Tuesday, December 1, 2009

Investing in Financials


One can’t figure out the best place to invest these days. Keeping money in the bank is not enough due to inflation. With today’s prices in both stocks and real estates one is tempted to invest in both. On the other hand, ‘low’ prices actually mean that past highs were not realistic so the bubble burst. Some articles advise readers to put money in stocks and real estate now because the price is right. At the moment, a slight bullish sentiment exists in the stock market. For real estate, a further decline is expected. The Case-Stiller real estate index forecast declining real-estate prices in some states until late 2010. One would think that investing in real estate is the best bet in present circumstances.


What about stocks? For example, some folks are starting to think that Citibank is a good investment in the long run. The new CEO may be the best candidate, all things considered although he does not have leadership gravitas. Information from other articles mention that he is a 'quant' – someone who is more mathematically inclined, more comfortable in financial equations than in human resources. Not a good combination considering the importance of emotional intelligence in leadership. But under the circumstances, a ‘quant’ maybe what Citibank needs to steer through all these complex financial derivatives the company finds itself possessing. Most CEOs in banks where clueless in the financial engineering that took place and resulted in disasters. See Bear Sterns, Lehman Brothers, UBS and even Citigroup.


With a ‘quant’ leading the bank, is that enough to steer the company through the challenges ahead? And what about government ownership via TARP? Looking at the bank’s reports, Citibank seem to have a good business model moving forward. The strategy is to leverage its global presence (in 110 countries) and get revenues in the only place where there is money and growth: Asia. The government investment is just another indication that the bank will not fail. Hence, the good factors are: a good business strategy for the future, a financial genius as a head, and a government ‘guarantee’ from bank failure plus restructuring and cost – cutting moves. Despite these good points though, the market does not believe the company will survive let alone thrive.


The stock price is an indication of this perception. Some articles even state that the company is already dead; it’s just a process of dismembering the corpse. But this view is not realistic considering above points. Perhaps the perception is that there are still some hidden surprises lurking somewhere in the balance sheet: maybe in commercial property foreclosures or credit card losses or maybe even in sub-prime mortgages. But again these are likely seen by a management team headed by a ‘quant’ and mitigated by the government presence. People like Robert Rubin say that Vikram Pandit is a genius and that he could see around ‘corners’. I watched some videos in the internet and he looks capable and smart.

The key is to keep the management team in place to foster stability. One assumes that the government perceives this problem and ongoing re-structuring such as breaking the company into two (Citigroup and Citi Holdings) will allow for better management while keeping Vikram Pandit in place. I think all these factors are sufficient to consider Citi stocks as a good long term investment. The market does not perceive these improvements possibly because it does not believe in the current leadership (which includes government ownership). Or perhaps there are intentional moves to keep this perception alive so a larger bank would gobble up Citibank. If another bank does come in, maybe JP Morgan or Goldman Sachs, investing is good as well. The ‘purchase’ stock price maybe expected to be profitable to insure taxpayers get their money back. Perhaps the final price should be around the USD $ 6 – 8 dollar range. Of course, there are a lot of risks because no one really knows how the future will play out.

On the other hand, considering all the other investment these maybe the most reasonable, all thing considered. But it’s the price that makes it attractive at USD $ 4 range. A less risky investment of course would be exchange traded fund (ETF) but recent prices from USD $ 25 to USD $ 45 would translate to lower number of shares and less profit. One should have at least 2,000 to 3,000 shares to experience a good return even with a slight increase in the share price. At the end of the day, investing in Citibank would mean keeping the money invested for at least 7-10 years to experience any significant profit. I think it’s a better bet than gambling in Las Vegas except for the much longer time frame.

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