Endgame for Citigroup?

Citigroup got hammered today (-17.3%) after it was reported that they were in talks to sell a majority stake in its Smith Barney brokerage business to Morgan Stanley. The breakdown in Citi's chart looks ugly. A retest of its November lows looks probable.




But Citibank under $6 begs the question whether this bank can survive. Reports are already starting to circulate about the break up of Citi (Marketwatch, Felix Salmon at Market Movers, Information Arbitrage). These ideas gain traction as we approach the inauguration of the Obama administration, particularly as the next administration will not be ideologically opposed to the nationalization of a bank. To quote Felix Salmon:

I'd say p=0.3 right now that Barack Obama's first major act as POTUS will be the nationalization of Citigroup. Yikes.

put/call ratio -- the beginnings of a bottom?

Last week the put/call ratio indicated that an intermediate top might be in place (in Is the put/call ratio calling a top?). Since then the markets have sold off and the put/call ratio has risen sharply. Now, the put/call ratio is starting to give hints that a bottom is about to form.

Below is a chart with the equity-only put/call ratio ($CPCE) in the top panel (along with its 60 EMA), and the 21 EMA of the same in the second panel, superimposed over $SPX. The third and fourth panels contain the entire CBOE put/call ratio (that's equity+index, $CPC).


When the equity only put/call ratio has risen above 1.04, there has generally been a bottom. Usually these bottoms have held for quite some time, but in March, the bottom held for a week, while in September, the bottom held for 3 weeks. None the less, bottoms. Well the $CPCE is again above 1.04.

Mind you, CBOE's entire put/call ratio ($CPC) has not risen nearly as sharply as the equity-only ratio. The equity-only ratio seems to be more accurate at calling tops and bottoms, but it would be reassuring if we got a confirmatory signal fro the entire CBOE put/call ratio.

Also, if you look closely, you can draw some parallels in the $CPCE struture at each bottom. In particular, there tends to be a prolonged period where the $CPCE is above its 60 EMA. While this formation doesn't uniformly call bottoms, it's pretty good at marking turns in equities. One of these formation may presently be forming in the ratio.

Breakdown in banks?

The banks sold off this morning. While it is still early in the day, it looks like there's a breakdown in banks. There's a sell signal from the MACD and the RSI just put in a lower low. Meanwhile the banking index broke below support from the lows of early December.

However, the banking index is very oversold, and three of the heavyweights, BAC, C and JPM are siting on support. Perhaps one more move down is needed to confirm this breakdown

A bounce in banks?

While I am pretty bearish on equities in general and banks in particular, here's one bullish alternative that I can't seem to ignore. Banks could be due a bounce.



Ariel, over at Unbiased Trading, gives the bearish alternative.

Bubble in Treasuries?

There has been a lot of talk about the bubble in Treasuries, but there's good reason to think that that talk is overblown. Here's a FT Alphavile summary of a Goldman Sachs note arguing that there's no bubble in US Treasuries.

What is Goldman's basis of argument?

1. Long-dated Treasury yields are first and foremost driven by the expected rate of inflation. The US economy is in a tailspin, and as the Fed acknowledged in the minutes they released,we'll have "disinflation" until at least 2010;
2. While there is the potential for "bond vigilantes" to demand higher yields, the Fed has already warned the market that they will buy Treasuries if necessary. In other words, if Treasury prices do start to collapse, the Fed will buy, and support prices. The Fed will do this to maintain the lowest possible rates in the economy;
3. While the supply of Treasuries will increase sharply, this probably won't cause an absolute increase in yields. Indeed, there's very little historical evidence that a greater supply of gov't paper has a meaningful impact on bond yields once macroeconomic conditions are accounted for.
   
   Read the FT Alphaville's summary of Goldman's note for more details.

But also, consider the Japanese experience. 10 year yields fell from a peak of 8% to a low of 0.5% during their lost decade episode. And that occurred in the face of some core CPI inflation.


Above graph from an excellent Martin Wolf piece,‘Helicopter Ben’ confronts the challenge of a lifetime, from Dec 2008.

Vix, Yen and TLT -- Vix is still finding resistance

Payroll numbers came in as expected, but the unemployment rate jumped. This, along with the poor economic releases out of Europe, set a negative tone, and the markets fell right after the opening bell.

Potentially, if SPX cracks 890, we could have the start of another downleg. Early this morning, it looked like SPX would break. The Japanese Yen was up sharply at the open -- this often signals equity weakness. Within hours, TLT followed the Yen up, another indicator that stocks would weaken. But Vix has risen only slightly, and once again is finding resistance at it upper 10 day BB.

There are still a few hours left before the markets close, but the longer Vix fails to break above is 10 day BB, the greater the chance that equites will bounce.

Global indexes hitting resistance

Others have suggested that the bear market in global indexes has further to run (i.e. China: Fun Bear Market Rally from The Financial Ninja) but a quick look at the charts suggests that many indexes are hitting resistance.

I have not done a comprehensive survey, but here are the first four non-North American ETF's that I examined.

FXI (iShares FTSE/Xinhua China 25) -- here's 18 months of data, with a descending trendline from the Oct 2007 highs still in play. FXI has retraced 23.6% of the fall from the highs, in a possible bear flag structure, with descending volume. It was just sharply rejected from the Fib after poking above the trendline. Now for the test of support.


EEM (iShares MSCI Emerging Markets) -- similar story to FXI, with some subtle differences. The trendline that's in play is from the May highs, and EEM has poked above this trendline on a few occassions, including two days ago. The bear flag is also clearer on this chart.



BKF (iShares MSCI Brazil, Russia, India, China) -- similar story to FXI and BKF (no suprise) but a more bullish chart as BKF broke out above the down trendline before being rejected by the 23.6% Fib. This last move could easily turn into a kiss back of the break out point before this index moves higher.


Th breakout in BKF is an interesting divergence from EEM and FXI especially as these three ETF's have many similar components. The snap back in BKF is partially caused by the Indian stock market, whcih has been rocked by an accounting fraud scandal these past two days.

Moving to the developed markets, here's EFA (Europe Australasia Far East Index iShares). A simiarl story to EEM, with a dscending trendline, once pierced, but still in play. The fib that seems relevant is from the May highs, not the 2007 highs.

Citibank, Option Expriy Week, Max Pain and Earnings

From FT Alphaville

Citi in $1.4bn loss over LyondellBasell

Posted by Gwen Robinson on Jan 09 05:50

Citigroup is to suffer a $1.4bn loss on its loans to LyondellBasell, the chemical group that placed dozens of its subsidiaries under bankruptcy protection this week after failing to restructure $26bn in debt. More…

Citigroup is to suffer a $1.4bn loss on its loans to LyondellBasell, the chemical group that placed dozens of its subsidiaries under bankruptcy protection this week after failing to restructure $26bn in debt. Citi’s loss, to be recorded in Q4 results mainly as a loan loss reserve, will put further pressure on its Q4 earnings, to be announced Jan 22. Citi on Thursday said its gross exposure to LyondellBasell, which is controlled by billionaire Len Blavatnik through his Access Industries, was $2bn. However, Citi has already taken about $600m in writedowns and reserves over the past few months.

Could be that Citi will be under pressure before earnings are declared.

Options expire in January on the 16th, before Citi declares earnings. Often, there's a bounce in the stock market during options expiry week, some people call it the Max Pain Effect. I wonder how much of this bounce is due to earnings releases.

Most earnings releases come out either during option expiry week, or the week before. During the last year, several of the crack-ups seen in the markets occurred in direct relation to earnings. For instance, both BSC and LEH failed just before their scheduled release of earnings.

The option expiry week bounce might just be an aretfact of earnings coming out the week before option expiry.

Which brings up back to Citi and it's earnings. They come out the Thursday after option expiry. Maybe we won't see the option expiry week bounce this month.

Vix, Yen and TLT -- vix running into resistance

Vix ran into resistance at its upper 10 day BB today, while the Yen strengthened sharply. TLT was more or less flat for the day, not following the Yen higher.

Vix was setting up a nice reversal pattern to the upside with yesterday gap up and big white candle -- today's candle is more uncertain, not quite a bearlish shooting star, but not quite a bullish white-black harami. Same story with SPX.

The Yen direction is also up in the air -- in isolation the past few days look very bullish, but taken in context with the move down from the highs, this latest moves, retraces 50% of the drop, and stopped at resistance.



Let's see how the markets react to the payroll numbers tomorrow -- for the past year, tyhe market has sold off the day payroll anticipating weak numbers. But this year there was no sell-off (although perhaps Wedensday's down counts?)

From Wall Street Journal's Marketbeat Blog
The Pre-Jobs Selloff

Month Covered	Dow Change	Jobs Change
June	-166.77	-100,000
July	-205.66	-67,000
August	-344.65	-127,000
September	-348.22	-403,000
October	-442.48	-320,000
November	-205.45	-533,000

Fed starts buying MBS paper, Markit's ABX indices drop

Alea (a great credit-side blog) posted today that the Fed purchased $10.2 Billion of Mortgage backed securities. This move was pre-announced by the Fed and not a surprise. What surprises me though, is that asset-backed bond prices took a dive today.

Here's Markit's AAA 07-1 ABX index (which includes mortgage backed securities (from Markit's website)). Prices were off 10% today, a drop reflected in all of Markit's ABX-AAA indices.


Another example of buy the rumour, sell the news, but this time in the MBS market?

I wonder if this drop will have wider implications, especially given the good correlation between the ABX indices and equities in general -- here's SPX over the time period as the above Markit chart


Or maybe the drop in stocks precipitated the drop in ABX?

UPDATE: John Jansen, over at Across the Curve, came up with a succinct explanation of why the ABX indices sold off yesterday.

January 8th, 2009 10:01 pm

... it appears that a bill to allow bankruptcy judges to alter loan balances has picked up a head of steam as Citibank broke ranks with other lenders and no longer opposes the measure.

Dealers report heavy trading in the various ABX tranches today and lots of cash selling. AAAs were down more than three points and some Penultimate tranches dropped over 4 points.

It would appear that the models by which some of this detritus trades does not have a variable for judicial fiat.