Bet on Citigroup Hurts Edward (Eddie) Lampert

Often compared to legendary Warren Buffett, Jim Cramer's college buddy Eddie Lampert made a big bet on Citigroup that has not looked good in the short-term. A New York Times article today reports:

In August, a hedge fund controlled by Edward S. Lampert, the value-oriented investor, disclosed that it had built a $1.3 billion stake in Citigroup, the beleaguered financial giant.

In the last year, RBS Partners, an affiliate of Mr. Lampert’s ESL Investments, has steadily poured money into Citigroup shares. As of March 31, it valued its stake, then about 15.24 million shares, at $782.6 million. It increased that stake to 24.8 million shares by June 30, giving its Citigroup holdings a value of about $1.3 billion, regulatory filings show.

Citigroup shares closed at $33.41 yesterday. That would value RBS’s stake at $828.6 million, a paper loss of about $471 million from late June.

Not only did Eddie Lampert, like Citigroup when it was much higher, his buddy Jim Cramer thought Citigroup was a great stock to buy at $53, collect the dividend and wait for it to go higher with a new CEO or announcement of a break-up. In the July 17th, 2007 article, "Cramer's Take on Eddie Lampert's Stocks," Jim is quoted as saying of Citigroup:

"For the life of me I don't understand why everyone isn't buying Citigroup. You've got a much better than average yield," Cramer said in a June 21 RealMoney blog post. "You have a management that doesn't have a clue and could be gone in an instant, which would mean you could pick up a quick $3 or $4. You have a company that could be a big gainer worldwide, and it is a ROWer (that's rest-of-world, for those who've missed my thousand references to it)."

and

"I am blown away that this stock has been stuck at $53 with all of these positives lurking. This isn't Bank of America (BAC) , where you can only hope that they stop buying things. This is one of those stocks where you could have a dramatic move up on any talk of a breakup or a change at the helm, and in the meantime you will get paid to wait."

With Citigroup, I've made a lot of money in my newsletter explore portfolio buying back in Sept 30, 1998 AFTER it crashed from the mid $30's to the teens. I sold enough shares to be on "house money" but I would have done better to have sold in 2000 when it hit the mid $50's before falling 50% to make a bear market low in 2002. That is not my style.

I like to buy great companies when they go on sale, the same way I buy pants and shirts at Macys (M) after holiday markdowns. After holding all through spring and summer, I am wearing a $58 Merino wool polo sweater-shirt now that I bought last year for $15 the day after Christmas. Even if Citigroup goes lower, you should be able to wrap up some shares now, collect the dividend and brag about how smart you are in a year or two when we get past this subprime mess and the stock has recovered.

Since 2002, Citigroup rallied again from the mid $20's to a new all time high in the mid $50's before the sub prime meltdown crushed the stock into the mid $30's. Yesterday, Citigroup clsoed at $33.41, at another major support line shown on the graph below.

Click to view larger graph

I've held all along and collect the dividend. I hope and believe this is yet another great buying opportunity, but I'll get no "trader points" for being a long term buy and holder on Citi, which is what I often do once I am on "house money" for stocks.

Note: I also own Citigroup in my personal portfolio. I may add shares here but I have yet to decide. Yesterday I added to my SPY position using profits taken in my international mutual funds. SPY is the ETF for the S&P500 which has a significant weighting in the financial sector.

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11/08/07 8:15AM PST Update: Here is a chart I found at "SeekingAlpha: Citigroup 'Crisis': Some Perspective Is In Order" showing the same support line with the "crisis of the day" listed.

Click to view larger graph

Are you one to say "this time it is different?" I hope not.

Quality Real Estate Holds Up In Sub Prime Meltdown

I am impressed at how negative “the boyz” have everyone from Jim Cramer and Larry Kudlow to Republican politicians fearing for their jobs. They are panicking as the stock markets are correcting for excessive risk taking when they ask the Federal Reserve to bail the risk takers out before the Fed is sure inflation is going down for good (See Chart of ECRI's WLI Growth Rate vs US GDP: 09/09/07 that shows the Fed can now cut rates.)

It is sad to see some will lose their homes when their mortgages reset at market rates they can't afford, but what made them think they could live in a house with a monthly mortgage far cheaper than the house cost to rent?

I have little sympathy for those seeking returns in excess of safe CDs and US Treasuries who are being crushed when their sub prime paper they bought with all sorts of fancy names is worth less than they paid. Sure it was nice to get 8 or 11% yields for awhile, but only a fool would think you get that sort of yield without high risk. (See Best CD Rates.)

In the major cities benefiting from global trade where there are good jobs and homes are too expensive to buy for speculation, real estate is going up! I do not think anyone is talking about this on TV.

Los Altos, California Real Estate Prices 2000-2007

Click image to see it full sized.

Los Altos, CA, just down the street from Google with its young millionaires looking for homes to raise families in a city with great schools, is doing great despite sky high prices.

Towns across the SF Bay or in South San Jose where renters were converted to homeowners to buy inflated houses due to the low cost of money are not doing well. This should serve as a reminder to anyone “speculating” on a home that buying a house in a poor location just because it is going up is risky.