Tuesday, March 24, 2009

Citi Counterpoint

For what it’s worth, I don’t disagree Herr Gimpson—government bailouts is NOT how capitalism is supposed to work.  Bad companies should fail and good companies will take their place. 

But, then again, we didn’t elect that guy, and haven’t elected that guy for a long, long, long time.  And I don’t see that guy either running or getting elected for a long, long, long time to come.  And I hate to be the one to tell you this (though knowing you the way I do, you already know it), the feds don’t give a shit about you and me.  Not even a little bit.


However, we haven’t had a completely unregulated banking system for nearly many, many decades.  There’s a good reason for that.  For more than a decade, though, those regulations were loosening and credit was getting cheaper and cheaper.  That’s how we got in this mess.  It’s taken awhile to build this burning tower and the chickens are coming home to roost, so to speak.


Citibank, for its part, has been an exceptionally poorly run company for quite some time.  They’ve binged and gorged themselves on growth and have failed at every turn to integrate their operations.  They’re big, but they’re not efficient, not at all.


On the other hand, they’re big.  They’ve got a lot of capital and a lot of cash and a lot of branches and an amazing ability to bring in deposits.  In other words, despite the fact that they lost money at prodigious rates in 2008, they didn’t lose that much cash.  This means their losses are paper losses, or write downs of assets—like the depreciation of your car, except they didn’t pay full price for the car.  More like depreciation of a comic book collection, I suppose.  But I digress.


The accounting losses do not equal cash losses at the same rate, which means if they continue on the same course long enough they WILL be insolvent, but they’re not insolvent YET.  And they might just be able to turn operations around enough to segregate the poor performing portions of their operations (citi holdings) and keep the well performing operations (Citicorp) and post some decent returns for the next several quarters.  If they do, and based on early reports from the first 2 months of the year they might be able to, their shares are going to show decent returns.  Especially if you look at those returns compared to the market (the Dow didn’t triple this month).


I wouldn’t call this an investment decision.  There’s a good chance Citi won’t be around in 10 years in the same form it is today.  It’s more of a gamble or speculation on a company that might be able to right their ship long enough to reorganize and spin off some divisions.  It’s executives think so, too.  They’ve snatched up 1.5 million shares in the last several days and doubled their investment.  The rats aren’t jumping ship, and I don’t think they’re keen to throwing $3 million in the garbage, either.  They didn’t get rich doing stupid things with money. 


My investment outlook remains the same—long term, steady, incremental deposits 3 funds, one index, one mid cap, and one large cap.  That stays on auto pilot with a 30 to 40 year outlook.


As for my speculative play, the way I see it, I can either complain that this is not how it’s supposed to work, fold my arms, and watch the rats who created this mess profit wildly from the short term gross undervaluation of their company, or I can participate in the speculation that the $3 stock is, in fact, undervalued and either some bailout is coming or they’re going to right the ship just enough to float that price up enough that I can take my own profit and laugh all the way to…  uh, Chase bank.  I don’t bank at Citi, for obvious reasons.


The most this little gamble will cost me is $200.  The most that inaction will cost me is…  well, waiting cost me $400 already, so I guess the cost of waiting is already significantly higher.


The cheese is out there and the rats are feasting, and I’m tired of being screwed by these bastards.


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