We keep hearing that the Federal Reserve has forced all of us into the stock market because it wants to create wealth and provide capital to avoid a Depression, something that was surely in the cards seven months ago when the pandemic began to lay our economy to waste.
There's only one problem: It's not true. The Fed's pumping admittedly has elevated most of new tech, although it hasn't done much with old tech, meaning cloud versus not-cloud. But it hasn't helped many other stocks in a way you would hope.
Consider the stock of Citigroup (C) , where the first woman was named the head of a major bank on Thursday. That event gave us a good moment to consider the performance of the stock of Citigroup under departing CEO Michael Corbat, When Corbat came in eight years ago the stock stood at $34, although it was a moving target because of market turmoil. He announces his retirement with the stock at $51. During that same period the S&P moved from 1543 to 3339.
The S&P beat the stock of Citi handily even if you consider dividends. Worse, the stock went from the high $60s to $50 during the period since the Fed turned the juice on. Fed Chairman Jay Powell did not inflate the stock of Citi. He didn't cause the bubble; indeed, some would say, considering those numbers, he burst it
Here's why. If you didn't know anything about the stock you would be blown away by how well Corbat performed. He took a bank in disarray and turned it into a serious growth engine, all the while returning more than $80 billion to shareholders, an unthinkably large number versus what could have occurred under the poor leadership of the previous team.
Remember, Citi is only a $106 billion company. Corbat was able to turn it around by generating income, from $7.5 billion when he took over to $19.4 billion. The efficiency ratio -- a great measure of how much a bank actually makes with its sales -- went from 65.4 down to 56.5. Return on tangible common equity went form a paltry 5% to 12.1%, a number that shed its red-headed stepchild status, as did its tangible book value north of $70.
Incredibly, his stock, which yields 4%, is at such a huge discount to its actual net book that it actually should be taken over by another bank if such a takeover were allowed.
And why is the discount so large?
The Fed. It doesn't want Citi to buy back shares or raise its dividend, something any non-bank manager would be thrilled to do, especially the buyback because it is so additive for shareholders. The stock, I could argue, should be dramatically higher, which would demonstrate Corbat's true value to shareholder. Where's the bubble there?
Or how about healthcare? Have you seen the stocks of the major pharmaceuticals lately? They're horrendous, starting with Gilead Sciences (GILD) of Remdesivir fame, down 17% since we created the Cramer Covid-19 index. Almost all the terrible performers belong to the healthcare cohort. Why? The government. It's all about the election, where pols from both parties want to lower drug prices. So much for goodwill generated in Warp Speed.
These are gigantic cohorts. I could include airlines, travel, leisure -- all just disasters because of the pandemic itself. And those might be getting worse, despite the stock price increases. Same with retail ex certain essential services and RH (RH) . Slim pickens.
What does it say? I think just like we hear that the Fed has given us no chance to buy anything but equities, the government, including the Fed, has given us no chance but to buy tech because it's the only sector with growth.
So with Corbat's departure, let's knock off the bubble concept. The government has deflated a huge cohort of stocks. And I am not even including oil and gas. Tech is a buy by default and by its ability to surmount the new stay-at-home world.
Nay, it's not a Powell-made bubble. It's a government-led assault against everything but tech. That's how you have to analyze the creation of a boom. It's isolated to a few stocks, and that is most surely because of adaptation and management. Not Jay Powel's gigantic SPAC, one that doesn't exist to anyone willing to get their hands dirty and look underneath the hood of the Nasdaq and the S&P 500.