Thursday, November 20, 2008

Global No Confidence Vote: The Naked Citi

Economically we're approaching another fateful moment, another fork in the road...and quite likely another cliff ahead. The Dow tumbled to near 7,500 today, representing a devastating loss in the last week as the auto bailout has stalled out until December.

Far more sinister is the collapse of Citigroup, the number 2 bank in the US. Announcing 53,000 layoffs on Monday, the bank's stock has now imploded under the vital $5 a share point where institutional investors like pension plans and hedge funds aren't allowed to tread. This could trigger a massive selloff that will sink the company, and indeed Citi is now shopping itself around in a last ditch effort to get above the $5 mark.

It's the latest company to play "Deal or No Deal."
Citigroup Inc., which fell 26 percent in New York trading today, is considering selling off pieces of the bank or the whole company, the Wall Street Journal reported online, citing people familiar with the matter.

Talks are preliminary and don’t suggest that New York-based Citigroup is backing away from its insistence that it has sufficient capital and funding, the Journal said.

Buffeted by four straight quarterly losses, Citigroup has raised about $75 billion since December by selling assets and equity stakes, including a $25 billion injection from the U.S. Treasury. The government will do whatever it takes to stabilize Citigroup, including pouring more money into the company, because of the threat its failure would pose to the global economy, said Peter Wallison, a fellow at the Washington-based American Enterprise Institute.

“There is no question that Citigroup will not be allowed to fail,” said Wallison, who was Treasury Department general counsel under former President Ronald Reagan. “I would not think it is a good idea to restore the ban on short selling,” he said.

Citigroup declined $1.69 to a 15-year low of $4.71 on the New York Stock Exchange at 4:15 p.m. It has fallen 84 percent this year.

Like AIG, Citigroup will not be allowed to go under. Hundreds of billions will be poured into it over the next few days by Hank Paulson and friends. Another loaded Weapon of Financial Destruction has been pointed at the global financial system, and as sure as Jack Bauer saves the day in "24" the government will save the floundering company. Bank of America, the number one bank in the US, has slid to $11.25 or so.

The largest banks in the US are failing.

But even more sinister than that, the S&P 500 hit its lowest close since 1997.

"It was pretty brutal," said Phil Orlando, chief equity market strategist at Federated Investors.

He said the market is at a critical point, with the S&P having "tested" or closed below the lows of the previous bear market. Investors will be looking closely at the next few sessions to see if stocks can hold those key levels.

Since peaking at an all-time closing high of 1,565.15 on Oct. 9, 2007, the S&P 500 has lost 52%. The Dow has lost nearly 47% since closing at an all-time high of 14,164.53 on the same day. Since hitting a bull market high of 2,859.12 on Oct. 31, 2007, the Nasdaq has lost 54%.

"The wealth destruction is phenomenal," said Tom Schrader, managing director at Stifel Nicolaus.

Cut in half and still falling. Nobody knows what to do. We're out of rate to cut. We're not running on fumes, we're running on OTHER COUNTRY'S FUMES.

It's rather depressing. What's worse is I don't see a bottom to this yet. The housing crash rolls on, unemployment is rising sharply, and the consumer-driven economy is running out of consumers to consume.

It's a race to see who gets bailed out first, the automakers or Citigroup. I'm betting Citi, and I'm betting a deal will roll around before Monday, stoking another lovely bear market rally that will run smack into the reality of a dismal holiday shopping season come a couple weeks or so.

Citigroup will not be long for this earth in its current form. Bank of America is most likely next. These institutions are testing multi-year lows this week. We're down to a massive decision point here. Too Big To Fail is about to be tested.

Citigroup shares lost more than one-quarter of its market value on Thursday as investors questioned the banks ability to handle potential credit losses and writedowns in 2009.

The bank has been reeling on concerns that mounting losses from credit cards, mortgages and toxic debt could overwhelm its efforts to slash costs and add deposits. Citigroup has access to U.S. Federal Reserve funds, is working at insuring some of its debt and is reducing its balance sheet faster than any other company in the banking industry, said analyst Bove who believes these steps backstops the bank's liabilities.

"It would take a Depression every bit as large and long as the 1930s debacle to shake this company's viability," Bove said.

Care to test that theory? Nevermind...we're testing that right now.

Be prepared.

Cross-posted at the Frog Pond.

Waxman On, Waxman Off

Democrat Rep. Henry Waxman, that is. He's now the Chair of the mega-powerful House Energy and Commerce Committee after taking the spot from Michigan Rep. John Dingell.

Rep. Henry Waxman (D-Calif.) will become the next chairman of the House Energy and Commerce Committee after House Democrats voted to replace current Chairman John Dingell (D-Mich.).

Waxman won 137-122 in the secret ballot vote.

The dramatic intra-party showdown for the coveted position signals a leftward turn for the Democratic agenda. The outcome was a blow to the seniority system and a victory, at least in perception, for House Speaker Nancy Pelosi (D-Calif.).

Though her aides denied it, many saw the hand of Pelosi in Waxman’s challenge for the post, which conveys great power over how the Democratic agenda of President-elect Barack Obama will be implemented.

Waxman is considered more liberal on issues like climate change, energy and business regulation, and potentially more aggressive on healthcare. Dingell, the longest-serving House lawmaker, is close to the auto industry and autoworkers.

Dingell has long been the main obstacle on the Democrat side of the aisle to reforming the auto industry and to clean energy technology. He fights for his home district of Detroit deep in UAW country and he's fought for it well, but he's put the auto industry's needs ahead of America's for decades now. It's time for the country to move on. Environmental and energy reform are far more important now, not to mention badly needed reform of interstate trade laws and REAL climate change legislation. This committee would handle health care reform legislation on the House side too, most likely working hand in hand with Ted Kennedy and presumptive HHS Secretary Tom Daschle.

Waxman taking this committee over is a big neon sign that Obama's domestic agenda is on the front burner and cranked up to boil. This is huge folks, Dingell has been the ranking Democrat on this committee since Reagan and it means Obama's allies in Congress are gearing up swiftly and effectively to launch into signfiicant action come January. Going after Dingell is something even Clinton wouldn't contemplate, much less do. This is the kind of change we need.

Obama knows exactly who he needs to have going into the fights ahead...and he knows who he needs to have moved aside. I'm feeling better and better about the real prospect of effective environmental, energy, and health care legislation.

Indiana Jones And The Search For The Market Bottom

You don't have to be a world class archaeologist to figure out what's going on in the Dow this week. Earlier I warned that the Dow would indeed test the 8,000 mark again, and it did at the end of yesterday's session falling to just under the 8k level.

With an entire night to digest the numbers, Dow futures are having another meh day. It could go either direction, and this may actually be a vitally important day in the markets. If the Dow rallies once again or stays around the opening level then it's another sign the 8k level is the bottom for now. There's evidence that the market really wants to stay above 8,000. News this morning that Saudi prince Alwaleed Bin Talal Alsaud increased his stake in Citigroup to a full five percent of the company may be the rally point for today.

If it sinks big time however like yesterday, then all bets are off.

Plenty of evidence is there on the latter. The Fed is starting to see evidence that deflation may be the threat, not inflation.
Five years after Federal Reserve Chairman Ben S. Bernanke helped stamp out the risk of deflation, the threat is returning as the financial crisis and a worsening economic slump pull inflation lower.

Fed policy makers now predict the U.S. economy will contract until the middle of next year, according to minutes of their Oct. 28-29 meeting released yesterday in Washington. Government figures showed that consumer prices excluding food and fuel costs fell for the first time since 1982 last month.

The minutes, along with a slide in financial stocks to the lowest level in 13 years, increased the odds that the Fed will cut its benchmark interest rate next month. Bernanke may also need to revisit the unorthodox policy options, such as purchases of U.S. government debt, that he outlined as a board member in 2002-2003, Fed watchers said.

``The Federal Reserve put deflation back on the table as a significant policy concern,'' said Vincent Reinhart, former director of the Fed's Division of Monetary Affairs, who is now a visiting scholar at the American Enterprise Institute in Washington. ``There does not appear to be any barrier to lowering'' main rate below the current 1 percent level, he said.

Deflation, or prolonged declines in prices, hurt the economy by making debts harder to pay off and lenders more reluctant to extend credit. Japan is the only major economy to have suffered the phenomenon in modern times.

Things could go either way, short term. Long term however keep in mind things will get worse...much worse. We're getting closer and closer to the "Stagpression" scenario, a multi-year period of recessionary contraction that will cycle around the globe.


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