China reassures the markets

Listed on the London Stock Exchange:

BARC 305.10p +6.20p (+2.07%)

CAU 47.50p -0.25p (-0.52%)

CRWN 30.50p 0.00p (0.00%)

FPER 5.25p +0.25p (+5.00%)

FCCN 46.00p +0.50p (+1.10%)

GAR 3.38p +1.63p (+92.86%)

JKX 234.30p -5.60p (-2.33%)

LLOY 56.62p +0.82p (+1.47%)

LLPE 60.00p -0.75p (-1.23%)

MAI 157.00p +9.00p (+6.08%)

QQ. 129.50p +12.30p (+10.49%)

RBS 46.73p +1.48p (+3.27%)

UNG 2.62p -0.13p (-4.55%)

Listed on New York Stock Exchange:

C $3.96 +$0.21 (+5.60%)

China reassures the markets that they are not selling eurozone debt indicating that they have confidence in the eurozone economy. This sent the markets in an overoptimistic mood so the FTSE All-Share went up by 2.38% this week. My portfolio went up by 2.77% this week, narrowly beating the market, and my gain is now about 0.5%.

GAR, a recruitment consultancy for management roles, went up massively because two private equity gurus Jon Moulton and Pierce Casey decided to invest £2 million into the company. One of it's directors, Jeremy Daniels, agreed to invest a further £35,000 into the firm. The price of Norman Broadbent has been renegotiated from £5.5 million to £2.03 million because one of it's subsidiaries, BNB, went into voluntary liquidation because trading during 2009 was much worse than expected. They are due to report a loss of £3.5 million for 2009 due to adverse trading conditions relating to the brutal recession. I might invest a bit more money into this firm since the 30 existing shares will be consolidated into one new share [so that the amount invested before and after stays the same], trading conditions will definitely get better when the economic conditions improve and it is a contrarian stock in terms of P/E, PBV and P/CF as of 24/5/2010. However, the company is still heavily geared. Also, with new faces of good calibre, the firm will eventually make good profits in the future. 

QQ., a defence company, made a pre-tax loss of £66.1 million due to a delay in orders. Therefore their after tax earnings went down by 30%. Dividends are suspended for a year. However, over the past four years before the latest result, profits and dividends have gone up at a generally increasing rate. Dividend yield has gone up a increasing rate as well. I will definitely invest more in the near future though I cannot say exactly when. I will have to do another detailed analysis on the company in the near future. The analysis will be available at around a few weeks from now at the very latest. 

The markets will eventually rebound in the near future.

Notes: Ratio values as of 24/5/2010 for GAR and the company's sector respectively. Note that two outliers were excluded when the average P/E for the sector was calculated.

The Germans overreact

Listed on London Stock Exchange:

BARC 298.90p -10.00p (-3.24%)

CAU 42.75p -2.00p (-4.02%)

CRWN 30.50p 0.00p (0.00%)

FPER 5.00p -0.13p (-2.53%)

FCCN 45.50p +4.75p (+9.64%)

GAR 1.75p 0.00p (0.00%)

JKX 239.90p -6.60p (-2.68%)

LLOY 55.80p -1.88p (-3.26%)

LLPE 60.75p +0.75p (+1.25%)

MAI 148.00p -10.50p (-6.62%)

QQ. 117.2p -7.70p (-6.16%)

RBS 45.25p -2.01p (-4.25%)

UNG 2.75p 0.00p (0.00%)

Listed on New York Stock Exchange:

C $3.75 -$0.23 (-5.78%)

The German government banned naked short selling [which is short selling but involves not even asking the holder before shorting] on eurozone sovereign bonds, credit default swaps and shares in the top ten German financial institutions. The institutions are Allianz SE, Deutsche Bank AG, Commerzbank AG, Deutsche Boerse AG, Deutsche Postbank AG, Muenchener Rueckversicherungs AG, Hannover Rueckversicherungs AG, Generali Deutschland Holding AG, MLP AG and Aareal Bank AG. This, fears over China's economy overheating and US financial reform scared the investors so much that they overreacted and sold their holdings in massive numbers causing the markets to fall by 4.08% (using FTSE All-Share index values) this week. The ban was intended to stabilise the markets and preserve confidence in the euro. My positions were affected badly that the portfolio gain from last week have reversed into loss of about 2.19%. Even JKX, which has strong fundamentals, LLOY and RBS, which have minimal exposure the to Greek debt, did not withstand the selling pressure from traders and investors blinded by panic and short term views. In my opinion, the EU must save the euro at all costs otherwise it will be politically embarrassing to the founders of the single currency. They may pump more funds into the eurozone economy and find more ways to provide stability to the markets, even if the actions are draconian. 

Finally I want to make a good point. Critics might say that I should have took profits in mid April and known that the markets would get this ugly. To be honest, predicting the general direction the markets go are hard enough in the short term. It is a bit easier in the long term. To predict the exact severity of the direction is just asking for trouble in terms of losing money. It is easy for them to look back and say I should have took profits before the markets fell once they knew the full facts. The point is that relying on precise predictions regarding the severity of events will lead to trouble. Going very slightly off the point, relying on analysts' forecasts so much will lead to the same thing.

What goes up must come down

Listed on London Stock Exchange:

BARC 308.90p +25.20p (+8.88%)

CAU 49.75p +1.50p (+3.11%)

CRWN 30.50p +0.50p (+1.67%)

FPER 5.13p +0.13p (+2.60%)

FCCN 41.50p +3.75p (+9.93%)

GAR 1.75p 0.00p (0.00%)

JKX 246.50p +15.70p (+6.80%)

LLOY 57.68p +4.15p (+7.75%)

LLPE 60.00p -0.50p (-0.83%)

MAI 158.50p 0.00p (0.00%)

QQ. 124.90p +4.90p (+4.08%)

RBS 47.26p +1.76p (+3.87%)

UNG 2.75p -0.25p (-8.33%)

Listed on New York Stock Exchange:

C $3.98 -$0.02 (-0.50%)

The markets went up due to euro guarantee plan and went down again as there are concerns that the austerity measures announced by a number of euro countries may affect economic recovery in the eurozone. UK bank stocks, including the ones I have shares in, are affected quite badly due to an inquiry by the Competition Commission regarding whether retail and investment banking parts should be split up. US banks, including Citigroup, are affected by financial reform bill proposals regarding the ban of banks from proprietary trading. At least my portfolio value went up since the good news outweighed the bad. My portfolio gain now stands at about 1.75%. I think the markets may be volatile for a little bit longer. It is going to be a fun ride going up and down. I am going to stay put and plan future purchases to further diversify my portfolio.

In my opinion, history may repeat itself over again. The last time this sort of economic crisis happened was the Great Depression which followed from the 1929 crash. The second Glass-Steagall Act (more formally The Banking Act of 1933) passed to separate retail and investment banking, prevented retail banks from performing investment banking functions. This ensured that depositors funds cannot be used for speculative purposes such as trading for the bank's own account and underwriting securities the issuer has trouble selling to existing shareholders. The Act, along with other measures such as New Deal and  Federal Deposit Insurance Corporation, has aided economic recovery in the US. However, other countries did not implement similar laws and their economies recovered roughly at the same time as the US. I believe that limiting the risk the bank takes on and not using depositors' funds for risky activities may be more effective than separation of retail and investment banking parts. Combining investment banking and retail banking is not a bad concept in general. What makes it bad is the people who run them badly. Greed is part of human nature and until more appropriate measures are in place, crises of epic proportions such as this will ultimately happen again. 

Is Citigroup big hit or big flop?

Citigroup Inc.

Ticker: C

Sector: Banks

Listing: NYSE

Introduction

Citigroup is a universal bank which is operating in more than 140 countries across five continents. The bank is split into two major groups; Citicorp and Citi Holdings. The former comprises the following businesses that form the core to their strategy of being the global bank that provides excellent services; investment banking, private equity, research and analysis, sales and trading, institutional asset management, retail and business banking. The latter comprises the following that the bank will dispose when market conditions improve; brokerage, asset management and loans, which represent higher risk of default. Special Asset Pool, also part of the latter group, consists of assets and loans that are likely to be written off due to their very high risk nature.

Analysis

The bank is currently restructuring itself due to the 2007 credit crisis which eventually turned into a global banking crisis of 2008 that resulted in the worse global recession since the Great Depression. Initially, it was too diversified trying to be the jack of all trades and master of almost none. It was basically comprised of basically separate companies in all but name. The bank got into huge trouble during the crisis and asked the US government for bailout in the form of equity stake and TARP (Troubled Asset Relief Program). The bank made a loss in 2009 due to the assets that have been written off in Citi Holdings. Securities and Banking and Transactional Services divisions have managed to increase profits quite significantly compared to 2008. This is because of the following; firstly, consolidations took within industries in general since some competitors got into trouble during the crisis. Secondly, many companies needed to raise capital via the markets. Thirdly, firms and governments needed to borrow funds from investors to shore up their finances. Profits from the Regional Consumer Banking fell compared to the same period. This is because consumers did not borrow as much before the crisis so they chose to save, some businesses went under and others could not get the required loans.

This goals for the 2010 financial year are:

1. Preserve high levels of capital, liquidity and reserves
2. Mitigating credit costs
3. Improve profitability and efficiency of operating businesses of Citicorp operating from their strong performances in 2009
4. Reduce assets in Citi Holdings even further.
5. Invest strategically in innovation and the Citicorp businesses that aid Citi’s future earnings potential
6. Improve on their already leading global position, especially in emerging markets.
7. Maintaining and expanding their role as a constructive organisation globally, influencing public policy debates and meeting economic and social goals. [I believe that this is important because they need to regain public trust in banks since the media in general and many politicians gave them a bad name and turned the majority of people against them.]

The Executive Management's statement, from the latest annual report, is quite optimistic. However, the bank does state that there are some uncertainties in terms of new legislation and macroeconomic outlook.

In the first quarter, the bank had a much better time. Overall, they made a good profit, which the Securities and Banking division have done extremely well. Losses from defaults have gone down and the balance sheet has been strengthened further. The bank has exited from TARP and the US state is going to sell it's stakes in an economically rational manner, because the government knows the bank can stand survive on it's own. The management is very optimistic in the long term. However, there is a tone of uncertainty in the short term due to the uncertain macroeconomic factors.

Financial ratios as at the close of 6/5/2010:

The financial ratios of other companies in the same sector can be viewed here. (1)


Using the contrarian strategy, the stock does only satisfies some of the criteria. However, I am prepared to use P/BV as the core ratio in this case. This is because:

1. Only P/BV is below sector average, making it cheaper compared to it's peers. The stock does not qualify in terms of other contrarian ratios. As mentioned earlier, the bank made a small loss due to the worst crisis in recent history. Also P/CF is negative.
2. Dividend yield is way below sector average.
3. With a whopping dividend cover of -76, the bank cannot afford to greatly increase and sustain it in the short term.
4. Current ratio does not apply to banks in general so that is why I did not include it. More importantly, the total assets has to be greater than total liabilities which is true in this case.
5. The P/S ratio is below sector average, making it cheap compared to it's peers.
6. The bank's earnings are below that of S&P 500, which is $50.97 (2) for the latter. Earnings are not likely to plummet in the near future since the bank has made a profit in the first quarter.

Conclusion

Based on all of the information I have researched, I believe that the stock is a good buy in the long term, based on the P/BV and P/S ratios and it will earn a good profit this financial year. This is because the bank will make a spectacular come back and dividends will be possibly paid in near future.

Note

I will not be responsible for any losses incurred by investors through investing in this stock. Investing in the stock market may result in not getting their initial amount back.

Source: 

1. ADVFN retrieved on 6/5/2010.
2. Standard & Poors retrieved on 14/5/2010.

Up and away as EU agrees plan

Things have got better for now. EU has finally agreed a €750 guarantee plan, to stop the Greek crisis spread to the weaker euro economies, which calmed the markets for now. All of the bank stocks I own have shot up massively, swinging my portfolio from a small loss of about 2.7% to a profit of approximately 7.2%. Others have gone up as well contributing to the rise in the portfolio value.

In the short term, the market has been oversold (see graph) so it may rise a little bit for now. However, due to the uncertainty of who may be in power in Westminster the markets may be a bit volatile in the very short term.

In the longer term, the market may fall a bit before it stabilises since it has been overbought for the past month from March to April (see graph). Looking at the long term, say five year span, the trend will definitely be up but it may be a long a bumpy road ahead. To come out as a winner, you have to pick the right stocks using the strategies I have mentioned earlier in the blog.  

Relevant articles of interest:

Contrarian Investment Strategy

Value Investing

The Zulu Principle

Hung parliament - Uncertain future?

Listed on the London Stock Exchange:

BARC 283.70p -54.55p (-16.13%)

CAU 48.25p 2.25p (-4.46%)

CRWN 30.00p 0.00p (0.00%)

FPER 5.00p 0.00p (0.00%)

FCCN 37.75p -1.25p (-3.21%)

GAR 1.75p 0.00p (0.00%)

ICA 89.5% 0.00p (0.00%)

JKX 230.80p -31.20p (-11.91%)

LLOY 53.53p -12.60p (-19.05%)

LLPE 60.50p -0.25p (-0.41%)

MAI 158.50p +0.50p (+0.32%)

QQ. 120.00p -7.50p (-5.88%)

RBS 45.50p -8.85p (-16.28%)

UNG 3.00p 0.25p (-7.69%)

Listed on the New York Stock Exchange:

C $4.00 -$0.16 (-3.85%) - since purchase on 5/5/2010

In turbulent times like these, I am glad that I take the long term view when investing in the stock market. Maybe I should master the short term strategies so that I can hedge my portfolio against bad events so that I can increase my overall gains. To do this I need to learn technical analysis and have the appropriate tools.

Goldman Sachs is hit by another bad event, which the shareholders filed lawsuits for negligence. They are not having a good time at the moment due to the SEC accusations of fraud in the market place and the last thing they need is this. Icelandic eruption disrupts flights in Ireland and Scotland affected some airlines. UK gets a hung parliament which made investors nervous. These and other less important events have been overshadowed by the Greek debt crisis. The financial markets are still reacting badly to the Greek debt crisis because it may spread to other weaker EU economies; Spain, Portugal, Ireland and possibly the UK. The EU has broken all of its rules to shore up the euro.

Things have got very ugly in one week since I posted my last post. The Greek crisis and hung parliament in the UK sent the FTSE100 went down by almost 8% this week. My portfolio gains have been virtually wiped out for now. My portfolio loss is about -2.7% (-2.3% excluding C). I think the investors are seriously overreacting to whole situation. Even the good first quarters for LLOY and RBS cannot halt the decline. The EU are likely to rescue the euro for political reasons and the hung parliament is just a blip for the London markets if the Tories and Lib Dems form a government. I believe that the Conservative-Lib Dem coalition is more beneficial to the UK economy hence my portfolio may benefit from this. I have bought C based on my own analysis, which I will post at the latest by next Friday. I think the banks may fall a bit further before it get better due to the Greek crisis. No good news may halt the decline.  I wonder what the next trading week brings in store for me.

Greek debt worries part III - Bail out!

Greece has finally been bailed out by the EU and the IMF. They will provide €110bn to shore up the ailing economy in return for €30bn worth of austerity cuts and tax rises over three years. The EU will provide the majority of the funds, €80bn, and the IMF will come up with the remainder. The move is unpopular in Germany because it will have to provide most of the funds, since the economy is the strongest in the euro zone. The markets should clam down a bit when they open on Tuesday. If the EU stopped messing out long ago then the markets may have never spooked in the first place. Oh well, these things will always happen again and again. The UK may head that way if they keep on dithering. 

The US stated that BP would have to cover the costs of the oil spill which started to occur last week when the oil rig collapsed during the fire. The latter said that they are doing everything they can to prevent an environmental disaster in the Gulf. I think that would send the shares down even further because the potentially high cost of the event in terms of this financial year profits.

Greek debt worries part II, UK general elections and a note on Citigroup (C)

BARC 338.25p 24.05p (-6.64%)

CAU 50.50p -0.00p (0.00%)

CRWN 30.00p 0.00p (0.00%)

FPER 5.00p 0.00p (0.00%)

FCCN 39.00p -2.00p (-4.88%)

GAR 1.75p 0.00p (0.00%)

ICA 89.5% 0.00p (0.00%)

JKX 262.00p -8.00p (-2.96%)

LLOY 66.13p -2.35p (-3.43%)

LLPE 60.75p +1.25p (+2.10%)

MAI 158.00p +6.00p (+3.95%)

QQ. 127.50p -6.00p (-4.49%)

RBS 54.35p -1.45p (-2.60%)

UNG 3.25p 0.00p (0.00%)

The Greek debt crisis is still having an extraordinary effect on the markets this week. Standard & Poor's downgraded Greece's sovereign debt rating to junk status because of the increased likelihood of default on their huge debt. This will make it harder the them to service their huge deficit. Spain and Portugal were next to have their ratings downgraded for similar reasons. However, their situation is much better. BARC holds about €15bn of Greek debt, which probably explains the reason that it's shares went down quite a distance more than other banks.  The other reasons are that the first quarter profits from BarCap is less than analysts expected and the it is less impressive than it's peers. LLOY and RBS had hardly any exposure to the debt, which is a good thing. The UK banks' exposure is nothing compared to France and Germany's exposure. If Greece does default then it would be a disaster to the eurozone economies in general, which may make the markets nervous wordwide. However, this presents a good buying opportunity for the contrarian investor [like other crises in general] if one know what companies to look for. The eurozone members would have to bail the Greeks out for economic and political reasons, with the latter more important.

Will the UK get a hung parliament? Who knows? I believe that the Tories have a massive advantage over Labour and the Lib Dems for a number of reasons, such as their experience in tackling the last recession in the 80's and the tendency of voters to pick them as their first choice over the Lib Dems in many constituencies [even though they are not the first choice in terms of voter number nationwide - this is why the latter want the election rules changed]. More importantly, if the next government cannot get the reforms through in order to reduce the budget deficit then the UK may be in big trouble. They may have their sovereign debt rating downgraded causing a potential panic in the markets. They may even end up in the same league as the Ireland, Portugal and Spain.

I notice that Citigroup (C) has done well in the first quarter and many sources such as this say it is a good time to buy the stock. While I personally have no problem with that in general, I want to provide a more detailed research whether the stock is really a good buy or not. While it is not a true contrarian stock at the moment, except in P/BV terms, it may be a good buy in many respects. Looking at the general good first quarter profits the banks enjoyed so far, I know the reasons that investors want to buy into Citigroup. My portfolio gain is now about 15% now and this may get worse before it gets better. I better sit tight and don't panic like sheep.