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

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