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Generational Dynamics Web Log for 15-Jan-08
Citibank's huge loss and sharply lower retail sales roil stock market

Web Log - January, 2008

Citibank's huge loss and sharply lower retail sales roil stock market

Investors are being hit by a double-whammy today, starting with a Citigroup press release announcing fourth quarter earnings:

"Citi Reports Fourth Quarter Net Loss of $9.83 Billion, Loss Per Share of $1.99


Citigroup earnings, 1999-2007 <font face=Arial size=-2>(Source: economist.com)</font>
Citigroup earnings, 1999-2007 (Source: economist.com)

Results Reflect Write-Downs on Sub-Prime Related Direct Exposures in Fixed Income Markets and Increased Credit Costs Related to U.S. Consumer Loans

New York, NY, January 15, 2008 Citigroup Inc. (NYSE:C) today reported a net loss for the 2007 fourth quarter of $9.83 billion, or $1.99 per share. Results include $18.1 billion in pre-tax write-downs and credit costs on sub-prime related direct exposures in fixed income markets, and a $4.1 billion increase in credit costs in U.S. consumer primarily related to higher current and estimated losses on consumer loans.

For the full year 2007, net income was $3.62 billion, or $0.72 per share. See Schedule A for full year business segment results.

Management Comment: "Our financial results this quarter are clearly unacceptable. Our poor performance was driven primarily by two factors significant write-downs and losses on our sub-prime direct exposures in fixed income markets, and a large increase in credit costs in our U.S. consumer loan portfolio. Looking beyond these two factors, revenues and volumes continued to grow strongly in a number of our franchises and we generated record results in international consumer, transaction services, wealth management, and advisory," said Vikram Pandit, Chief Executive Officer of Citi."

The surprises were as follows:

The fantasy hope had been that Citibank and other financial institutions would have a few more writedowns of bad mortgage-backed assets, and then it would be all over, and the bubble could start expanding again. The Citibank report made that fantasy unlikely, even to investors.

That was followed by news that retail sales fell sharply in December, by 0.4%. Most retail companies make most of each year's profit during the December holiday season, and a fall in retail sales will have a severe impact on earnings.


Growth of delinquent consumer loans <font face=Arial size=-2>(Source: nytimes.com)</font>
Growth of delinquent consumer loans (Source: nytimes.com)

These two reports -- the Citibank and retail sales reports -- were linked to a Monday NY Times report that also finds sharp falls in retail sales, but relates it to surges in delinquent and defaulting consumer loans -- credit cards, auto loans and mortgages.

The surging delinquencies indicate that the cutbacks in retail spending are not temporary, but are going to continue for a while.

Citibank's announcement this morning that it lost $4.1 billion on consumer credit really resonated with the other news.

Wall Street opened sharply lower this morning. As of 1 pm, the Dow Industrials have remained down about 180-200 points, after trending downwards since the new year.

It's clear that journalists, analysts, pundits and financial managers have absolutely no idea what's going on. The "bulls" are saying that growth will slow down, but there'll be no recession, and the economy will really take off in the last half of the year; the "bears" are saying that there'll be a mild recession, and the economy will really take off in the last half of the year.

One thing that's particularly striking is that the stock markets are not reacting to the current liberal Fed policies, as implemented in the Fed's "Term Auction Facility" (TAF) announced last month.

The interest rates that triggered the "credit crunch" last year have returned to normal, thanks to the large amounts of liquidity that central banks, including the Fed, the European Central Bank, and the Bank of England, have injected into the financial system through these auctions. Unlike Fed funds rate adjustments and open market operations, which are "general purpose" interest adjustments, the auctions provide liquidity to banks for the specific purpose of easing short-term credit problems.

The Fed held a TAF auction on Monday, selling $30 billion in 28-day credit, and another $30 billion will be auctioned off on January 28. The interest rate bid on Monday's auction, 3.95%, is substantially lower than the current Fed funds rate (4.25%), indicating that the auction has succeeded in solving immediate "credit crunch" problems.

Last August, I wrote that "The nightmare is finally beginning." At that time, I was expecting that we'd follow the 1929 pattern, which would lead to a major panic around the end of September. Within a couple of weeks it became apparent that we were NOT following the 1929 pattern at that time.

However, we HAVE been following the 1929 pattern since January 1, and this may (OR MAY NOT!) indicate that we're close to a tipping point that would trigger a generational panic and crash.

It's no longer the case that "bad news is good news," and any bad economic news means that the Fed will lower interest rates, which makes it good news. Today, further Fed cuts are being taken for granted, and "bad news is bad news," driving the market lower.

Today we have tens or hundreds of trillions of dollars in various securities, especially credit derivatives, in the interlocking portfolios of hundreds (thousands?) of financial institutions, investment houses and hedge funds. If the market continues to fall in this way, then these highly leverage firms will begin going bankrupt. At some point, a bankruptcy will trigger a domino effect, a chain reaction, forcing further sales, causing a generational panic. There's no way to predict when that will happen, because it depends on chaotic (in the sense of Chaos Theory) events that can't be predicted, but the signs calling for increased watchfulness are present. (15-Jan-08) Permanent Link
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