Confidence in Banks and Government While Fools Reign Supreme
March 02, 2009 | about stocks: BAC / C / UDN / UUP
Trading looks like it has become the art of fools of late. And here is the proof: Anyone who has read Accounting 101 will tell you that the treasury department's action in Citigroup's (C) preferred stock does not change Citi's bottom line, assets or liabilities even by an iota. In fact, if anything, it helps Citi's balance sheet because now Citi will not have to pay interest on the treasury's preferred stock. Even more amazing is the fact that this news was not really news, as Citi itself had notified this discussion last Monday. And even then, for the whole week Citi's stock was climibing up. And then suddenly traders (fools) seemed to be awakened and read the news. Even more astonishing is the fact that financial channels like Bloomberg repeatedly called it a new government bailout for Citi. They called it multiple times the "third bailout of Citi". And I was just amused that these reporters seemed like they were out on a high school pass - not any one who knows about finance and/or accounting, not even an ounce.
Let me reiterate for those who care to know the truth and want to listen from people who understand the subject: treasury's action on Friday was NOT a new bailout of Citi. All treasury did was to take a position in Citi to bolster its tangible common equity by utilizing the funds already injected in Citi. Now some people might make the argument of Citi being semi-nationalized with that move. I would disagree with that because that does not seem to be the intention of government and rightly so.
First, the Federal Reserve already monitors major banks, including Citi, regularly. Second, in these times government is interacting with banks more than normal, but that was the case with or without conversion from preferred to common stock. I did not see anything in the news to actually cause panic, though Citi's investors (or traders) did. In fact, by looking at the market's reaction on Friday, I can say that these days, trading is governed more by speculators than investors. And as long as markets are dominated by speculators, confidence will never return. It seems like the SEC will have to step in again with the short sell ban rule, or at least a version of that, to reduce the excessive volatility in the equity markets.
If anyone wants to take a very low risk future gain position then it would be in Citigroup and Bank of America (BAC) stock. Citi in particular is a global institution and its balance sheet is still healthier than most banks and investment banks. Unfortunately for Citi, other camouflaged banks like Morgan Stanley (MS) and Goldman Sachs (GS) are not bearing the wrath of short sellers. But Citi will survive. And even in its most fundamental and stripped down version of a retail bank, Citi stock's fair value is $7.5 considering a price/book ratio of 0.5, which is still a significant discount for an institution like Citi.
I strongly believe that major banks have the power to weather the storm and government will provide the necessary help for them to emerge from this mess. It is in the best interest of every one who is making profits in Dollars either by short selling or by going long. The current market strength of the Dollar against other major currencies shows that global traders still have confidence that the US will recover earlier than any other regional market. And banks are an integral part of the recovery and the nation's economy.
So I would suggest long-term and strong hearted investors to take a position with free cash in major banks, especially after the market routs investors like it did on Friday. Slowly building a portfolio in these stocks will provide healthy gains in the next 12 months. Trying to find other safe or better investments will again be a fool's exercise, including holding a cash position in Dollars, because all other investments (including cash) are dependent on the future of major banks. They will rise or fall together. So it would be a better investment to take a position in banking stocks immediately after panic attacks similar to the one evidenced last Friday.
Disclosure: no positions, but buying C and BAC at these distressed levels.
source:
seekingalpha.com/article/...-fools-reign-supreme?source=etrade
wow, die c hält sich bisher verdammt gut! mal sehen, ob sie dem druck standhält! halb 7 spricht geithner... ohohhh
katjuscha, nimms einfach hin ...