New Trade Citigroup (C): Fading the Recent Strength, Playing for a Move Back To Recent Lows By July Expiration

by Dan June 20, 2012 12:49 pm • Commentary

Update- New Trade June 20th at 12:50pm: We wanted to to wait for the Fed Statement before initiating another short structure in C, but with the news out, and little help on the way, we see the likelihood of European debt fears, coupled with lack of revenue growth of U.S. banks causing massive headwinds for the banks for the balance of the year.


TRADE: C ($28.75) Bought the July 28/25 Put Spread for .70
  • Bought 1 July 28 Put for 1.07
  • Sold 1 July 25 Put at .37

Break-Even On July Expiration:

Profits btwn 27.30 and 25, make up to 2.30 or 3x your money, max gain of 2.30 25 or below.

Losses of up to .70 btwn 27.30 and 28 and max loss of .70 above 28/

We like this structure as it catches Q2 earnings that we think will stink and should catch what we think will be a volatile period for the broad market.



Original Post June 20th, 2012 at 11:09am: Listening to the Whispers of the Credit Market

Citi’s management has been out and about the last couple weeks, CEO Vikram Pandit adequately answered some hard hitting questions from the Maria Bartiromo on CNBC this past Monday (read transcript here), and last week met with Sanford Bernstein bank analyst John MacDonald on June 14th.   Here was Macdonald’s quick take-away in a not to clients dated June 15th:

Yesterday, we met with Citigroup CEO Vikram Pandit and CFO John Gerspach. Management struck a cautious tone about global economic risks faced by the industry and the subdued operating conditions for large banks. That said while acknowledging a challenging revenue environment, the company expressed confidence in its balance sheet, noting that risk exposures continue to be reduced, credit quality is still improving, and capital ratios are high and increasing.

We are reducing our EPS estimates for 2Q on a weaker outlook for trading revenues and net interest income. Despite the near-term challenges, we believe Citi shares offer attractive value for medium to longer-term investors given the current valuation (0.55x TBV) and our outlook for book value growth and the out-year buildup of excess capital. Maintain OP, $39 PT.

Most other research analysts echo the same sentiment, as there are 21 Buys, 6 Holds and 5 Sells.  The only notable Sell rating is by sometimes influential CLSA analyst Mike Mayo.  The only real leg to stand on that Bulls have to own the stock here is valuation relative to historic and the belief that things can’t really get that much worse for the money center bank.   This is where we firmly disagree.  Sentiment can get much worse and fast, and we want to hit one chart that we think is fairly instructive to our bearish view in the name and why we feel the stock will make new lows at some point this summer.

Citi 5 yr CDS vs 30 day ATM Implied Vol from Bloomberg


The 2 year chart above clearly displays credit market participants’ continued fear with 5 yr CDS trading at levels that were common during last year’s market swoon as a result of the European Sovereign debt crisis, while Implied Vol in the equities realm has retreated to levels that nearly signal complacency given the stocks 5 yr history of out-sized volatility.

We don’t mean to beat a dead horse, but the European banking system is the epicenter of this crisis.  Since C is the most internationally exposed large American bank, it’s the name we keep picking on for our short ideas in the sector.

The technicals suggest the recent bounce is close to done:

The $30 level is the big resistance level, with a declining 50 day (purple) and a declining 200 day (black).  The stock has worked off its massive oversold condition from May, and looks poised for a retest of the $25 support level going back to last year.