Over the past few days Citi (C) has been trading like the internet stocks in 1999 as it climbed from about $3.30 to a close of $4.18 today, not a bad week. The company has poor fundamentals and is not what I would call a “sound” investment it is, in my opinion, a gamble to own the company. Here is the kicker, I am a share holder of Citi, I own the common with a cost basis of $3.32 and I own January 2011 4 calls with a cost average of $.37. My common stock is up 25% and my options doubled.
Don’t get me wrong, I like making money, but even I know something is just not right with this kind of move for a company that has 28.5B shares outstanding and a market cap of just under $120B with horrible earnings. I bought the stock because I figured it was worth about $4.50 if they sell all the assets they claimed and maybe $5 if the hedge funds decided to pick it up for alpha. The problem is the company has not sold the assets yet and the rise in share price is based on rumor of some sales, a rumor the SEC is banning short selling on government owned companies (which is false), Bove and other analysts saying it is undervalued or turned the corner, Pandit claiming the bank is on its way to profitability, the $2B in TRuPs priced @ 8.5% and, the latest, is the firm could earn $20B by 2012. That was a mouthful.
However, very little of that, which is not already debunked, can be verified and much is speculation. I would say it was one mother of a short squeeze and that made momentum player, read high frequency traders, to pick it up and run with it. In short, no pun intended, I do not believe it is sustainable, but I have not sold yet, I am crazy what can I say. I think the momentum and irrational behavior of the markets along with the belief that the common shares will not be diluted, which the CFO said dilution of common shares will likely happen, will carry the stock higher in the near-term. Well, let’s say if I am wrong I will happily take 20% and 80% profit, respectively, on my positions. In other words, I will not cry if it goes down tomorrow.
What I would not do is buy it way up here until there is some confirmation of asset sales or profitability. Even if they report a profit we will not know if it is real because of the marked-to-fantasyland rules in place. In other words, I would not add speculative money to this stock to save my life right now, it is not worth it. If you own it already do whatever you are comfortable with, but do not buy more. Greed is a terrible disease that leads you to make bad decisions so be happy with whatever gains you have and look for other opportunities.
According to a Bloomberg article the Too Big to Fail Banks are crying over higher capital requirements that would take effect next year. I am sure your hearts, like mine, go out to these institutions as they struggle to scratch out a living, it is tough when the industry can only payout some $140B in bonuses for 2009 when they wanted $150B, but hey, we are all sacrificing aren’t we? The institutions are requesting a 3 year period to phase in the new requirements instead of doing it all at once and, once again, they are putting the gun to America’s head threatening the economy and the, cough, cough, recovery if their wish is not granted.
The threat is that lending, as if there is any to begin with as banks are buying some $1.2T in US government debt, would cease as it would impact securitization of consumer debt. First, let me explain what is happening and why they are fighting these new regulations, then you will see what the real agenda is and why they are fighting for a phase in period. As many of you know, banks have off-balance sheet accounts called all sorts of things from SIV’s, Special Investment Vehicles to Qualifying Special Purpose Entities, these gems are where banks move their products of questionable quality to be sold or securitized. Now, the rule is past and the asses are coming on the boost, period. The question is how fast will the assets come on the books, now or over 3 years.
Lehman made them famous because they did the granddaddy of all accounting sleight of hand tricks and would sell their CDO’s to their SIV’s and then report the sale as a profit, not bad, huh? It works until the value of these things completely blows up, see September of 2008 for the results. Well, the FASB in conjunction with Fed and FDIC want to move these off balance sheet items to the balance sheet, finally! This way, you the investor, can value the bank properly because you can see the “assets” or lack thereof in the day light. Now do you understand why the banks are fighting this move?
The banks want a 3 year window for the assets to come onto their balance sheets, I think you know why, but I will tell you anyhow. If the assets came on all at once it might break their balance sheets and a portion f these banks could fail or require more government assistance, we know this. However, my feeling is so what? Let them fail, do we really need a Citi Group or Bank of America or any other too big to fail bank anyhow? No, we don’t as there are plenty of banks to fill their shoes. Frankly, these institutions should not exist anyhow and they are not really lending, sorry FHA loans do not really count as lending.
These new assets are a significant problem, I am not saying they are not, but this is what the industry did to itself. Wells Fargo claims that every $1B it brings on in new assets will crowd out $15B in new loans. This sounds an awful lot like last year when the industry put a gun to its head and said save us or we will pull the trigger and take you with us. I don’t like it and I don’t buy it, sorry. Let them go and do it now. Cram down the rule on them without a phase in period at all and while you’re at it reinstate mark-to-market so we can truly value the bank’s assets. I know the ramifications and I am willing to accept them as I am tired of this one industry that blew up the whole world still wielding all this power over us when they should be begging for forgiveness. Just to fuel the fire, here is what John Gerspach from Citigroup and JP Morgan wrote:
Citi:
“We do not plan to reduce lending in only those businesses specifically impacted by the incremental regulatory capital requirements,” Gerspach wrote.
JP Morgan:
The capital requirements “will have a significant and negative impact on the amount of consumer-conduit funding that will be made available by U.S. banks,” said the letter from JPMorgan, the New York-based bank that this week reported its biggest quarterly profit since the subprime-mortgage market collapsed in 2007.
“We strongly support a phase-in period for the rule changes,” according to JPMorgan’s letter, which was signed by Managing Director Adam Gilbert.
These statements sound like threats to me, don’t they? To me they sound like they are going to reduce lending to every business line, which is surprising since they are not really lending anyhow. So, record profits are rolling in while they are clearly hiding huge losses offshore, which is what it looks like to me at least, but we will not know until we see what is there. However, if they are made to put these assets on their balance sheets all at once, they will bring down the house of cards all over again, how convenient.
Regardless of what happens the change will have to take effect for annual reports on November 15, 2009. Guess what I will be doing on that date? Hopefully the same thing you will be doing because this is a big deal.
Capmark filed for bankruptcy tonight, which was not surprising, but it this will create a stir in the markets on Monday. It marks me happy that I am short as hell, but I am sure this is spun as some sort of green shoot, on CNBC at least.
Capmark, created out of the commercial real estate arm of GMAC, was negotiating with its creditors, Citi and JP Morgan, but apparently, that did not go as planned. The move also wipes out private equity stakes from KKR, Goldman Sachs Capital Partners and Five Mile Capital which bought Capmark for $1.5B in cash and $7B in debt. KKR already wrote down their investment in this company.
According to the bankruptcy filing, the group owned 75.4 percent of the company while GMAC, or the General Motors Acceptance Corp, owned 21.3 percent. Employees and directors owned most of the remaining stock. Equity investors are typically wiped out in bankruptcy.
Capmark listed $20.1 billion in assets and $21 billion in liabilities as of June 30, 2009 in the bankruptcy filing, which was made in U.S. Bankruptcy Court in Wilmington, Delaware.
Pretty interesting for a Sunday night and I guess this confirms the rumors about the commercial real estate business being just fine…
Citi, JP Morgan and, presumably, Capital One have or will be soon raising minimum payments on credit card debt. The minimums will increase from 2% of account balances to 5% which is a huge hike during the highest level of credit card defaults on record. This means that defaults will go sky high in 30 to 60 days which may cause major problems.
I realize that some may think this is not a big deal or that it is a good thing credit card companies are doing this, but it is not. They are trying to move marginal credit risk into default, for reasons I do not really understand yet, but it has to do with the new credit card bill or perhaps to get the defaults done now versus waiting for them to unwind.
Regardless, this will have unwanted consequences and will force defaults sky high, literally. As unemployment hits 10%, then 11%+, these higher minimum payments will not be met. Since this is a credit crisis, not a liquidity crisis, credit will be increasingly harder to get because of fear of default. This brings us to the possible “why are they doing this section?”
Simple, they are trying to finad any reason to not lend to consumers. The banks want to hoard money, some say because they are insolvent, which has some truth to it, but as they try to boost their Tier 1 capital and TCE the more they can hoard the better they will be. I have a few cases to illustrate this point.
1. Citi group has a $100M+ loan for a mall in Syracuse NY. The mall is supposed to rival the bigger malls in America. However, Citi says the developers defaulted and stopped payment on the line of credit. It is in court and there seems to be little merit for Citi to stop payment.
2. A person I know is buying a commercial building and they are putting down 25% of the value of the loan, its only $100K. Everything was a green light until the bank held things up, that is when they found an old paid off judgment on the buyer. The deal is off. Seriously an 8 year old judgment, that is paid, with 25% down is a relatively risk less loan for the bank, but so far it is a no go.
Banks want to hoard money and they refuse to loan, hey its their business, those ungrateful bastards. The point is the defaults are going to go up, period. This could prove dangerous to our fragile economy and it is our opinion that banks should really reconsider this endeavor.
We figured Wachovia had until Wednesday at the latest for the bailout package to make a difference for them, Tuesday was a more likely scenario though. Based on what we saw, we figured National City would fall first followed by Wachovia. I guess at the end of the day it does not really matter.
Was this a bank failure? That depends on what you are looking at and who you believe. The FDIC arranged the sale to Citi which means that they were on the verge of failing. As you know, we made the call of who we thought could fail and most of the predictions were correct. We believe that National City is the next to go, unfortunately.
What is very sad is the fact that if the bailout package went through last week then this would not have happened. While we oppose this package it was goign to pass, that was a given. However, this package could have been completed on Thursday of last week, but Congress, in their infinite wisdom, decided to attach pork to the bill and then dragged their feet for 3 extra days.
Then, Yesterday, Pelosi, Reid, Frank and Dodd told us they have a bill and then proceeded to tell us how great they were for compromising on everything. What they didn’t tell you was that their incompetence cost us another huge bank with more waiting in the wings. To think that they saved us is just dumb, they are now part of the problem.
This was never a Republican or Democrat issue, this was an American issue and they failed us, miserably. We are nonpartisan, but believe that the dems, in this case, dropped the ball and should bear responsibility. While the republican administration and Congress screwed up, the dems had control for 2 years. The point is they need to politics on the sideline right now to fix this problem.
We have yet to get a copy of the plan as the website is still clogged, but we will voice our opinion on it when it is reviewed. Hold on as the next few days in the market are going to be a wild ride.
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