Do we have nothing to fear but fear itself?
I sure felt like that after listening to Citigroup's (C) robust conference call this morning, the one that ignited a long smoldering fire and got the stock back on the right track.
Citi may be the metaphor for this moment where we really are too worried about the business world as there's no doubt there's a lot of concern about a slowing international economy.
Get a load of what CEO Michael Corbat said on his conference call: "we clearly see a disconnect between what we see in our business and what the markets are saying." He goes on to say he sees no significant slowdown and that "we see the biggest risk in the global economy is one of talking ourselves into the next recession as oppose to the underlying fundamentals taking us there."
So, what does it mean? What does that commentary and this earnings report say about the market and where we are headed?
First, I think we've been through a huge bear market, one that made us oblivious to anything good and made anything negative top of mind because it is hard to believe that we could have stocks plummet like this if the real world wasn't about to roll over. Citi's a classic example. The stock of this dominant international bank went from $70 before Jay Powell declared war on the economy in order to save it, to $48 in less than four months. That's called a bear market and don't let anyone tell you otherwise. Any time you take that kind of shellacking what it says is there's going to be a real slowdown as well as a spike in bad loans.
But when we read through Citi's numbers the only real negative was in the volume of trading, which, while lucrative and down enough 21% year over year -- to give the quarter the appearance of weakness -- it has nothing to do with the real economy which was pretty robust for the bank without any spike in bad loans whatsoever.
That's the fear of fear itself speaking.
More important, we have a very different pattern developing here than the last times the banks reported. I have gotten used to bank stocks getting hammered after they reported because they have repeatedly run into the quarter.
But because banks reflect people talking themselves into the next recession, we don't have that kind of run-up. Instead we have a situation where a company that just made $4.2 billion in the fourth quarter and trades well below its tangible book of $63.79 -- the stock's at $58 -- bought back 74 million shares. If you sold Citigroup into the decline the odds favor that some percentage of your sale was bought by Corbat, who intends to buy back another 8% of the company's shares in 2019.
It gets better, there's actual momentum to the company as well as an annuity stream called "Treasury and Trade Solutions" that, on its own, would probably be worth at least half of the value of the bank's stock because it is gigantic and fast-growing with low risk. Think of it as a global cash management business for multinationals that does everything from payroll, foreign exchange conversion, supply chain and finance trade loans. Remember Citi, because of its worldwide legacy, has an on-the-ground presence in 100 countries. Consider it a fintech business like a Square (SQ) or a MasterCard (MA) or a PayPal (PYPL) which are valued at gigantic price-to-earnings multiples versus the 8 times this year's earnings that Citigroup trades at.
No wonder the engaged shareholder ValueAct has taken a big position and is having a constructive dialogue with Citi; it's hidden assets are probably worth so much more on their own than within the bank even as no one is talking about breaking up the company.
You know what else I like? Citigroup is very big in Asia-Pacific securities, number two in fixed income, number two in mergers and acquisitions, ex-Japan, and number three in equities. Why does this matter so much? Because of the elephant in the room, Goldman Sachs (GS) . Now my charitable trust owns both stocks because they are so darned cheap and I don't believe we are headed into a recession, but one of the chief reasons why Goldman's stock is down so much is the risk to its reputation from its scandal involving some bond offerings that Goldman placed that look to be fraudulent. Goldman is number five in fixed income, number one in M&A, ex-Japan and number two in equities. If you really believe that Goldman will get hurt in Asia because of the scandal -- and I don't know if it is true but many on the street seem to think it is -- Citi's the big winner.
Is there a bigger takeaway for the equity markets beyond Citigroup? First, the financials represent about 20% of the market so if they can catch fire that's good news for the overall tape. There are plenty of high quality regional banks like a KeyCorp (KEY) or a Huntington Bank (HBAN) that have become accidental high yielders, giving you a greater than 4% yield. That, alone, tells me, like Citigroup, their stocks are buys. These regional banks are incredibly cheap but because bank CEOs fear the government will come down on them if they try to combine, there's no real way to bring out instant value. Heck, if you want a profitable trade, you should theoretically be able to buy Goldman Sachs and hope it merges with Citigroup to become a sales, trading, and fintech powerhouse.
Then again, that's a dream so don't buy it because of musings.
Second, we have to accept the fact that if you own a stock that's been crushed by the bear and it delivers any good news it will be rewarded, something that hasn't really been the case since one year ago.
Now today wasn't the best kind of day to analyze this phenomenon as we caught a couple of downgrades of tech stocks, particularly semiconductors, that were strictly about stocks that have come back up too hard, too fast based on nothing. But you can interpret that as good news, too, because unless you bought them on Thursday or Friday, you aren't sweating it. Apple's (AAPL) stock got rocked again on the same old news; it's getting a tad tiresome, not unlike Facebook (FB) , with a stock that seems to be breaking out from purgatory after everyone saved the journalists who write for the penny savers thrown on your driveway. Who knows how much Apple will actually go down when it reports if it's like Citigroup. Oh and then there's Amazon (AMZN) down again on the divorce of the century. If they could reconcile you would have a short squeeze of dramatic proportions. But that's nobody's business except for those who insist on selling it based on the rupture.
We also were reminded today about how risky stocks can be. Sure we don't want to talk ourselves into a recession, but the violent nature of owning a once-safe utility, PG&E (PCG) , with 12 million customers, with a stock that was literally cut in half over bankruptcy fears, is a reminder that you must factor in frailty more, especially given that so many investment firms were recommending the stock of this beleaguered utility felled by the camp fires they were not prepared for. That said the ETF effect, the one makes each stock a one-for-all and all-for-one experience, allows you to buy a ConEd (ED) or an (AEP) for less than it traded on Monday.
Still, most companies aren't about to face breathtaking liabilities from California fires. It's enough that they have fear itself going against them, and that's where the opportunity might be.
