Bill Cara: Citigroup 4Q05 disappoints, Fri., Jan. 20, 2006, 7:59 AM

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January 20, 2006

Citigroup 4Q05 disappoints, Fri., Jan. 20, 2006, 7:59 AM

Wall Street analysts were generally disappointed in the 4Q05 results for Citigroup, which is the world's largest financial services conglomerate. Earnings from ongoing operations came in at $0.98 vs expectations of $1.00.

According to Thomson First Call, the analyst ratings are 2.0 out of 5, which is a Buy, with 5 at Strong Buy, 11 at Buy and 5 at Hold. After the 4Q05 results came out, you can expect these ratings to fall.

For example, Charles Peabody of Portales Partners now has a sell rating on Citigroup. Speaking on Bloomberg TV today, Charles said "Margin expansion does not happen in the negative part of the credit cycle" and since he is dropping his earnings expectations (global consumer group issues) for 2006, that means he expects the price of C to drop.

I noted that in the first week of January, Banc of America Securities dropped the rating on C from Buy to Neutral (Hold). As I say, you can expect more of that from Wall Street today.

With the economy slowing (and possibly heading to a recession), short-term interest rates rising (causing an inverted yield curve), and credit tightening underway to combat monetary growth, this quarter and possibly this year is likely to be a challenging one for the Financial sector.

Particularly hard hit will be the consumer lenders. It will be difficult for these companies to sustain high earnings when returns on long-term loans are insufficient to cover rising cost of capital. That's what happens with an inverted yield curve.

Yes, I saw this happening in 2H05, and went short the U.S. Financial sector ETF (XLF) in my most painful decision for 2005. I was surprised by the reflation (excessive printing of money) in the U.S., which apparently started in September just prior to the Refco failure. But over the long-term, it is wise for traders to stick to the common sense that unless a financial services company is undergoing substantial internal growth, it is wise to sell and stand aside during times of a negative credit cycle.

For the record, Citigroup is included in the Cara Global 100 Best Companies based on fundamental and quantitative factors, including an excellent dividend. However, based on economic and technical (trend and cycle) factors, I am presently bearish. I would be looking for at least a ten-pct price decline before starting to accumulate.

And during accumulation, I start by writing put options, which takes in premium income until the price drops to below the option strike price before I get to take in the stock at a price I feel comfortable with over a long-term period (10 years or longer). That way, my Adjusted Cost Basis (ACB) continues to drop and my Dividend to ACB yield continues to rise.

For research, here are the links to (i) ADVFN financial data, to (ii) Investertech price technical data and (iii) to Value Line (Fred Harris analyst, dated Nov-25-05), for Citigroup.

Other than the usual headline articles (briefly), I tend to focus on these three information sources to make decisions whether (i) a company has sufficient quality to cause me to have interest in trading its shares, and (ii) the underlying stock is at a Point of Cycle where I would want to be accumulating or distributing that stock.

Individual analyst opinions, inside buying/selling, and institutional buying/selling, are factors I generally ignore, although I do admit that the more you focus on this type of information the more likely you are to pick up nuggets of knowledge that add to your overall perspective.

At the end of the day, your job is one of portfolio management, not stock picking, nor an attempt to pick tops and bottoms. In portfolio management, you are trying to (i) lower your capital risk, and (ii) increase your cash-on-cash return, which is your Dividend Yield to ACB.

As I say, your portfolio is your store, and stocks like C are your inventory. Right now I'm in a position where I sold down my inventory of C in 2004 and 2005 and I'd like to see a ten-pct drop in my future acquisition costs before I send my purchasing agents out to acquire more inventory, which I expect to do before the end of 2006.

As I had a problem with Type Key, here is my reply to David's comment:

davidtr4-

When I say "based on economic and technical (trend and cycle) factors, I am presently bearish", and I am looking for "the underlying stock (to be) at a Point of Cycle where I would want to be accumulating or distributing that stock" then I am clearly stating that chart reading (technical levels and indicators) tells me where I expect to find an accumulation level.

I don't know where that is going to be until a cyclic reversal actually shows up in the charts. That happens to be the point of momentum reversal. So I use that key -- when it occurs -- to begin thinking about tactics to accumulate (stocks on my A list).

In the case of Citigroup, the earlier accumulation zones were about -10 pct lower, in the low 40's, so I mentioned that number. It is not a target. I don't set targets because I don't know what the market conditions are going to be at that point, whenever that point of cycle actually arrives.

Too often I read in comments like this that traders are trying to set rules for themselves. I think that's wrong. I continue to say that the art of trading is as important as the science.

You have to learn to get a "feeling" for the market, in order to exercise judgment. I have yet to see the wisdom of setting price targets, other than perhaps making a statement as to the extremes of the bullishness or bearishness of your technical bias.

/Bill

Posted by Posted by Bill Cara on January 20, 2006 07:59:50 AM | Category: 40 Financials , U.S. Equities

Discourse

I take it that the accumulation price target is not based on chart reading.

What factors do you consider in deciding what price is a good long-term accumulating price for a stock?

The answer I suppose would take a couple of text books to complete but I am just looking for an overall view to your suggestion of at least 10% decline for C.

Posted by: davidtr4 at January 20, 2006 9:31 AM [link]

Can't understand why the market doesn't seem to like the constant stream of bad earnings reports. I wonder what Bob Pisani is saying here?

Posted by: MarkM at January 20, 2006 10:33 AM [link]

Citigroup - Seeking pride avoiding regret

I have been holding Citigroup for over 4 years. Let me start by reminding everybody as a non-US investor I bought into the USD at around $1.50-1.62/USD and the USD trades at approximately 1.15 CDN per USD. I'm not even going to calculate my loss even though my stock is up over $10 since I bought in and at some points $14 over my buy point.

This is the worst case of psychological errors in trading where my stock is up and still I'm down or breaking even. Do I consider this a winning trade or a losing trade - I'd have to say in real terms - a real bad loser

Citigroup is just too big for its own good and a highly inefficient bank. I have a lot of experience in banking and some of the departments really need to scale down.

The only way Citi will ever prosper in my opinion is to start by:

Serious Job Cuts at all levels
Increase productivity per worker
Cut unprofitable departments
Increase global exposure in developing markets
Keep their legal and credit exposure to a minimum
Keeping Goverments in external countries happy
Increase the dividend slowly

This has become a core holding on defense rather than a play for capital appreciation.

Yes you can make capital gains if you wait for a cycle low and sell at market tops prior to earnings. However, people who buy CITI aren't in it for market timing.

Posted by: dinov at January 20, 2006 10:42 AM [link]

Anyone else think the December low is psychologically important for the Dow here?
Stockman you ought to be creaming this thing with your energy and gold today. Happy Friday!

Posted by: MarkM at January 20, 2006 10:57 AM [link]

MarkM

Yes. But let's see at the close. If a panic sets in they may take 'em all down. At the moment I am down 25 bps with the mkt down 125 bps, I'd love to see that hold but I'd say that's a 50:50 bet right now. Stocks I added to yesterday POT, N, SIRI and AVP holding well. If they break their respective lows of the last 5-10 days I'll have to let them go. We'll see.

Posted by: stockman at January 20, 2006 12:01 PM [link]

JRCC- FYI

In the interest of full disclosure I have sold most of this position at a small gain due to a trend line break and a weak market.

PG- FYI

Same story.

long: JRCC

Posted by: stockman at January 20, 2006 12:22 PM [link]

Gold: Intraday reversal started the last significant correction. Will it this time?

stockman- I can stop watching that JRCC chart now. Very puzzling action and I'd love the take of a professional tape watcher about those repeated spike openings. Glad you made money.
I tried for AAPL and YHOO bounce and got hit by this sell-off. Had picked a nice low in both!

Posted by: MarkM at January 20, 2006 12:27 PM [link]

One of Bill's favorite companies-PD, and other miners are retreating today. I guess the overall earnings disappoitments is casting a pall over most sectors.

Only Jan, and there is an anchor on the averages...

Posted by: Dave at January 20, 2006 1:50 PM [link]

PD-

I like that trend line. With a turn up above the short term down trend I'd have to buy some. On the other hand it looks like the past 3 years you could just wait until the May trough for a lower risk entry. Any technical thoughts MarkM/anyone?

Posted by: stockman at January 20, 2006 2:05 PM [link]

stockman-

I don't know about seasonality. Market weakness in both '04 and '05 around that time frame. These RSIs look like pretty good bull market entry points. I would be surprised at much under 50 for an RSI on the weekly. What is fundamental news? This is contra-trend right?

Posted by: MarkM at January 20, 2006 2:22 PM [link]

MarkM,

My understanding their latest earnings report was terrible because their costs are rising faster than the prices of copper is increasing. Their costs have increased because of the ore they are mining is increasingly lower grade.

Posted by: davidtr4 at January 20, 2006 2:42 PM [link]

I should have stated this is regarding PD.

Posted by: davidtr4 at January 20, 2006 2:44 PM [link]

davidtr4-

That's what I recalled, that earnings were a big miss after expected hot performance. Doubt that costs improve with $70 oil either.

Posted by: MarkM at January 20, 2006 3:03 PM [link]

From the conversation, it seems that while metal miners / processors benefit from higher commodity prices, they take a hit on their bottom line higher energy prices. So conclusion -

LONG GOLD, LONG OIL :)

Still waiting for a good entry point to energy stocks after selling Dec 2005. :(

Posted by: Dave at January 20, 2006 3:14 PM [link]

Dave-

Not to worry. There will be other entry points. May 05 or November 05 or even late December 05 provided them. What's to sy there won't be three more in 2006? This energy bull is going to run for awhile. All the fundamentals are there as well as all the catalysts. I am grossly underexposed myself. Let's just pay attention to corrections and hit it hard.

Posted by: MarkM at January 20, 2006 3:22 PM [link]

All-

Pisani and Bartiromo just said that the majority of earnings reports are good. It's "just 20%" that are missing. But tech and financial and energy led the rally up and tech and financial are the ones that are missing. No one expects the homebuilders to come in with a bad report or energy for gosh sake. Pisani can't wait to get off TV and get a drink. He's running out of spin here.

Posted by: MarkM at January 20, 2006 3:28 PM [link]

stockman-

I now have the ridiculous but happy news to inform you that as of 3:29 pm Eastern I am beating the S&P YTD with my 20% market exposure. Gold (7%), oil (6%), healthcare (7%). Who says that complete ignorance can't be profitable? But now that the market has given me this reprieve I need to get to work again.

Posted by: MarkM at January 20, 2006 3:39 PM [link]

MarkM-

Sounds like I am taking on much greater risks to accomplish the same thing. Lost 52 bps today to being up 1.95% ytd; SPX decline of 1.84% leaves it at a net TR of 1.16%.

A few more days like this and sentiment could take a pretty good swing. Natural resources broadly look pretty good today, bonds caught the safety bid. Fear rising but long way to go before extreme.

Stopped out of another telecom piece. All in all a pretty good day ;-)

Posted by: stockman at January 20, 2006 4:09 PM [link]

stockman-

These days bring out the bargain hunter in me. Has anything fallen close to or in The Zone? I am not certain it's PD given the red flag they just ran out.

We need a little more to come off gold here before I open my wallet. But I am itching to. Also have been itching to buy more oil.

Posted by: MarkM at January 20, 2006 5:33 PM [link]

Listen to Coxe's call (update today). Talks a bit about PD, gold, natural gas and oil. Global risks.

I think we have to wait for a sign of an upturn as far as PD goes. (Assuming they don't take out that uptrend line.) I would also like to know how much more copper they sold at LOW PRICES to protect shareholders.

I like the way the 'laggard' energy stocks are acting (see CHK, ECA).

long CHK, ECA

Posted by: stockman at January 20, 2006 5:45 PM [link]