Don't Play Games With Citigroup
By John Roque
Special to RealMoney.com
9/24/2004 9:16 AM EDT
URL: thestreet.com
Monty Hall was the host of the game show Let's Make a Deal. The show would go something like this: Monty would say to someone in the audience, "I'll give you $50 if you have a rubber band." (As an aside, Monty once asked this of Oscar Madison on an episode of The Odd Couple and Felix Unger replied, "Oscar you have a rubber band ... it's holding up your sock.") Geez, they just don't make television shows like this anymore. Sorry for digressing but that Odd Couple episode always kills me.
Anyway, the contestant might luckily produce the rubber band and Monty'd hand over $50. Then Monty'd make it more interesting by saying, "OK, you can keep the $50 or you can trade it in for what's behind door number 1, door number 2 or door number 3." Sometimes the trade would work out well and the contestant would end up with something worth more than $50. Sometimes the trade wouldn't work out well and they'd end up with a slab of bacon, a box of Q-Tips or a hotdog. You get the point.
And here's my point: I think investors are playing Let's Make a Deal with the market.
Here's how the game is currently working: Monty Hall says, "Just for playing the game I'm giving you Citigroup (C:NYSE) stock. But, here's the catch: The absolute and relative price action in Citi is bearish. Now choose what's behind door number one, door number two or door number three."
Citi in Dust
The bearish price action can't be ignored here
Click here for larger image.
Of course, on the real Let's Make a Deal the items behind the doors were a secret, but I'm going to do it a little differently here and present the options as I see them. Remember, you have Citi and the absolute and relative price action is bearish. So with your Citi in hand choose one of the following doors:
Door Number 1 -- Buy: Despite Citi's bearish absolute and relative price action, the stock is "cheap." It sells for 11 times '05 earnings and it yields more than 3.6%. You are taking the stock that Monty gave you and you are averaging down by buying more and you don't give a darn that the absolute and relative price action is bearish because you don't drive by looking out the rearview mirror, but rather by looking forward.
Door Number 2 -- Sell: Citi's bearish absolute and relative price action is a concern. Not only is Citi a market bellwether, but it makes up nearly 11% of the S&P financials sector and the financials sector is 21% of the S&P 500. Since Citi is the most important stock in the most important sector in the S&P 500, it is the most important stock in the world. A market bellwether that's this weighty with bearish absolute and relative price action either means: a) the market's going to have problems going forward, or b) the "cheap" argument isn't working because if Citi were really "cheap" it wouldn't be going down.
Door Number 3 -- Hold: Citi's bearish absolute and relative price action is just a minor concern because the overall market is cheap and you're finding a lot of other stocks to buy. You've got some energy, insurance, aerospace/defense, a railroad, a few industrials, and a utility (not a bad idea to have a utility as it helps to lower the beta in your portfolio). Besides, tech's getting cheap too.
You already know my answer: I choose door number 2.
I know this is just technicals, and it might sound like I haven't seen a therapist in a while, but the action in Citi is keeping me awake at night. I'm concerned because with Citi weakening I'm wondering when the market's going to have problems going forward. This is not to say that I don't like energy stocks -- nope, I'm fairly in lust with energy stocks. For me energy stocks are a combination of Courteney Cox and Salma Hayek. Could the picture be any clearer? But that still doesn't assuage my concern about Citi.
You see, it's been more than 10 years since my former partner Steve Shobin introduced to me the idea of Citi as a market bellwether, and of all the technical lessons learned from him, I thought this one was the most important. Citi's either weakening because the market's going to have problems going forward or because the "cheap" argument isn't working. Because if Citi were really "cheap" it wouldn't be going down. And that's my deal.
Postscript
There may be a door number 4, behind which lies a bellwether that is losing its influence with regard to market direction and impact on the financial sector. I still think this would be problematic because of Citi's weightiness, but it might just mean I'll have to find another market bellwether. |
