It's not very often you will find me focusing on one share but something rather important has happened to Citigroup [C]. Firstly let me explain I am not, most assuredly not, recommending any position in Citi. I don't "do" recommendations and as most of you who read my articles know, I prefer to look for the longer term effects. Think of this article more along the lines of a follow up to A beginners Guide To Credit Default Swaps and CDS, An Example in Real Time.
Citigroup is in serious trouble. It's not the first time Citi has been threatened but it may be the last. Too many risks have been taken without adequate protection or examination. Whilst previous episodes of credit collapse were eventually seen off, with a little outside investment help, this time the problem may be just too big. If Citigroup does start waving a white flag, the repercussions will be enormous.
I am going to rule out a takeover/buyout similar to the Bank of America / Countrywide deal. That deal was not, in my opinion, about a grab for cheap assets. I believe BoA had too much invested in Countrywide to allow it to file for bankruptcy. I also suspect BoA may also have been exposed to large counterparty agreements that would have cost much more than BoA have paid to absorb Countrywide. Essentially BoA have covered their own position.
Citigroup will not get such kind treatment. Instead of it being "too big to fail" I think it may be "too opaque to sell". Firstly, here is a chart of Citi, it is telling us what the market thinks:
It's a weekly chart going back to 1997. I have circled the 4 important lows: 1998, 2002 x 2 and current. Citi is now valued at the 2002 low price, including any inflation or $ devaluation effects. This is one ugly share to own if you are not a US based owner. Notice the subtle difference between the current low and the previous 3. Previously Citi spiked down into its low and then rebounded rapidly.
The current low is different, a sustained period of selling continues whilst the oversold condition persists. It is the opposite condition of continued buying whilst in an overbought condition as seen in 1999/2000. Unless a financial miracle occurs Citigroup is going lower, 1998 anyone? If my suspicions come to fruition then the price may well end up quoted in cents.
Can I relate fundamentals to the chart view? Yes I can. To read the rest of this letter click here.
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