Citigroup – “Coming Out of the Blue!”

There is so much good news occurring in the United States it is hard for a blogger to catch his breath, especially when you know what to look for.  Well, on Friday we just received another piece of good news confirming yet again the US is healing from the financial collapse of 2008.  We are four months shy of five long years when America’s largest financial institutions not only failed but needed government help in order to survive.  The history of this period, with the many books written and movies produced, is conclusive that without US federal government help Citigroup would have been one of the financial failures along with AIG, Lehman Brothers and countless financial firms during the latter part of 2008.

Citigroup, with assets of over $2 trillion dollars, made this institution one of the “Too Big To Fail” (TBTF) institutions that was ringed fenced by the US government.  If Citi were to have fallen back in 2008, the economic shock would have been so catastrophic and dark economically the world economy would have fallen in a depression that would have rivaled the 1930’s.

Enough of the bad thoughts, as always let’s start with our model price chart.

Citigroup with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

Citigroup with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

For those interested, a daily updated chart of C subsequent to this post will be maintained on Facebook, here.

As you can see Citigroup had a positive transit of EBV-3 or $50.74.  This is significant because the equity markets are communicating that Citi’s balance sheet has some value.  After almost five years of the equity markets saying the balance sheet of Citi had questionable value, this is a big deal.  I don’t know if many of you have ever read an annual report of a major bank or a “TBTF” financial institution; I would rank these financial reports “the” most difficult to read and or analyze of any publicly listed company.  The reports are riddled with an alphabet soup of financial products and derivatives that make little sense to the layman.  Combined with the fact their stated assets – loans and investments – may have a different market value than the stated asset values recorded on their balance sheets.  It is far easier to let model price theory (EBV lines) and publicly traded equity prices determine whether Citi’s stated balance sheet, including off balance sheet liabilities, have any value.

For fun I thought I would include in this blog our long-term model price chart of Citigroup going back to 2006.

Citigroup with monthly price bars, EBV Lines (colored lines) and model price (dashed line)

Citigroup with monthly price bars, EBV Lines (colored lines) and model price (dashed line)

Couple of things I would like to point out on this long-term model price chart of Citi.  First off it may shock you that Citigroup was trading over $500 a share back in 2006 and 2007 pre the financial collapse of 2008.  This is a direct comparison to the stock price of today – Citigroup had a very unusual 10 for 1 reverse stock split in March 2011.   So you can see the losses shareholders have suffered over the last six or seven years.

Second, you can observe our EBV lines have what I call a “waterfall effect” from the end of 2007 to mid 2009.  This represents the write offs Citigroup has taken on the stated asset values (and shareholders equity) on the company’s balance sheet.  This is very important because the US government and regulating agencies are very quick to recognize losses on their banking industry’s balance sheets.  This helps the economy recover faster from a financial crises because the free enterprise market and financial intermediation necessary in a complex economic system needs strong and financially solvent banking institutions to interact.  Many countries, including Japan and many of the European countries fail to force their respective banks to recognize bad loans and equity write-downs leaving the banking system in a weaken state as well as their national economies in recession because credit creation is very difficult without strong and vibrant sovereign banks.

Third, Citigroup has tried to emerge from EBV-3 on three separate occasions over the last 5 years (see arrows on the long-term model price chart).  This answers the question “Haven’t investors missed the boat?”  In August of 2011, Citi was trading under $30 and is currently trading over $50.  Citi has been crawling under EBV-3 for almost 5 years and investors in the stock have been taking, in my view, a lot of risk.  Yes, their investment has worked out lately however the risk far out weighted the reward in my view.  With Citi trading under EBV-3 investors could have faced additional balance sheet write-downs, equity dilution through common share issues and or possible nationalization leaving common investors suffering further losses – with nationalization a low probability outcome in the United States but still a consideration nonetheless.  With a positive transit of EBV-3 much of the risk that I have highlighted above has been severally curtailed, mathematically speaking.

This is a Big Event!

I just want to underscore in terms of Citigroup, the company, and the US economy this is a big event.  Solvency was at the heart of the issue in the 2008 financial crises.  Much and maybe all of the US financial industry in the fourth quarter of 2008 was insolvent.  Time, stress tests, unlimited Federal Reserve backing and US government injection of capital – known as TARP – helped keep the financial industry alive through this very dark period in US financial history.  Citigroup faced financial collapse without substantial government aid and implicit reassurances to market participants that Citi was “Too Big to Fail”.

With Citi now emerging and having a positive transit of EBV-3 “the market” is starting to signal confidence in the stated assets of Citigroup’s balance sheet giving further confidence to investors of the ability of the company to stand alone without continual US government support returning Citi to a healthy profitable company pre the 2008 financial crises.

“Coming Out of the Blue!”

For those new to my blog, “Coming out of the Blue” is an investment strategy where investors purchase large capitalized equities as they emerge or have a positive transit of EBV-3.  Since our last EBV line is colored blue, we call this “Coming Out of the Blue”.  This investment strategy is a buy and hold strategy that can take many years to unfold and be profitable.  I have blogged many times of this investment strategy and have blogged on specific names that I will follow up on with additional blogs from time to time.  In this light I believe I will be writing about Citigroup for some years to come.

Again, I do emphasize that I am not specifically recommending Citigroup for you to purchase.  The purpose of this blog is to highlight specific situations that are teachable in relation to our model price work in the hope you can learn our concepts with the potential of passing these concepts unto others.

Links to some of my “Coming Out of the Blue” blogs (but not all).

Questions and Answers about “Coming Out of the Blue!”

How Jumbo Gains are Possible Using Model Price – Part 1

How Jumbo Gains are Possible Using Model Price – Part 2

JP Morgan – “Coming out of the Blue!” (Again)

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