Is Citi doomed?

Citigroup Inc (C) shares sank to their lowest level in more than nine years on Tuesday after analysts projected that the bank would be taking another $15B to $18B write-down for bad mortgage debt this coming quarter. This places the bank in the perilous position of needing further capital infusions.

Unfortunately, it appears that the sovereign wealth fund spigot is shutting off. Samir al-Ansari, the head of Dubai International Capital, said that it will take more than the combined efforts of the Gulf's wealthiest to save the U.S.-based bank. These statements, made at a private equity conference, are a signal that Citi must find another source for capital.

Sovereign Funds May Not Save Citigroup
Citigroup Shares Drop After Dubai Fund Says Mideast Sovereign Wealth Funds May Fail to Save It
http://biz.yahoo.com/ap/080304/dubai_funds_citigroup.html

HingeBear: Ten Underperforming Stocks

HingeBear is a selected list of ten stocks with the likelihood to underperform the market over the next 12 months.

A couple of earlier articles outlined stocks with a bullish case (Five Smallcaps Primed to Soar / HingeBull: Five more outperformers). This summary focuses on the opposite angle, stocks that investors should spurn from a long position perspective. While some of these stocks are in industries such as homebuilders that have rallied off of 52 week lows in the past few weeks, these particular stocks are likely to underperform their peers over the next 12 months. If you want exposure to these sectors then there are probably better upside candidates available.

These stocks were initially found using the HingeFire stock screener to search for stocks with struggling fundamentals and price declines over the past year. Further comprehensive assessment revealed poor balance sheets and declining growth outlooks, factors which will probably lead to underperformance over the upcoming year.

A number of these stocks appear to have limited downside left and may not be appropriate short candidates. A few of them have the potential for the second shoe to drop leading to further price declines.

The following stocks are included in the initial HingeBear list:

• ALTU (Altus Pharmaceuticals Inc.)
• AMGN (Amgen Inc.)
• C (Citigroup Inc.)
• HOV (Hovnanian Enterprises Inc.)
• LNY (Landry's Restaurants Inc.)
• MRVL (Marvell Technology Group Ltd.)
• MBI (MBIA Inc.)
• SLM (SLM Corp.)
• WM (Washington Mutual Inc.)
• RT (Ruby Tuesday Inc.)

Further brief commentary about each is provided below:

Altus Pharmaceuticals Inc. (ALTU)

Altus Pharmaceuticals, Inc., a biopharmaceutical company, engages in the development and commercialization of oral and injectable protein therapeutics for gastrointestinal and metabolic disorders.

Altus has roughly $150 million in net cash, yet it burned through $45 million in capital over the trailing 12 months. In December, the company lost a partnership agreement with Genentech for its hormone replacement therapy, ALTU-238.

While the company has rebounded from its low near $5 so far this year, the future outlook is not all that bright. There are better alternatives in the Bio industry for consideration as an investment.

Amgen Inc. (AMGN)

While AMGN beat the 4th quarter profit estimates, it had flat earnings and lower sales. The sales of many drugs are dropping off rapidly for the biotechnology giant. There is nothing in the upcoming forecast which demonstrates that Amgen will match either the market or sector performance.

Citigroup Inc. ( C )

CDOs anybody? This banking giant is in trouble for its inability to control risk. It is now in the position of wandering hat in hand to international sovereign funds looking for a bailout to meet capital ratios.

There is the possibility that the banking sector has bottomed out after the fourth quarter earning reports. However Citi is unlikely to perform better than the other banks during a sector recovery.

Hovnanian Enterprises Inc. (HOV)

With the housing sector in free-fall, nothing looks good in homebuilders. Hovnanian is one of the homebuilders with the weakest balance sheets and numerous impairments. Even if the sector recovers, Hovnanian is not expected to keep up in price appreciation. In fact from the straight-forward math, the company may face liquidity problems over the coming year unless sales increase – a scenario which is not likely in 2008.

Landry's Restaurants Inc. (LNY)

Decreasing sales, poor ratios, and financials that Moody’s downgraded to a “negative’ outlook on debt ratings in December. There is no information for this restaurant operator that can be described as promising. One recent twist is that Landry's boss, Tilman Fertitta, has recently proposed buying the remaining 61 percent stake in the business to make it a private business; it is not known if this proposal will pan out.

Marvell Technology Group Ltd. (MRVL)

Executive suite turmoil, losses, and no uplifting news. There appears to be no angle for this mid-cap chip maker that would provide any indication that it will match the overall performance of the market.

MBIA Inc. (MBI)

MBIA is a troubled bond insurer with a large SIV insurance exposure in the subprime mess. William Ackman of Pershing Square Capital Management recently outlined to regulators that MBIA still has an additional $12B of CDO exposure that has not been properly disclosed. The firm is desperately hoping that either regulators or an acquisition will bail it out. If one of these scenarios does not play out then it will liable be priced in the pennies like fellow insurer ACA Capital. If some sort of plan is arrived at then the stock price may increase from current levels.

SLM Corp. (SLM)

Sallie Mae can use an education on how to produce profits and run a fiscally responsible operation. This education financer has a long list of problems in the press over the past year and the situation is not expected to improve moving into 2008.

Washington Mutual Inc. (WM)

Washington Mutual is a large bank with a long list of troubles. It’s cousin Countrywide was recently purchased by BoA for pennies on the dollar. JPM Chase is currently mulling the acquisition of WaMu according to most press reports. If the bank does not get acquired then it is apt to sink further. On the other side of the coin any announcement about being acquired will likely elevate the stock.

Ruby Tuesday Inc. (RT)

Ruby Tuesdays recently cut its 2008 earnings outlook. This is on top of a second quarter earnings report (2008) showing same-restaurant sales decreased 10.8% and 8.7% at company-owned and domestic franchise restaurants. The statistics demonstrate falling revenue and earnings. Sometimes there is a reason that a trailing P/E of 7 does not represent value. There is nothing in the Ruby Tuesday’s information which would recommend it as an investment which will match market performance.


Disclaimer: The summaries provided at the HingeFire blog should not be construed as official investment advice.. You should see a qualified investment advisor if you need direct advice about your individual financial situation. The information provided does not constitute a solicitation to buy, or an offer to sell securities. The author does not hold a position in any of the securities outlined above.

Is it time for a pool?

How large will the write-downs be at Citi? Citigroup reports next week and the write-offs are likely to be sizeable. Several firms have already provided projections, Merrill Lynch jumped aboard with a prediction of $16 billion, Goldman Sachs is sticking with $19 billion, while Sanford Bernstein is estimating a $12 billion loss. Any number pulled out of the air is likely to be good at this point. There is an expectation that Citi will want to get as much as the bad news off the books in the 4th quarter report. This will enable the new management team to make future quarters look comparatively glowing if minimal future write-downs need to be taken.

Citi: Some quick math

Analysts warned this week that Citi may need to right off another $18.7 billion in the fourth quarter, exceeding earlier estimates of $8 to $11 billion. The actual total may be even greater than this based on some simple math. Citi holds some $43 billion in CDOs with subprime mortgages underlying them. At this point, these derivatives are trading best case for 43 cents on the dollar; many are down near 22 cents on the dollar. A simple calculation of 57% of $43B shows that $24.5 billion of bad CDO investments will still need to be written down. Not all of this will occur in the fourth quarter, but to properly mark the books to market the greater part of it must.

The totals may even be worse, Citi has an additional exposure of $12 billion to subprime that is non-CDO. Additionally the bank will be fortunate to hit a peak salvage value of 43 cents per dollar on these investments; many will go for below 30 cents in the current crunch.

This makes it likely that Citi will need to significantly cut its dividend and seek additional outside investment from sovereign funds to bulk up its capital ratio to regulatory minimums.

The banks are still running red, and the impending credit card meltdown is not included in the tally yet. A number of notable Hedge Fund managers were quoted this week saying that Citi was a buy at $5 per share, a mere 83% tumble from the current share price.

Citi May Write Down $18.7B, Analysts Say

Some Humor: Project Head Honcho

Project Head Honcho: The Citigroup CEO Search
A video on YouTube provides Citi some help with their CEO search:

Citi Gets a Bailout

Wall Street rebounded today on news that Abu Dhabi bailed out Citi to the tune of $7.5 billion. The news was viewed as relief from the continual negative disclosures coming out of the financial sector.

The deal actually underlines the severity of the crisis facing the banks. Without this infusion, Citi would be in a situation where it would probably be forced to merge with investors (including many in the Middle East) receiving pennies on the dollar. The situation still is not attractive for Citi; the bank still does not have a CEO and will shortly be laying off 45,000 employees. A good portion of assets are still impaired and need to be written down.

The upside is that the bank managed to swing this deal despite the dismal environment. It brought hope that Sovereign wealth funds may rescue other large financial institutions.

Citigroup Sells Abu Dhabi Fund $7.5 Billion Stake
http://www.nytimes.com/2007/11/27/business/27citi.html?_r=2&ref=business&oref=slogin&oref=slogin

Citigroup Plans New Round Of 'Massive' Job Cuts
http://www.cnbc.com/id/21974307

Stocks Higher After Citi Secures Capital
http://biz.yahoo.com/ap/071127/wall_street.html

Should Citi Pay for its Mistakes

There is one point of view that deems that the creation of the M-LEC to bail-out Citi and other banks from their SIV crisis is a concept that interferes with the free market. The other side of the argument promotes the need for stability in the market place to avoid a string of cascading failures underlines the need for the creation of the SIV Superfund.

From a risk tolerance perspective, why should banks such as Citi be bailed out for their own mistakes? Shouldn’t the shareholders and the company pay the price in a free market economy? Isn’t the SIV bailout effectively a form of capital-based socialism; where firms avoid the consequences of their decisions? Certainly, the financial market would not offer group bailouts for individual who can not meet their financial obligations; why should it be any different for a large bank.

Allan Sloan of Fortune takes Citi to the task in his recent article:

Citigroup: 'Gimme shelter'
http://money.cnn.com/2007/10/26/magazines/fortune/citishelter.fortune/index.htm?postversion=2007102914