Saturday, October 24, 2009

Hex and the Citi Revisited

On Jan. 10, 2009 I wrote Hex and the Citi, focusing on Robert Rubin and the mismanaged, probably insolvent Citigroup (C). I warned that the then-ongoing Obama stock rally was in great danger of failing, which it did by dropping about 23% in the next 8 weeks. It took exactly 6 months for the averages to rise above their Jan. 9 level, by which time green shoots had truly been spotted. Then on Oct. 20 I pointed out that Citi was the only one of the major banking companies I could find with a downsloping 200 day moving average. Citi is the only one of the mega banks to have a down chart in 2009, joining some large troubled regionals such as SunTrust (STI).

There is now more concern that recent actions on Citi's part presage serious problems. Mish has a post on this with interesting links titled Citigroup's "Hail Mary Pass": How To Know Citigroup Is In Serious Trouble. I recommend it.

Citi remains a sort of hairball. The stock chart had an obligatory jump likely due to short covering plus a rise in commercial real estate securitization pricing off of very depressed lows. These prices have sunk 20% this month and are far off their highs; the A-rated tranches have dropped percentagewise a bit more than the AA or AAA tranches. Click here for Markit's web page on this data. A continuing drop in CMBS pricing and other issues, details of which are nonpublic, could force Citi into full receivership.

On Friday the ECRI announced a drop in a key measure of the rate of growth of the economy. In the past, peaks and troughs in the growth rate cycle have marked good sell and buy points. Most of the good news may be out and all of it may be priced into stocks and low-quality bonds for months of good headlines ahead.
A catastrophe with Citigroup could easily tip off another bear market, though perhaps just a pause that refreshes.

Just as it would have been hard to imagine that the stock market would jump 60% in 7 months, who could have imagined that Rasmussen Reports would find that:

For the first time in recent years, voters trust Republicans more than Democrats on all 10 key electoral issues regularly tracked by Rasmussen Reports. The GOP holds double-digit advantages on five of them.

Is anything making sense any more?

Well, maybe something. Here is what I wrote about gold on Jan. 6, 2009:

It makes sense to own gold as a hedge. This should be a bullion equivalent such as a Krugerrand.I own gold and root against its "success".

Gold was around $852 then and is about 25% higher in price as "quantitative easing" e.g. debt monetization has been introduced by the inflationists at the Fed and the Bank of England, and as no serious financial reforms have been introduced by the Obama administration. This move in the price of gold would be more dangerous if it had not already exceed $1000 per ounce early in 2008.

Watch Citi. If its stock price moves sharply down, the general stock market, which is looking toppy on technical grounds, could be ready for a sharp move down as well.

Copyright (C) Long Lake LLC 2009

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