Citi Stokes the Stock Market

Here's a sampling of Wall Street analysts' reactions to news that Citi was profitable in the first two months of 2009

Bad news at big banks has helped drag the stock market down over these many miserable months, so it's only fitting that some relatively good news from one of the beleaguered U.S. financial powerhouses helped spark an equity rally on Mar. 10. Citigroup (C) shares rallied 38% on Mar. 10 after news that the company's CEO, Vikram Pandit, sent a letter to employees that said that the firm was profitable through the first two months of 2009, and was having its best quarter-to-date performance since the third quarter of 2007. Pandit also said the preferred exchange announced nearly two weeks ago is expected to make the company the strongest capitalized large U.S. bank. as measured by tangible common equity and Tier 1 ratios.

How did Wall Street analysts react to the Citi news and other developments on Mar. 10? Here's a sampling of commentary compiled by BusinessWeek:

Nick Kalivas, MF Global Research

Citigroup has announced improved profitability and defended its capital position.… The memo downplayed worries over deferred tax assets (DTA), which are part of the capital base. The market has been skeptical of the value of these assets. Citi expects to use the DTAs, but also highlighted its strong tangible equity base.

The company said it did a stress test, which was more pessimistic about the economy than the Fed's test. Citi said it was confident in the adequacy of its capital base, given the stress test. This implies it does not need more capital.

Citi said it was profitable during the first two months of 2009. Revenues, excluding externally disclosed marks, were $19 billion. Given the rise in credit card and mortgage delinquency, along with the deterioration in commercial real estate, the mark on assets is important to profitability. Additionally, delinquency rates are rising among corporate customers. This statement is coming under the greatest scrutiny.

To go along with the Citi news, the Securities & Exchange Commission is reportedly looking at the uptick rule and other measures relating to short sales. A decision could come next month. This could create a short squeeze in the equity market, but is not likely to solve the financial crisis.

Marc Chandler, Brown Brothers Harriman

Market optimism returned with a vengeance [on Mar. 10], helped by Citibank CEO [Vikram Pandit] saying the bank is having its best quarter since 2007. This is hard to believe given that the fundamental backdrop is still worsening, but markets are looking for any source of good news right now.

Still, the fact that the dollar held up despite the surge in optimism supports our view that it's no longer just about the safe-haven flows for the dollar. We continue to favor an eventual downside breakout of the 1.25-1.30 range for [the euro vs. the dollar] given our negative view on the euro zone, as EU officials continue to say that more fiscal stimulus is not needed.

Action Economics

Treasury Secretary Geithner said the recession in the U.S. and around the world is intensifying, according to news wire headlines — the comments come from an interview with Charlie Rose to air later today on PBS. Geithner says it is our obligation to fix the crisis, and noted President Obama indicated that we will "do what is necessary." It is critical to stabilize the financial system, and the fix will require "sustained action."

The Treasury Secretary also assured that the TALF program will be sustained over a long period of time. Geithner noted that some banks were prudent, but others made bad judgments, while "unjustifiable" bonuses made the problems worse. He also said some banks may need significant capital. The top 20 banks play an "essential" role in the economy and will be protected by the government. But the U.S. involvement will be short-lived. We still find Geithner's comments to be more posturing than reassuring, or enlightening.

Alexander Young, Standard & Poor's

Amid the worldwide stock market plunge, already historically elevated global equity correlations have risen even higher as all markets have converged aggressively to the downside. As a result, the benefits of equity portfolio diversification have all but evaporated, magnifying investor losses. There has literally been nowhere to hide within any geographic, size, or style category.

Every major worldwide equity asset class has now fallen at least 53% from its peak with the vast majority down well over 60%. Given the global nature of the current economic and earnings per share contraction, the broad-based equity fallout is understandable, in our view. In terms of a silver lining, while rising global equity correlation has amplified losses, we believe it is also likely to boost gains as markets will likely recover in unison. Over time, this should provide long-suffering investors with some well deserved relief, by our analysis.

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