- Citigroup (C), the largest U.S. bank by market value, said on Monday its third-quarter net income will drop 60 percent on turmoil in the subprime and leveraged loan markets, as well as weakness in its consumer business.
- CEO Charles Prince, who called the results "a clear disappointment" said the decline had been driven "by weak performance in fixed-income credit market activities, write-downs in leveraged loan commitments, and increases in consumer credit costs."
- Among the principal culprits for the warning were $1.4 billion in pre-tax write-downs on funded and unfunded leveraged loan commitments.
- Citi also said it was taking $1.3 billion in pretax losses on the value of subprime mortgage-backed securities it had warehoused to repackage into collateralized debt obligations, and leveraged loans it had planned to repackage into collateralized loan obligation securitizations.
- The profit warning was a sign that despite mostly better-than-forecast results from Wall Street brokerages like Goldman Sachs & Co. (GS) and Lehman Brothers (LEH), major U.S. banks still face significant headwinds from investors' retreat this summer from riskier forms of credit.
- "I think people are expecting there were some losers in the whole subprime (sector) and that not all of the bad news had come out yet. Now, for some of the banks, it's probably worse than people thought it would be," said Rick Meckler, president of investment firm LibertyView Capital Management, in Jersey City, New Jersey.
- The profit warning came on the same day that Swiss bank UBS AG, the world's largest wealth manager, unveiled $3.4 billion in losses, swept out senior managers and slashed jobs.
- The bad news for Citi was not restricted to leveraged loans and subprime. The bank also said its consumer division would see a $2.6 billion increase in credit costs "with approximately one-quarter of the increase driven by higher net credit losses and approximately three-quarters driven by higher charges to increase loan loss reserves," Chief Financial Officer Gary Crittenden said in a recorded call.
Takeaway: Nothing surprising and my UltraShort Financials largest component is Citigroup (C) - the muted reaction is "typical" of the market of late. More bad news = more Fed cuts = problem solved. I think more important than the headlines loss is the last point above - the consumer is worse than people are assuming and this is where I think Wall Street is 'still' not seeing the picture. Loan loss reserves are underfunded in my opinion across the board for what is going to happen with the consumer. The regional banks (and even behemoths like Citigroup) cannot hide this as well as the investment banks.
But yet again, this is shrugged off as I guess 'everything is already priced in'.
Long Ultrashort Financials in fund and in personal account
7 comments:
I like the posts on the yahoo C board by people saying that 'the market knows it's not as bad as it sounds and it's time for C to hit new 52-week highs'.
What I don't get is entire lines of business are going away (permanently) or dropping by 1/3rd (not cyclical, just going away) - yet valuations are based on the 'credit era' we just came out of where earnings were goosed by new and 'innovative' businesses. So this tells me either we are going to go back to giving out subprime loans and hedge funds will forget the lessons they just 'learned' and will again buy tranches of 'junk' (otherwise WHO exactly is going to be buying these products which goosed earnings?) or the market is still in denial that parts of these businesses are gone and/or going to go back to 2003 levels.
Headline on Yahoo Finance "Stocks Soar on New Hopes for Fed Cuts"
Almost laughable. It hasn't even been 2 weeks since the last one - I was asking when we'd start hearing the drumbeat about the next round of cuts... now we get all of October to hear about it - woo hoo. Probably another 50 basis points since everything is so swell in the economy ;)
Touching 14,000 again today. The same articles that talk about this mark also have quotes such as:
"While the direction of the preannouncement should not come as a surprise, the magnitude is greater than expected with credit being a factor. Still, we wonder with Citi, among others, attempting to put a tough quarter behind them, if this move helps flush out the negative factors plaguing financials."
"Citi Chief Financial Officer Gary Crittenden said the results were below the firm's expectations, even given the recent turmoil in credit markets."
"News of a quarterly loss from UBS, and a 60% drop in Q3 net income from Citigroup, may bring credit-market concerns back to the forefront." - nalysts at Action Economics
"We are getting more nervous with the markets as they once again get close to tagging their all-time highs without the benefit of many individual stocks participating." - Paul Nolte, director of investments, Hinsdale Associates
"A gauge of manufacturing activity came in below expectations, but investors appeared to brush the news aside."
But hey, bad news = good news! More rate cuts!
More quotes:
"There are some examples out there that we have our hands around the subprime problem,'' said Igor Golalic, who manages $2.5 billion at Federated Investment Inc. in Pittsburgh. ``There's a perception that the worst is over, now that the Fed is on our side."
"Greenspan said in a speech in London that that lenders were seeking to buy longer-term assets of lower quality and ``that is a good sign"."
"Homebuilders climbed after Citi advised buying shares of Pulte Homes Inc., Centex Corp., D.R. Horton, Lennar and Ryland Group Inc., saying the builders may rally. ``It is precisely when things have gotten this bad that the stocks start looking good,'' wrote Citi analysts led by Stephen Kim."
"investors speculated the worst may be over for banks and construction companies hurt by subprime mortgage losses."
"Stocks also climbed after the Institute for Supply Management said manufacturing in the U.S. grew in September at the slowest pace in six months and a gauge of prices declined, giving the Fed more leeway to cut interest rates."
Is it all over suddenly? Act as if nothing happened?
I mentioned last week the $38 billion repos, $22 Billion of which are mortgages... which traditionally never happened. The Fed buying mortgages? I think perhaps this is what is buoying the market behind the scenes - the literal bailing out going on. I.e. we will take the junk off your hands - just keep doing business and lend to each other... we will take the nasty stuff and hide it within the Fed.
Well until the trend changes you have to keep riding it. Unfortunately the hedges are hurting performance today! The big tech momo stocks have slowed down but now the smaller caps are rising again - strange to me, because they are more tied to the domestic economy.
So what happens Friday
If the unemployment number is better than expected we go up because the economy is not so bad as we assume
If the unemployment numbers is worst than expected we go up because the Fed will cut more
So conclusion = we go up if the number is bad or good. All news is good news.
Interesting on the homebuilders - I mentioned this weekend I heard a lot of chatter this weekend that they are looking attractive to people for a trade... i.e. KB Homes actually was up on its earnings report - so they are washed out and no where to go up in the near term.
Nokia just took another $8 billion of stock off the table - see my post about the inevitable upward movement up in the market - there is not enough stock as corporations flush with cash and outside investors flush with cash buy buy buy.... not necessarily a good predictor of the short run but in the long run as new riches are made and that money has to go somewhere, with all these huge stock buybacks there is limited supply of stock to go around. Interesting to watch this unfold. A trend is a trend until it no longer is one.
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