Posts tagged ‘Citigroup’

The Illusion of the Reverse Split

Source: Photobucket

I’m still trying to figure it out – do I want more shares and a reduced share price in the case of a traditional stock split, or do I want less shares and an increased share price in the case of a reverse stock split? Well, apparently Citigroup Inc. (C) has determined the latter reverse stock split is the best approach.  Citigroup CEO Vikram Pandit hailed the reverse split and $0.01 dividend announcement in a broadly distributed press release, as if these irrelevant illusions were transformative:

“Citi is a fundamentally different company than it was three years ago. The reverse stock split and intention to reinstate a dividend are important steps as we anticipate returning capital to shareholders starting next year.”


Okay, so Citigroup is paying out a whopping 1/10 of one penny per your current share price (compared to $.49 per share before the financial crisis) and Vikram is telling me I should be excited. Maybe additional ecstasy should be kicking in once shareholders learn they will receive 1 pie with no slices, rather than 1 pie with 10 slices? These same share-slicing and re-piecing gimmicks were implemented in the pre and post dot-com era with no beneficial value. If this truly was such a novel idea, I wonder why smart people like Warren Buffett have chosen not put such amazing, whiz-bang ideas to use. The lauded 1-10 reverse split planned by Citigroup could also be used to raise Berkshire Hathaway’s share price from $127,766 per share to $1,277,660 per share. One share of post reverse-split BRKA could buy you 288,410 shares of Citigroup today.

Proponents of the reverse split cite the institutional benefits provided by the move. Not only will institutions previously prohibited from buying single digit equity securities now be able to buy Citigroup shares, but institutions will also be able to pay lower commissions because the current 29 billion shares outstanding will be reduced to a measly 2,900,000,000 shares. In reality, reducing share count through a reverse split may fool a few unknowledgeable speculators, but prudent investors understand a reverse split does not impact the value of the company one iota.

The fact of the matter is that earnings and cash flow growth will be the main drivers behind institutional shareholder buying of Citigroup’s stock.

Famous investor John Templeton simply stated, “In the long run, the stock market indexes fluctuate around the long-term upward trend of earnings per share.”

Peter Lynch appreciated the importance of earnings too: “People may bet on hourly wiggles of the market but it’s the earnings that waggle the wiggle long term.”

So while Citigroup may not be a horrible stock, the announcing of a 1 for 10 reverse stock split will not be a share price savior. So rather than let the illusion of capital structure gimmicks inform your decisions, investors would be better served by focusing on the sustainability and growth of earnings and cash flows.

Wade W. Slome, CFA, CFP® 

Plan. Invest. Prosper.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, but at the time of publishing SCM had no direct position in BRKA/B, C, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.

March 22, 2011 at 12:05 am 1 comment

Making +457,425,000% – 13 Minutes at a Time

I love investing, but sometimes the shear boredom can get a little tiresome. I mean, a puny little -500 point collapse in the Dow Jones Industrial Average every five minutes can be so 1987.  Thank goodness for yesterday’s largest, intra-day point-drop in history (almost 1,000 points) because without out such a meltdown, I might fall asleep at the trading desk and there would be no way to make an annualized +457,425,000% (~457 million percent) trade in a single day. Earning a well-deserved return like that will not only exceed the rates achieved on T-Bills, but will also likely outpace inflation as well. Making that kind of money is not bad work, if you can get it.

Executing the Tricky Trade

Sound difficult to do? Well, not really. All you need to do is find a stock or security that has fallen more than 99% in a single day, then buy the security for 10 cents per share and then sell it immediately, minutes later at $61.09. Repeat this process another 390 times per day for 52 weeks, and you’re well on your way of turning $1 into $4.5 million over a year.

IWD Chart (Source: Yahoo! Finance)

Take for example, the iShares Russell 1000 Value Exchange Traded Fund (ETF), IWD, which yesterday traded for pennies at 3:47 p.m. Eastern Standard Time (EST) and skyrocketed over +600x fold in the subsequent 13 minutes. Fortunately (or unfortunately), depending on how you perceive the situation, the irregular trading activity was not limited to IWD.  Other securities showing severe abnormal trading patterns include,  Accenture (ACN), Boston Beer (SAM), Exelon (EXC), CenterPoint Energy (CNP), Eagle Material (EXP), Genpact Ltd (G), ITC Holdings (ITC), Brown & Brown (BRO), and Casey’s General (CASY). In full disclosure, I did not take advantage of any 99% pullbacks yesterday, but now that I know how the game works, I will be on full alert.

What the F*%$# Happened?

Initially reports pointed to a Citigroup (C) trader who entered into an inadvertent $16 billion (with a “b”) E-Mini futures trade order, when the trader meant to enter a trade for $16 million (with an “m”)…ooops! This alleged transaction purportedly triggered a wave of selling, culminating in a select group of stocks temporarily trading down to pennies in value. There is a related, yet more plausible, potential explanation. Quite possibly, as a function of excessive trading volume overwhelming the New York Stock Exchange, the overflow of trades migrated to less liquid ECNs (Electronic Communication Networks) and over-the-counter markets. Chances are the high frequency traders were not blindly jumping in front of the train. Whom really got screwed were the retail investors that had stop loss orders at “market” prices, which likely were triggered at unattractive prices.

I’m not sure if we will ever find out what truly happened, but whatever explanations are provided, rest assured there will be multiple more conspiracy theories on top of the legitimate guesses. The top 5 conspiracies I’m pushing are the following:

1)      Frustrated by the fraud charges filed by the SEC (Securities and Exchange Commission), Goldman Sachs intentionally tripped over a power cord at the New York Stock Exchange (NYSE), which triggered a wave of bogus trades.

2)      High Frequency Traders (see HFT Article) were upgrading their computers from Windows Vista to Windows 7 and experienced an outage causing global disruption.

3)      In order to pay for the potential upcoming lawsuit liabilities and SEC fines, Goldman shorted the Dow Jones Industrial index at 10,800 and then went long once the index broke 10,000.

4)      Warren Buffett was rumored to suffer a heart attack, but after realizing belching relieved his chest pain, the markets recovered dramatically.

5)      Worried that regulatory reform may not pass, a secret group of Congressmen shorted stocks (see Do As I Say, Not As I Do article) to push stocks lower, then distributed TARP (Troubled Asset Relief Program) assets to voters minutes later in order to buy November votes and push stock prices higher.

Political Aftermath

Click To Hear Senators

Politicians will be frothing at the mouth or be pressured into approving financial reform. Even if markets manage to stabilize in the coming days and weeks, the pressure to ram regulatory reform through Capitol Hill will be mind-numbing. Mary Shapiro, Chairman of the SEC, and politicians will also be pushing to produce a clear scapegoat to throw under the bus, whether it is a trader at Citi, a high frequency traders at Goldman Sachs, the CEO at the NYSE (Duncan Niederauer), or a talking baby from the E-TRADE commercials. Regardless, depending on how quickly a credible explanation is unearthed, we will know how much, if any, reform is needed. If the markets are genuinely transparent, following the paper trail of responsibility to the stocks that dropped to $.00 or $.01 a share should be a piece of cake. If the systems are too complex to explain why handfuls of stocks are trading to $0, then even I am willing to look up to the skies and say heaven help us with some tighter oversight.

Over the last few years, there have been very few dull, financial moments and the markets did very little to disappoint yesterday. Irrespective of the political mudslinging, scapegoating, or irresponsible behavior, the SEC needs to get to the bottom of these issues rapidly in order to protect the integrity and trust of global players in our markets. What we don’t need is a political knee-jerk reaction that merely creates unintended, negative consequences. No matter what happens, I will at least be equipped to test a new strategy designed to make +457,425,000%.

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper. 

*DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, but at the time of publishing SCM had no direct positions in GS, IWD, C, BRKA/B, CNP, EXP, G, ITC, BRO, and CASY, or any security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.

May 7, 2010 at 1:56 am 2 comments

Meredith Whitney’s Cloudy Crystal Ball

Meredith Whitney, prominent banking analyst at her self-named advisory group, should have worn a bib to protect her from the adoring drool supplied by Maria Bartiromo in a recent CNBC interview. Ms. Whitney has quickly become a banking rock star during this “Great Recession” period.  She was right at a critical juncture, and as a result she was thrust into the limelight. Much like Abby Joseph Cohen, the perma-bull Goldman Sachs strategist who gained notoriety in the late 1990s, Whitney (the perma-banking bear) will continue having difficulty living up to the lofty expectations demanded of her.

Despite the accolades, Whitney’s crystal ball has gotten cloudy in 2009. I suppose accuracy is not very important, judging by her bottom-half 2007 ranking (year of her major Citigroup call) in recommendation performance and 48%-ile ranking in the first half of 2008. Analysts, much like reporters, can avoid looking dumb by reporting the news du jour and by following the herd. Whitney has followed this formula with her continuous bearishness on the financial sector, excluding a brief but late upgrade of Goldman Sachs in July. Not only was her analysis tardy (Goldman’s stock tripled from the 2009 bottom), but her call has also underperformed the S&P 500 index since the upgrade.

Incoherent Inconsistencies

Like a bobbing and weaving wrestler (her husband John Layfield is a retired staged professional wrestler from the WWE), Whitney tries to concoct a completely mind-boggling narrative to explain her forecasts this year in the CNBC interview with Maria Bartiromo:

11/18/09 (XLF Price $14.60): “For the year, I have been at least ‘cover your shorts, go long.’ I haven’t been this bearish in a year.” (See Maria Bartiromo Interview)  

Hmm, really? Are you kidding me? Wait a second…is this the same “go long” Meredith Whitney that expressed the following?

3/17/09: (XLF: 8.55 then, 14.60 now +71% ex-dividends): “These big banks are sitting on loans that were underwritten with bad math, and the stocks are going to go down…these stocks are uninvestable.”

(Fast forward to minute 8:20 for quote above)

2/4/09 (XLF: 8.97 then, 14.60 now +63% ex-dividends): “Investors should not even consider owning banks on an equity basis” (Click here and fast forward to minute 8:10 for quote).

The schizophrenic accounting of her postures are all the more confusing given her stance that the sector was “fairly valued” in October, according to the CNBC Bartiromo interview.

Don’t get me wrong, she made an incredible bearish call on Citigroup in the fall of 2007 and was expecting blood in the streets until a massive rebound in 2009 surprised her. Investors need to be wary of prognosticators that get thrust into the limelight (see Peter Schiff article) for a single prediction. The law of large numbers virtually guarantees a new breed of extreme forecasters will be rotated into the spotlight any time there is a major shift in the market direction. I choose to follow the footsteps of Warren Buffett and stay away from the game of market timing and market forecasts. I believe James Grant from the Interest Rate Observer states it best:

“The very best investors don’t even try to forecast the future. Rather, they seize such opportunities as the present affords them.”


Meredith Whitney may be a bright banking analyst and perhaps she’ll ultimately be proven right regarding the downward banking stock price trajectories, but like all bold forecasters she must live by the crystal ball, and die by the crystal ball.

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

DISCLOSURE: Sidoxia Capital Management (SCM) and its clients own certain exchange traded funds (including VFH), but currently have no direct positions in C, GS, or XLF. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.

November 23, 2009 at 2:00 am 13 comments

Compensation: Pitchforks or Penalties


Currently there is witch hunt under way to get rid of excessive compensation levels, especially in the financial and banking industries. Members of Congress and their constituents are looking to reign in the exorbitant paychecks distributed to the fat-cat executives at the likes of Goldman Sachs, Bank of America and the rest of the banking field. According to The Financial Times, Goldman has set aside $16.7 billion so far this year for compensation and benefits and pay is on track to meet or exceed the $661,000 employee average in 2007. The public is effectively calling these executive bankers “cheaters” because they are receiving benefits they don’t deserve. The backlash resembles the finger-pointing we see directed at the wealthy steroid abusers in football or cork-bat swingers in baseball. Americans seem OK with big payouts as long as they are achieved in a fair manner.  No one quibbles with the billions made by Bill Gates or Warren Buffett, but when you speak of other wealth cheaters like Jeff Skilling (Enron), Bernie Ebbers (WorldCom), or Dennis Kozlowski (Tyco), then the public cringes. The reaction to corporate crooks is similar to the response provoked by steroid use allegations tied to Major League Baseball players (i.e., Barry Bonds and Roger Clemens).

Less clear are the cases in which cheaters take advantage of a system run by regulators (referees) who are looking the other way or have inadequate rules/procedures in place to monitor the players. Take for example the outrage over $165 million in bonuses paid to the controversial AIG employees of the Financial Products division. Should AIG employees suffer due to lax rules and oversight by regulators? There has been no implication of illegal behavior conducted by AIG, so why should employees be punished via bonus recaptures? The rules in place allowed AIG to issue these lucrative Credit Default Swap (CDS) products (read more about CDS) with inadequate capital requirements and controls, so AIG was not shy in exploiting this lack of oversight. Rule stretchers and breakers are found in all professions. For example, Lester Hayes, famed All-Pro cornerback from the Oakland Raiders, used excessive “Stickum” (hand glue) to give himself an advantage in covering his opponents. If professionals legally operate within the rules provided, then punishments and witch hunts should be ceased.

Regulators, or league officials in sports, need to establish rules and police the players. Retroactively changing the rules after the game is over is not the proper thing to do. What the industry referees need is not pitchforks, but rather some yellow flags and a pair of clear glasses to oversee fair play.

Cash Givers Should Make the Rules

What should regulators and the government do when it comes to compensation? Simply let the “cash givers” make the rules. In the case of companies trading in the global financial markets, the shareholders should drive the rules and regulations of compensation. “Say on pay” seems reasonable to me and has already gained more traction in the U.K. On the other hand, if shareholders don’t want to vote on pay and feel more comfortable in voting for independent board members on a compensation committee, then that’s fine by me as well. If worse comes to worse, shareholders can always sell shares in those companies that they feel institute excessive compensation plans. At the end of the day, investors are primarily looking for companies whose goal it is to maximize earnings and cash flows – if compensation plans in place operate against this goal, then shareholders should have a say.

When it comes to government controlled entities like AIG or Citigroup, the cash givers (i.e., the government) should claim their pound of flesh. For instance, Kenneth Feinberg, the Treasury official in charge of setting compensation at bailed-out companies, decided to cut compensation across the board at American International Group, Citigroup, Bank of America, General Motors, GMAC , Chrysler, and Chrysler Financial for top executives by more than 90% and overall pay by approximately 50%.

Put Away the Pitch Forks

In my view, too much emphasis is being put on executive pay. Capital eventually migrates to the areas where it is treated best, so for companies that are taking on excessive risk and using excessive compensation will find it difficult to raise capital and grow profits, thereby leading to lower share prices – all else equal. Government’s job is to partner with private regulators to foster an environment of transparency and adequate risk controls, so investors and shareholders can allocate their capital to the true innovators and high-profit potential companies. Too big to fail companies, like AIG with hundreds of subsidiaries operating in over 100 countries, should not be able to hide under the veil of complexity. Even in hairy, convoluted multi-nationals like AIG, half a trillion CDS exposure risks need to be adequately monitored and disclosed for investors. That why regulators need to take a page from other perfectly functioning derivatives markets like options and futures and get adequate capital requirements and transparency instituted on exchanges. I’m confident that market officials will penalize the wrongdoers so we can safely put away the pitch forks and pull out more transparent glasses to oversee the industry with.

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

DISCLOSURE: Sidoxia Capital Management and its clients do not have a direct position in Goldman Sachs (GS), AIG, Berkshire Hathaway, BRKA/B, Citigroup (C), Enron, General Motors, GMAC , Chrysler, WorldCom, or Tyco International (TYC) shares at the time this article was originally posted. Sidoxia Capital Management and its clients do have a direct position in Bank of America (BAC). No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.

October 27, 2009 at 2:00 am 1 comment

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