When Soro gets involved into anything expect spike in volatility. I think the fund was actually behind the stock price run to 55 and when they missed, it got out plummeting the price. I don't know whether such activity benefits investors. Soros himself pointed out many times that volatility is the real tool how hedge funds make money. This time they definitely missed to make fast money. Something went wrong for them.
I know it is hard to persuade you guys because your mind works the way market flips over. I am positive that if the market landscape was different than we have now we would not have such anomalies. In the first place, it is hard to see why the market reached such high flying status anyway. Citi should have been trading below 50 in any case until they clean up their balance sheet. What is surprising the way market goes up and down. Any move is fast and brutal. Take a look at long term VIX chart. If somebody tells me it's random then he has to explain why every time spike in volatility is so crowded and periodic. A random chart should look differently. I dont blame emerging markets for the recent selloff. They have issues and investors should adjust their portfolios. However, the magnitude, speed and synchrony of such declines should be most likely attributed to activities of large institutional funds which are managed by Wall Street firms and equipped with trading technology that most independent investors don't possess. I sold my Citi holdings when I got disappointed by quarterly results. I knew that it would go down but I had no idea that it would go down that much and that fast.
There is no doubt that many investors maybe willing to buy at current levels as the Citi's stock trades at prices showing there has been no progress at all. Yes, C missed 2 quarters in a row but YvY there is a progress and better operating results. For the moment the market is not rewarding such progress as investors stay on a side. As long as machines correct the market for the trade down and given that thousands of automated trading platforms and algorithms keep tracking and correlating market and asset prices, there is little chance that investors decide to come back. Everything is being traded on corrective move in stock market. Volatility is back, and institutional computers handle such volatility the best way. Many individual stock charts show multiple daily minicrashes which the best way to identify high concentration of automated directional trading. Unless market stabilizes investors have to wait. So far, there is no sign of such stabilization. I am positive that emerging market fear as a trigger was nicely capitalized by some for the corrective move down. At least today we got some material poor economic news to justify such move that started out on speculative basis of crashing economies overseas.
First, when emerging contagion arises from speculative capital outflow by funds investors should not be worried. The problem is when local authorities are in pursuit of risky local monetary policies or there is a sharp deterioration in economic fundamentals. But how do you know what policies are being run by governments in such countries and what measures they are taking. For example, I talked to my fried in Russia who works in the bank and he said that while everybody is concerned about russian ruble slide there is no panic in the bond and equity markets. The only thing that his bank anaysts are worried about is that Central bank does not provide smooth drift of russian monetary unit to fair value rather than allowing sharp and fast decline of national currency on investment fund withdrawals and active speculative acitivities of russian banks at forex markets. I do not think that crowded selling by investment funds can be a sign of rational activities. Second, when Citi talks about emerging market clientele, it was pretty clear that it was focused on urban customers with good credit and financial standing interested in global footprint particularly on institutional side. Why would such clientele all of a sudden show dramatic decline in their credit and financial status which should lead to deterioration in loan book for Citi as Mr. Bove described? When the financial crisis hit US most of banks were hurt by subprime segment. I doubt that given credit metrics trends on their presentations form last 4 quarters show that Citi is not efficient in managing the risk in their international loan book. Finally, you are absolutely right HFT has nothing to do with fundamentals but it has a lot to do with the stock price. Here, we have not only conflict of interests but a dilemma. Stock price fell so much and so fast that it simply could not be only investor selling.
The emerging market concerns are overblown by many market specialists. Someone can not judge these markets by sharp fluctuations in local currencies, outflow of speculative funds and decelerating of momentum economic trends. I even do not understand how a lot of US stationed money managers and analysts comment on emerging markets when they have never been there. Similar mistake was actually done by Bill Gross when he predicted that US economy had decades of slow, flat or down US economy advising clients to stay away from stocks. US rates going up speculation is also nonsense as Fed officials said many times that tapering is not rise in rates and they would stay as long as unemployment exceeds 6.5%. and even if rates go up I doubt that #$%$ Bove knows exactly how this will affect business activity in emerging markets. Most likely he speculates on this from his general considerations rather than actual data.
I am not advising to buy Citi shares but it should be clear to anyone with independent thinking that this might be an opportunity. Still, questions remain as management has not provided investors with any forecast that raises confidence in it's ability to hit their goals for 2015. Two quarters in a row of underperformance even in a challenging economic envrionment is too much. The management is supposed to show progress and better operating performance on a relative basis even in a challenging environment rather than collect rewards when times are good. This is why they are getting paid so much and being trusted by shareholders. Unfortunately, Citi has lagged behind peers.
My primary concern here remains the market structure which is flooded with HFT and short term trading. Poor operating results and sharp volatility in emerging market currencies and equity markets was fair enough for fast traders to make money on shorting the weak industry member and on the back of selling from disappointed investors.
I don't think that the stock is being crushed by emerging markets. It is being crushed by high frequency trading.
We are back to the market where institutional HFT will dominate for a while. It is the market where institutional automated trading networks will control every piece of volatility in bonds, stocks, currencies, commodities, ETFs, indexes, etc. It will be very volatile and unpredictable. I expect flow of complaints regarding HFT and strange market movements to rise again compared what we have had for a year or less.
Unlike in the past there is less sharp and quick daily volatility swings in market indexes which was then transferred into individual liquid stock volatility by high frequency trading. Machines seem slowly and steadily drive the market down competing for return on a short trade. This is potentially more dangerous given high flying market in need of correction and low volatility levels. I think investors are in prolonged period of market consolidation with a downside bias. Unfortunately, such period is accompanied with higher volume levels of institutional algorythmic trading which is hard to predict in terms of market risk impact.
It is a hard question. Some market professionals, analysts and observers have already casted a vote of support. Indeed, from a longer term perspective investors should be happy as the progress at Citi is quite noticeable. However, investors operate in a world of fast trading machines, in a world in which short term spectrum of investment returns is populated mostly. It is this world and culture that should pose at least certain reluctance on investor decision. Adding to current position or initiating a new one is rational on a fundamental basis but nobody wants to be trapped by market volatility and market volatility masters. From this perspective by reporting weaker quarterly operating performance the management have failed to protect Citi investors from market forces in a sense that there is no downside protection in a short term.
BAC is a better alternative for now as the bank reported better operating results for the quarter. Given it's fundamental support it will be less vulnerable to market volatility which is driven and translated in a single highly liquid stock by high frequency trading and market making. Contrary, Citi is especially vulnerable to technical risks given absence of business operational support from the last 2 quarters. Due to the slow progress in Citi's turnaround and management comments the stock is going to be a volatility toy in the hands of market forces and therefore it is a higher risk security. While making progress toward 2015 goals the management has recently done little to protect Citigroup shareholders from market volatility in terms of operational efficiency.
Poor quarterly and uncompetitive performance realtive to industry members left investors holding a bag of volatility. The stock will fall pretty hard in case of market correction. It's recent performance fundamentals offer no downside protection or upside potential in the world of fast trading machines and short term money disappointment by last 2 quarter underperformance. Once investors start to retreat from Citi as a volatility play for short term money, there would be more downside risk.
On top of slow client activity and environmental issues it should be that they are losing market share to their competitors in almost every business except transaction services. Battling the legacy issues, facing challenging international environment and stockpiling cash citi loses competitive power in increasing their transaction volume. I dont thin there is anything they can do in the near future and it is quite questionable at this point how Corbat is going to hit his 2015 targets without increasing revenue and profitability. It is very unlikely that he can do it just cutting cost.
Before the earnings concentration of high frequency trading makes Citigroup stock quite risky as sensitivity of the price to momentum DJ index volatility jump. It does not matter if the stock falls or rises when investors get disappointed or encouraged by the report. It is just quite risky from the technical rather than fundamental perspective compared to JPM, BAC, GS or MS. Crowded HFT trading could take the stock price in either way quite drastically and very fast on no material ground, on any news or simply on investor selling or buying. Protective bets in both direction depending on your positions can be highly valuable in such technically vulnerable stock.