foreign currencies with particular regard to the yen and euro, and a looming recession.

With the shares down $1.98 on Tuesday and 3.04 billion shares outstanding (shares have since dropped modestly further), Citigroup is apparently worth about $6 billion less as a result of this "new" information.

Citi does about half of its business in foreign countries, so with the dollar making unusually big moves against the yen and emerging market currencies like the Turkish lira, Indian rupee, and Mexican peso, the worry is of course that when the revenues are translated back into dollars, they'll come in weak. Fair enough, but more than

Top Stories
Detroit restructuring plan set to be unveiled. Detroit emergency manager Kevyn Orr is due to unveil his restructuring plan for the debt-laden city today to unions, bondholders and bond insurers, including MBIA (MBI) and Assured Guaranty (AGO). Orr will reportedly try to persuade creditors to accept as little as 10 cents on the dollar for the city's debt. He has indicated that creditors would be far better off compromising now than taking their chances with a bankruptcy filing.

Hilsenrath: Tapering doesn't mean end of QE. The WSJ's Jon Hilsenrath, who seems to have the inside track at the Fed, yesterday quoted officials as saying that a tapering of asset purchases doesn't mean an end to asset purchases, and a hike in short-term interest rates isn't anywhere close to being on the radar at this point. The report helped Wall Street to close higher, although stock

Stocks discussed on the Lightning Round segment of Jim Cramer's Mad Money Program, Thursday June 13.

Bullish Calls:

Gigamon (GIMO): "That is your opportunity (that the stock is down). This is a very stellar company that has accelerated revenue growth. I think it is going to be one of the best IPOs for 2013."

Barnes & Noble (BKS): "They are the only game in town. I think they are okay."

Citigroup (C): "I want to buy Citi. I think the situation is good. I think it is very undervalued. I want to own the stock."

Duke Energy (DUK): "I like Duke Energy very much. If it just gave you a little bit more

By Jeff Bailey

The diverse and dynamic financial sector in the U.S. is one of the crucial factors behind our entrepreneurial economy, and without it, we'd be a slower-growth and less-exciting economy.

Like much of Europe is currently.

Stephen Fidler's smart article in The Wall Street Journal over the weekend pointed out that banks dominate the financial landscape in Europe, holding three quarters or more of total financial-sector assets in France (75%), Germany (78%), Italy (85%), Portugal (86%), Spain (87%) and Greece (96%). European banks are in bad shape, of course, weighed down by debt from European countries, and that's sapped their ability to lend. And that, in turn, is sapping growth in Europe, as there isn't a big non-bank financial sector to pick up the slack.

U.S. banks make up just 28% of the assets of the financial sector, by comparison, with investment funds, insurance companies and pension

By Kurt Schacht, JD, CFA

Could this really be “The End” of this saga? Not just to rotten movie sequels but to sequentially rotten treatment of investors. The ever-growing avalanche of news stories reporting mega-billion-dollar client withdrawals from Steven A. Cohen’s once proud $15 billion SAC Capital have reduced it to a mere shadow. To hear tell, nearly all outside client money is being pulled, reducing the once-stellar hedge fund to essentially the Cohen family office. Does this offer the tantalizing prospect that the times may be finally, and perhaps significantly, changing?

From mighty Blackstone (BX) and its handling of $40 billion in pension funds to Magnitude Capital and the $3 billion in hedge funds it manages, several major investors have notified SAC of redemptions and withdrawals, as SAC navigates the treacherous shoals of federal prosecutions for alleged insider trading, news reports indicate. Prosecutions focus on insider information

There comes a time in every investment cycle that one has to make a decision to sell or not. This is not an easy decision, because most of the time it's not easy to see clearly ahead. And as Alan Greenspan has said, when you're in a bubble, you don't really know it.

While I have called for many months now that the market will continue north, even in the face of a fiscal cliff trigger, nevertheless when the situation calls for staying on the sidelines, on the sideline investors should stay.

The question is, why should we stay on the sidelines?

For one thing, the VIX index is increasing. See, volatility has been very low for a long time now. But you never know when that will change and when the VIX index will creep up and make a mess of things. The index is still quite low, however

This report is one of a series on the adjustments we make to convert GAAP data to economic earnings.

Reported earnings don't tell the whole story of a company's profits. They are based on accounting rules designed for debt investors, not equity investors, and are manipulated by companies to manage earnings. Only economic earnings provide a complete and unadulterated measure of profitability.

Converting GAAP data into economic earnings should be part of every investor's diligence process. Meeting the challenge of performing detailed analysis of footnotes and the MD&A is a fiduciary responsibility. We've performed unrivaled due diligence on 5,500 10-Ks every year for the past decade.

Asset write-downs are unusual charges that don't appear on the income statement because they are bundled in other line items. Without careful footnotes research, investors would never know that these non-recurring items distort operating earnings by overstating core-operating costs. Our models

More than four years since we saw name-brand financial institutions blowing up and taking the global economy down with them, the public still has a major distrust of the big banks. The sector as a whole (XLF) trades at 13.5 of 2013 estimated earnings. This is a 10% discount to the broader S&P's (SPY) 2013E earnings, and is the second most cheaply valued sector next to energy. Individually, names like Citigroup (C), Wells Fargo (WFC), and JPMorgan (JPM) trade at even deeper discounts to the forward multiple of 15 on the broader market with P/Es in the range of 9 to 11.

Some of this is indeed justified. I've discussed the factors that will make banking somewhat less lucrative going forward compared to five or six years ago. These headwinds are well-documented, and with valuations so low on a relative basis, they also seem to be well-priced.

Income generation

Things have settled down over the last few trading days, but the markets have been a little shaky since the end of May. Below we take a look at how default risk has been impacted recently for the six largest U.S. banks and brokers. In the charts below, we highlight the prices of five-year credit default swaps since the start of 2011. The price for each firm is in basis points, but basically the number shown is the price per year in dollars that it costs to insure $10,000 of the

"Everything gets destroyed a hundred times faster than it is built up. It takes one day to tear down something that might have taken 10 years to build. If the economy starts to go with the kind of leverage that is in it, it will deteriorate so fast that people's heads will spin.

I know from studying history that credit eventually kills all great societies. We have essentially taken out our American Express card and said we are going to have a great time. We borrowed against the future, and soon we will have to pay."

That quote could very well have been from today, but it wasn't. It was actually from the 1987 copy of Market Wizards, straight out of the wise mouth of Paul Tudor Jones. I love quoting Jones - he's arguably one of the best macro traders of all time and despite the recent

This article was originally published on June 7

I’m at a conference on the underbanked this week, where it’s basically impossible to swing a cat without running into someone talking about mRDC, which stands for mobile remote deposit capture. Or, in English, the ability to cash a check using your smartphone.

A lot of bigger banks have had this ability for a while now: take a photo of a check using your phone, and you don’t need to bring it into a branch in order to deposit it. (And some of the bigger banks can make that process quite frustrating.) This is just a mobile way of depositing your check - it then enters into the standard banking system, and it will clear when it clears.

People with prepaid debit cards, however, who live on a much tighter cashflow model, can’t afford to just sit around waiting for their

I receive notes occasionally from subscribers interested in the situation with banks. Some wonder why we don’t own any stock in them.

The situation isn’t good, I’m afraid. The Federal Reserve reported that the level of business loans at the beginning of this month was $1.6T, about 10 pct higher than a year ago. While that seems positive, there’s creeping concern that banks are already back to their old ways of relaxing standards to win a bigger share of the lending market. Both terms and interest rates are turning out to be very flexible, just as they were into the subprime mortgage crisis.

The Fed released a survey of lending officers this month showing that 65 pct of U.S. banks are writing business loans at lower rates and relaxing underwriting standards to attract business borrowers. This prompted the Fed, the Federal Deposit Insurance Corporation, and the Office of the Comptroller

The banking industry has been riding a wave of fee revenue tied to record low interest rates.

The mortgage fee money spigot may shrink to a trickle from a flood this summer as home buyers ratchet down mortgage demand hoping for rates to fall again.

However, if mortgage demand drops and bank fee revenue falls, bankers will fill the gap by easing underwriting standards to take advantage of wider spreads between the Fed funds rate and mortgages.

Those easing