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Friday, April 18, 2008

Citirgroup Earnings, Downgrades and LIBOR

Citigroup (C) reported earnings this morning… or lack thereof. The market threw a little bit of a party. C and broader equity futures spiked up on the news.

Citigroup Reports Loss on $15 Billion of Credit Costs (Update1): “Citigroup Inc., the biggest U.S. bank by assets, posted its second straight quarterly loss on at least $15 billion of writedowns and increased loan losses as customers fell behind on home, car and credit-card payments.

The first-quarter net loss of $5.11 billion, or $1.02 a share, compared with earnings of $5.01 billion, or $1.01, a year earlier, New York-based Citigroup said in a statement. While the loss was worse than the $4.75 billion predicted by analysts in a Bloomberg survey, revenue exceeded their estimates. The shares climbed 6 percent to $25.46 in early New York trading.”

So C missed. But since it wasn’t an apocalyptic report, the broader markets are in rally mode. With revenue down 48% and $39 billion in write-downs booked, can it possibly get any worse?

“The bank cited increased delinquencies on mortgages, unsecured personal loans, credit cards and auto loans, amid “trends in the U.S. macroeconomic environment, including the housing market downturn and rising unemployment.””

Actually it can. The losses on mortgages are far from over as housing prices are expected to continue to drop. The losses on unsecured personal loans, credit cards and auto loans are just now beginning to accelerate.

While the Bulltards are cheering, Moodys and Fitch have quickly and quietly snuck in some downgrades on C.

Fitch lowered C to AA- with a NEGATIVE outlook.
Fitch cut Senior Unsecured Debt to AA- from AA
Fitch cut Long Term IDR to AA- from AA

Fitch also believes that selling the frozen buyout loans that C has on its balance sheet won’t free up capital. Probably because C would have to finance the damn deals themselves and foot the first few losses to get a sale done.

Fitch downgraded Citigroup’s Individual Rating from A to A/B.
The ratings explained here:

“A denotes:
A very strong bank. Characteristics may include outstanding profitability and balance sheet integrity, franchise, management, operating environment or prospects.

B denotes:
A strong bank. There are no major concerns regarding the bank. Characteristics may include strong profitability and balance sheet integrity, franchise, management, operating environment or prospects.

C denotes:
An adequate bank, which, however, possesses one or more troublesome aspects. There may be some concerns regarding its profitability and balance sheet integrity, franchise, management, operating environment or prospects. D denotes:
A bank, which has weaknesses of internal and/or external origin. There are concerns regarding its profitability and balance sheet integrity, franchise, management, operating environment or prospects. Banks in emerging markets are necessarily faced with a greater number of potential deficiencies of external origin.

E denotes:
A bank with very serious problems, which either requires or is likely to require external support.

F denotes:
A bank that has either defaulted or, in Fitch’s opinion, would have defaulted if it had not received external support. Examples of such support include state or local government support, (deposit) insurance funds; acquisition by some other corporate entity or an injection of new funds from its shareholders or equivalent.

Notes:
Gradations may be used among the five ratings: i.e. A/B, B/C, C/D, and D/E.”

Moody’s affirmed C’s ratings, but changed the outlook to NEGATIVE.

While equities are throwing a mini-party this morning, LIBOR is spiking hard again. The financial system is under HUGE stress.

The Eurodollar front month is getting absolutely smashed as LIBOR continues to spike. All technical levels have been destroyed. The front month is pricing in a 75 basis point hike now. Fun times.

I will repeat that. RATE HIKES. Not cuts.

Those of you thinking:
WTF is LIBOR?
WTF is a Eurodollar?

Start reading. Start learning. This is about to become the next big thing…

Related Posts:
The TED Spread, LIBOR and EURIBOR = Scary Bad
Mortgage Insurers (Quietly) Downgraded: CDS Spreads Scream Trouble

21 comments:

Robert said...

Couldn't the reversal in EDs be due to a reversal of trades in the futures?

I heard stories of all kinds of players who had no experience in trading EDs buying them simply because they were moving higher. A lot of these guys had no idea what they were getting into.

Now we are seeing a short term correction, which may re-balance over time.

Ben Bittrolff said...

Robert,

EDs are just following LIBOR. Chart one over the other.

I'm looking at it like this:
1) Banks need liquidity.
2) So they hoard cash.
3) Those that fall short, try to borrow overnight.
4) Since banks are hoarding, and demand is elevated, there isn't enough to go around.
5) LIBOR spikes.
6) Most fancy and important derivatives are priced off LIBOR from SWAPS to mortgages.
7) End result: Despite central bank cuts, important market rates rise and the central banks are rendered less effective.

Rising short term rates should not be bullish for equities. At least not now while the economy is in the process of diving into a recession.

MAB said...

Ninja,

Perhaps investors are anticipating that the fed cuts less than expected and/or the European CB is forced to cut rates. A strengthening dollar vs. euro play.

Just a guess.

Ben Bittrolff said...

Mab,

The way its stands right now, EDs are forecasting rate HIKES. Weren't not talking about pricing OUT rate cuts, we're talking about price IN rate HIKES.

Anonymous said...

Interesting, my first thought was 'it's about time!' As bad as it will be, this will at least help control inflation and force a bit more honesty into the system will it not?

Alex said...

Ben, what's to stop the Bulltards' sentiment from persisting indefinitely, and acting as a buoy to these shares? I.e. what will be the catalyst for the next leg down?

Ben Bittrolff said...

Alex,

Sentiment can only go so far.
A lot of this is technical too. It doesn't help that the short position in Citigroup is MASSIVE.

The short positions in equities as a whole are at record levels. This isn't necessarily a contrarian signal, but it does make for fun moves when positions get squeezed.

Scott Finch said...

in regards to the comment about the market pricing in hikes via eurodollar futures. is it possible that the market for this contract is not reflecting expected central bank hikes, but rather reflecting raw supply demand for short term money? i really think i am missing a big piece of puzzle that i need to understand the situation. can someone just talk about this a little more

Ben Bittrolff said...

Scott,

Of course. Nobody is actually expecting real rate hikes. This is just what happens when people get squeezed out of their positions.

The EDs track LIBOR. LIBOR is spiking... nuff said.

Scott Finch said...

ok sweet, thats what seemed most logical to me. thanks ben

AFoolofcourse said...

A naive question, why the market goes up? Short covering? The market manipulated by the media, for instance, CNBC? I'm just feeling fooled!!!!!!

thedocument said...

Okay, I'm looking at a chart of $LIBOR and it shows a loss of 4 bp for the week, yet this blog talks about it spiking. What am I missing?

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