Market Diary 1-14-08
Today was a tough day for me. I stayed out of the market, and tomorrow I’ll know if that was wise.
Here was my temptation: As I mentioned earlier, Citigroup (C) reports its earnings tomorrow, along with Merrill Lynch (MER). Merrill Lynch is probably the more familiar name to the public, but Citigroup is much, much larger. And Citigroup is a Dow component, which means that it moves the market even more than its size would suggest.
Drudge has been running this story for a few days now. It describes how Citigroup has suffered some serious damage in the subprime mess, more than was expected. Such a major loss of revenue and especially assets would require Citigroup to constrict its lending business, which would echo all across the US economy. Perhaps the world economy.
Citibank’s solution has been to try to bring new capital into the company, and the most promising pool of new capital is in foreign governments, especially in the Middle East and China. If the foreign governments put their cash into Citibank, then it won’t have to curtail as much of its lending, and it may stave off a panic on Wall Street.
So what do we do with this news? The considerations flip and flop around.
You could say that this scramble for capital indicates that Citigroup is in far more trouble than they’ve let on, and their report tomorrow will trigger panic selling. But then, you would expect that selling to have begun with these news reports. Instead, Citigroup stock rose decisively last Thursday and Friday, and today it held steady in a doji. This was after the price steadily declined since mid-December. So the price movement suggests that the bad news was already anticipated a long time ago, and the recent news has given the market some hope that Citigroup has found a way out of its mess. So if Citigroup’s report tomorrow is anywhere close to the news stories, then it may see a rally rather than a crash.
It was fun to imagine wildly profitable puts from a crash, but eventually I came back to basics and remembered why I don’t play news. Unless you’re skirting the insider trading laws, the professional traders will beat you on news every time. They get the news faster, they interpret it faster, and they trade on it faster. And while insider trading is illegal, you have no assurance that some people out there aren’t breaking the law.
The Citigroup situation is a good example of how professionals with connections can annihilate individuals, even if the pros aren’t cheating. Citigroup and its employees can’t disclose any of the gory financial data to the public, but they almost certainly can disclose it to the foreign government as a necessary part of obtaining the money they so desperately need. And those governments aren’t subject to US securities laws. Once the data leaves the country, there’s no way to trace how it might seep back in. It might still be technically illegal to trade based on the recirculated information, but it would be nearly impossible for the SEC to prove it and enforce it. And once it hits Drudge, then everybody knows it, so that trading probably isn’t even illegal any more.
So I concluded that the big money already knows what’s going on at Citigroup, and its stock price tracks those negotiations pretty well. If the deal with China goes through, then the stock will do fine. In fact, it could go up quite a lot, as Citigroup could increase its market share as similar companies take similar losses without the padding of a foreign sugar daddy.
And now another twist: This story from the International Herald Tribune says that the Chinese have backed out of the deal. The story is dated today, Monday the 14th, but has no time stamp. (Those dinosaur publishers really need to get with the times.) Looking at the intraday chart for Citigroup, I’m not seeing anything to suggest that the news hit while the market was open. So tomorrow’s open is likely to gap down, go straight down on the opening bell, and then go down a whole lot more after that. And with the major indexes having already slightly broken their long-term support, a sharp down day will put us into an undeniable downtrend.
Disclaimer: Do not invest any money in the market. You should only invest your money in Certificates of Deposit paying one or two percent. With inflation at about the same rate, this means that you’ll effectively be earning nothing, but you’ll be providing capital to the lending system so that other people can use it to enrich themselves.