Four Months Later

I wrote this 4 motnhs ago. Still true. Not sure why I was thinking about it this morning.

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11/21/08


Citigroup, which has been backstopped by Treasury and therefore, according to conventional wisdom, should not be at risk of failing, is reportedly "looking at options." That's not-so-secret-code for trying to sell itself. My problem with this market is the same as that of lots of people I've talked to. Earnings and in some cases the equity have lost all importance when considering whether to buy or sell the equity.

How could that possibly make sense? The only important element for lots of names is the balance sheet. Note that I wrote "names" and not "equities." We're in a credit crisis-induced bear market. If a company has a balance sheet that you can't explain to a 6 year old, the stock is and has been trading like it's going to zero.

I'm not complaining. With what happened to AIG, and Lehman and Bear, it's obvious that managements don't even get it. How could investors be better off?

Let's continue with the Citigroup example. Citi earned the following:

2005 $3.07
2006 $3.82
2007 $4.25

Granted with leverage coming down, earnings power is not going to be what it was, but the company has proven definitively that it can earn $3 without breaking a sweat. Is the stock trading at 1.5x normalized earnings? Wrong question.

It doesn't matter. If you work at a publicly-traded financial institution, please complete the following survey:

Our balance sheet is:

[ ] highly leveraged
[ ] a ponzi scheme
[ ] I have no idea