Oh, Nooo! Morgan Stanley surprised analysts this morning and posted a loss for the first quarter 2009. Just when we thought things were getting better for financial stocks.

The reported loss was $177 million, or $0.57 per share. They also slashed their dividend 81% to 5 cents per share. When compared with Goldman or even Citigroup, who both were profitable, this looks bad for Morgan Stanley.

For the quarter, Morgan Stanley posted strong trading profits, but it’s results were nowhere near as strong as Goldman’s because they the firm doesn’t have the same “risk appetite”.

The most interesting thing about their earnings was the fact that they had to take a $1.5bn hit to earnings, because their credit spreads improved and it now costs them MORE to buy back their own debt. This is the same accounting loophole that allowed Citigroup to post a $2.5bn gain when people thought it was LESS creditworthy than the quarter before. Usually it’s a good thing when your credit improves. I guess my common sense would have caused me to fail accounting class.

All is not lost however, Morgan Stanley would have been profitable for the quarter had it not been for this accounting rule. More smoke and mirrors but this time they smacked MS in the face.

Uncategorized citigroup, goldman, morgan stanley

Marathon Monday is perhaps the best day of the year to enjoy Boston sports. Today features a fun-filled day that starts with the running of the marathon, continues with a Red Sox game, and is capped off by a Celtics playoff home game — what’s better than that!. I didn’t get a chance to watch the marathon today, but I did see some running. The running I saw was that of stock market investors running to the sidelines on the back of renewed fear surrounding financial stocks. As a result the Dow dropped 290 points and financial stocks were absolutely crushed. Below are the highlights from the day’s action:

• Bank of America reported solid profits but indicated that loan problems were persisting and even getting worse.
• There was increased scrutiny on Citigroup’s surprise quarterly profit, which seemed to come more from shrewd accounting than a sharp rebound in its core businesses. Goldman Sachs noted that Citigroup’s credit losses were growing at a “rapid rate” and put a price target on the stock at $1.50.
• Last night, the Turner Radio Network published what it claimed was a “leak” of the Treasury stress tests. They didn’t actually publish a document, just a summary and in short they said the stress tests showed the entire banking system was stunningly insolvent.
• The NY Times published an article stating that to in order to provide continued assistance to banks without having to petition Congress for more TARP funds, the U.S. may convert the preferred shares they own in banks as a result of TARP to common stock, similar to what they have done with Citigroup.
• The Financial Times was out saying that the U.S. was going to place additional conditions on those banks who plan to repay TARP funds. As a result, the market is likely to punish “bad” banks who have not repayed TARP and reward “good” banks that do.

Uncategorized bofa, citigroup, stock market

Citigroup released its financial results today for 1Q09 and they were profitable (let us all rejoice!!). Not so fast though , Citi posted a loss of $0.18 per share on a profit of $1.6bn for the quarter (I didn’t know it was possible to have negative EPS when being profitable).

It looks like Citi has used some “smoke and mirrors” to create this profit. For one, Bloomberg is reporting that:

“Citigroup posted a $2.5 billion gain because of an accounting change adopted in 2007. Under the rule, companies are allowed to record any declines in the market value of their own debt as an unrealized gain.”

Furthermore, Citigroup has been able to move some assets that might suffer further writedowns, into its “held to maturity” portfolio, which means it doesn’t have to mark those assets to market. Again, another accounting trick.

Like the other banks, the company saw a huge gain in its trading profit for the quarter, though it continues to show real weakness in basic areas like credit cards and retail banking. The graph below from the investor presentation struck me as interesting as Citi is facing Net Credit Losses (NCL) of over 10% from Credit Cards in 1Q08, and the trend is only accelerating. Ouch!

Citigroup also announced that the long awaited exchange offer swapping preferred shares for common shares will take place after the stress test results are released May 4.

With all this said, I actually like owning Citigroup stock in the short term. I think the market has been pessimistic (and rightly so given the numbers), but the pessimism has gone too far. I’m playing for a pop when the stress test results come out, because the market already believes Citi will be the worst performer among the 19 banks and will need to raise more capital.

Uncategorized citigroup

I came across an interesting article in the New York Post about how Citigroup and Bank of America have been aggressively purchasing AAA mortgage-backed securities in the secondary market. Surely, its a bit bizarre that those banks that hold the largest amount of these securities and have taken the largest writedowns are back playing in the same market that hurt them so badly in the past.

“One Wall Street trader told The Post that what’s been most puzzling about the purchases is how aggressive both banks have been in their buying, sometimes paying higher prices than competing bidders are willing to pay.

Recently, securities rated AAA have changed hands for roughly 30 cents on the dollar, and most of the buyers have been hedge funds acting opportunistically on a bet that prices will rise over time. However, sources said Citi and BofA have trumped those bids.”

Both BoA and Citigroup were the recipients of $45 billion in TARP funds meant to to help prop up the economy and jumpstart the housing market.

Despite receiving the TARP funds, both BoA and Citigroup are positioned to take large writedowns if the market for AAA MBS deteriorates further.

“One source said that the banks’ purchases have helped to keep prices of these troubled securities higher than they would be otherwise”

Since trading is very light in these markets, it would be very easy to purchase up to $1 billion in assets at slightly inflated prices to prevent writedowns on the remaining $20 billion or so that they are likely to still have on their balance sheet.

I’m sure this won’t be the last time we hear about this…….

Uncategorized bofa, citigroup, mbs, toxic assets

US Stock markets rallied Tuesday on the back of the release of an internal memo at Citigroup in which CEO Vikram Pandit is “upbeat” and argues that the current stock price of $1 does not reflect the company’s earning power and capital position. Further contributing to the rally were comments from Rep. Barney Frank (D., Mass.), Chairman House Services Committee, indicating that the often debated “uptick rule” may return in a month. Frank was quoted as saying “I am hopeful the uptick rule will be restored within a month”, according to CNBC.

Although these pieces of news are good reason for a rally, I think that the 6% rally that we’ve seen in the Dow & S&P 500 is a bit overdone. Its my suspicion that a good portion of the upswing that we’ve seen was driven by short covering in financial stocks which have been beaten down lately. Any sign of financials returning to profitability and/or rules hindering short sellers are good reasons to cover existing shorts.

Pandit’s memo is optimistic and details that Citigroup has been profitable over the first two months of the year. The market rallied on the back of this, which I think is overdone. Pandit’s statement comes as no surprise to me as banks have continued to make money throughout this crisis if we exclude the massive writedowns they have been taking on their “toxic assets”. The majority of these writedowns usually happen around quarter-end before a company releases earnings. Citigroup holds the largest amount of these “toxic assets” on their balance sheet when compared with other banks, so for me it’s going to be another month before we can pass judgment on if Citi is returning to profitability. For me its a crapshoot as the market for these “toxic assets” continues to deteroriate. Full text of the Pandit memo can be found here.

As for the return of the uptick rule, nothing is DEFINITE, but Barney Frank’s words are encouraging. I’m taking a wait and see attitude with this market and not getting too excited about the news.

Uncategorized citigroup, rally, stock market, toxic assets