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Monday, October 22, 2007

Citigroup Compelling 20 years after Black Monday

Twenty years after Black Monday (see "Black Monday 1987 Graphs") Citigroup (Ticker C, Charts) looks even more compelling to me today than when I added it to my newsletter “Explore Portfolio” back in September 1998 at a fraction of today’s price.
Click chart to View full size - More charts

On October 1, citing “dislocations in the mortgage-backed securities and credit markets, and deterioration in the consumer credit environment” Citi said its third quarter 2007 net income would decline about 60% from the year ago $5.06 Billion. Citi said it would:
  1. write down about $1.4B of its $57B portfolio of highly leveraged loans
  2. lose about $1.3B on the value of securities backed by subprime loans
  3. lose $600M in fixed-income credit trading. It also said consumer credit costs rose $2.6B, mostly due to a boost in loan-loss reserves.
CEO Chuck Prince said during the earnings conference call
  • "Looking ahead to the fourth quarter, while we obviously cannot predict market movements or other unforeseeable events that may affect our businesses, we expect to return to a more normal earnings environment as the year progresses."
Citigroup's plan is to write off all the bad news in this quarter and hope they can look forward to the future. If they over estimated their "subprime meltdown losses" then they can reduce loss reserves in future quarters to report better than forecast results going forward.

The fear is they under estimate their losses and more write-downs will follow. I believe people are selling like lemmings running off a cliff on fear things are much worse. Those of us with the ability to buy through periods of massive fear often end up with superior returns.

Technically, the chart for Citigroup found support on the dashed-blue uptrend line that marked the bottom for two major fear days in 1998 and 2002. The fear from this subprime meltdown is no different.

With a dividend of $2.16 and today's closing price of $42.61, Citi pays you a 5.07% yield that is considerably better than the 4.41% 10-year Treasuries currently pay.

Kirk Lindstrom's Investment Letter Performance

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