If you are American or continental European and you have ever been unfortunate enough to drive a car in the United Kingdom or another of the very few places on earth that force you to drive on the left side of the road, you will be familiar with the following gut-dropping feeling: for a moment, just a split second, after you have finally become comfortable with the idea of driving on what is for you the wrong side of the road, your mind suddenly reverts to its former state of consciousness, and you are convinced that you are now driving on the wrong side, the left side, which is, of course, the correct side in England. Sometimes the reflex reaction to return to the right-hand side of the road is so strong that you nearly swerve into oncoming traffic. Investing in the banks after a global financial crisis results in the same unpleasant feeling.
I have recommended recently the purchase of Bank of America (BAC) at what will turn out to be exceptionally low levels in hindsight. Now I would like to recommend a financial company that is even more hated than Bank of America. I can hardly read a paper or listen to a financial media broadcast without hearing some reference to too big to fail, which is an expression that has become mainstream largely owing to one company, a company so large and intricately involved in the global financial system that it was too big to fail in the following sense: if Citigroup (C) or Citi, as it is usually called now, had failed, the official unemployment rate would have topped out at 20% rather than at 10%; instead of talking about the great recession from which we are currently dragging ourselves, we would be talking about another Great Depression, or, as I claim, a Greater Depression because the world would have taken decades, rather than years, to recover.
The past few years have been painful enough, and that is why I find it infuriating when the Adam Smith purists proclaim that we should have let Citigroup fail; these financial zealots are rather like those Armageddon hopefuls who are disappointed that humanity wasn’t all violently exterminated on the prophesied date. I have owned shares of C for a long time, and, yes, I owned them through the global financial crisis as part of my (nearly) permanent portfolio. I watched my shares drop to a buck and then rally (if you want to call it that) back to $4.00. Now it trades at about $39, but only because of a 10-to-1 reverse-split fake-out. I think of the shares as priced at one-tenth of their current value to undo the fake-out factor. Therefore, the shares today would trade at a level of about $3.90. I added to my C position at about $1, which was a very difficult purchase to make. It seemed that the whole investment community was praying for Citi to go under, as Lehman was failing, but I figured that regulators knew more than puritanical traders about the catastrophe that would have resulted.
When I bought shares of Citi at a buck, I had that driving-on-the-wrong-side gut drop. During the past few years I have had the unpleasant feeling a few more times as I’ve watched not only the financials but also the broader market dip to absurdly low levels. Each time I would say to myself, “What if I am wrong this time? What if the stock is signaling that the company is truly spiraling into bankruptcy?” And that diffidence I felt about the market or an individual stock invariably turned out to be unfounded. The career traders were wrong. Now I treat that gut-drop as a good sign, that I am actually making the correct investment choice when I purchase the shares of a good company when everyone else, it seems, is selling them---that is, when I drive on the wrong side of the road.
Now back to Citi. Professional traders and capitalism zealots hate Citi so much because the U.S. Treasury and the Federal Reserve stopped the company from failing. Forget why Citi was saved or whether it should have been for a moment. The simple fact is that the U.S. Government kept Citi from going under, which is the major reason for professional investors’ profound hatred of the stock. As purists, they cannot invest in a company that took government help. Now even U.S. bank regulators hate Citi, and all U.S. banks, forcing them to adopt stricter capital reserve requirements and threatening fines and fees and lawsuits. Also, with such strict new regulation, the financial media has piled on and currently refers to U.S. banks a nothing more than regulated utilities. Still, the U.S. government will grow tired of running the banks eventually, and banks, like Citi, need to succeed in order for the economy to grow. Without the participation of the banks, any long-term rally is doomed.
With the broader market more or less trading range-bound this summer as professional traders take their vacations and as sovereign debt difficulties in the U.S. and in Europe work themselves out, C has been toggling between $38 and $40 (now we’re talking about the stock price after its reverse split fake-out). The stock has strong support at $38 and, unfortunately, strong resistance at $41; however, when C breaks through that resistance level, the shares will shoot up in price, because all the traders are watching that level and will not commit until the stock breaks out. If you would like to trade C, you could buy it near $38 because the shares have rebounded nicely from that level; then you could sell it as it fails to break through resistance under $41. If, however, the stock holds above $41, stick with it for a year-end rally in the bank stocks.
Still, I prefer Citi as a long-term holding, not as a trading vehicle because of its status as one of the most-hated stocks in history. If you are willing to hold shares for more than five years, the probabilities are on your side for an impressive return, especially when the company reinstates its once-substantial dividend.
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