When I started this site my focus was to try and bring to light how out of whack things like home prices, inflation, and stock prices were in relation to true fundamentals as well as the coverage issue of the mainstream media. Over just the last month or so, my job has become super easy as the news and reality have diverged so clearly that it is obvious to even casual observers something is amiss. Today was another banner headline day, so lets have a look.
Citigroup Secures Funding from Someplace You Never Heard Of
Early this morning the buzz was that Citi had secured substantial funding from a quality source. I waited till I had some time to read the news and here it was:
Stocks Higher After Citi Secures Capital
Tuesday November 27, 5:42 pm ET By Joe Bel Bruno, AP Business Writer
Wall Street Advances After Abu Dhabi Agrees to $7.5 Billion Investment in Citigroup
NEW YORK (AP) -- Wall Street rebounded Tuesday after the Abu Dhabi Investment Authority said it will invest $7.5 billion in Citigroup Inc. -- a vote of confidence for the nation's largest bank, which has suffered severe losses amid the ongoing crisis in the mortgage market.
The Dow Jones industrials rose more than 200 points in yet another volatile session as investors were hopeful the financial sector can remain healthy despite the ongoing credit crisis. The banking industry has been battered in recent months as defaults on home loans have risen and rendered some mortgage-backed securities essentially worthless.
Major financial institutions, including Citi and its competitors, have had to book some $80 billion of writedowns on those holdings -- a trend that has left the markets nervous about the full extent of the damage from soured loans. Citi's ability to secure a capital injection raised hope others might be able to do the same.
"The Citi deal is certainly a relief after a series of negative news on Monday with respect to the financials," said Todd Salamone, director of trading at Schaeffer's Investment Research. Funds like Abu Dhabi's "that have plenty of cash may be viewed as a potential rescuer given the balance sheet troubles the banks are having. A weak dollar makes it that much more possible."
So there you have it. After banks have written off $80 BILLION in bad loans so far, a healthy $7.5 Billion makes up for it all. In a previous post I went over the "housing losses are a drop in the bucket" argument. If $80-$100 Billion is nothing, $7.5 Billion should not even qualify as a nano drop in the bucket!
Abu Dhabi literally translated means "Father of Gazelle", and I hope they are as fast as Gazelles in hedging their investment. Abu Dhabi is part of the United Arab Emirates, and is generally considered the richest city on earth. That is all fine and dandy, but could Citi not find more mainstream investors for the money? I thought Warren Buffet was going to buy every bank in the world or something? When banks get into trouble in recent history, it seems that some rich nation like Saudi Arabia, or in this case Abu Dhabi, steps up to the plate. I will not comment on the political aspects of such "help" save that when cash is the main help a big favor almost always is expected in return.
So the investment resulted in restoration of confidence for Citi? It says so in the article. Lets take a look and see,
Citigroup (C): last trade 30.32 (-1.24%)
Average Volume (3m): 64,000,000 Today's Volume (3m): 193,100,000
I am not a serious stock trader, nor a fundamental analysis guy, but volume is a metric I do watch. Over 3 times the normal volume was traded and the stock lost another 1.2%. If that's confidence restored in Citi, they should hope people lose confidence again.
The terms of the deal are pretty convoluted as well. Mish has a great rundown on his site of the particulars, but the short version is it smacks of desperation at Citi.
Freddie Mac On the Attack!
Freddie was in the news today as well. Freddie obviously could not locate a bunch of bored oil Barron playboys to invest money in them (question: could they do that if Freddie is US government affiliated? I do not know, leave a comment if you do know) so they did things the old fashioned way:
Freddie Mac to Sell Stock, Cut Dividend
Tuesday November 27, 5:41 pm ET By Marcy Gordon
Freddie Mac Plans to Sell $6 Billion in Stock and Cut Its Dividend in Half to Bolster Finances
Cutting the dividend is a great way to save cash. Issuing even more stock while your stock is rapidly collapsing is another time tested winner. This move makes the Citi deal look pretty good! I wonder what id happening to senior citizen accounts lately. Poor rates of return on fixed income investments for over 4 years, and now dividend yielding stocks are cutting left and right. That's going to be a lot of angry elderly voters come the election.
FED Will Not Cut Rates (WINK, WINK)
Great headlines all over the place today. Check out this howler:
Fed officials lean toward no "holiday" rate cut
Tuesday November 27, 5:25 pm ET By Ros Krasny
CHICAGO (Reuters) - Two Federal Reserve Bank officials hinted strongly on Tuesday that they would not support an interest rate cut in December, contending that the Fed has provided enough insurance against financial turmoil and would risk opening the door to higher inflation.
"In some circumstances, lowering interest rates may prolong the painful process of price discovery," he said in a speech to the Rochester University Simon Graduate School of Business.
You know for a fact that the FED is going to cut rates when they trot out a member and he actually makes a good case to not cut them. The FED is trying to "manage expectations" and by that I mean they want a big bang for the rate cut buck. The FED is helped by a story like this running on reuters. The FED will cut on the 11th, no doubt about it. Whether it is 25bps or 50bps is the only game right now.
Consumer Confidence numbers were lower than expected. Ho Hum. Home prices showed their single biggest drop since the GREAT DEPRESSION as well today. Again, a yawner. The market keeps putting on a show in the face of truly severe events. In a previous post I postulated that all market participants are holding their collective breath until the new year. After a day of headlines like today, I feel even more confident that 2008 will be very interesting indeed.
Have a good night.