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.
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