Citigroup Short: A Bet On The Falling U.S. Dollar (NYSE:C)

Citigroup (C) has been lagging the performance of the S&P 500 index badly since March. Not coincidentally, the weak trading action in Citigroup (Citibank) is highly correlated with problems in the value of the U.S. dollar since late March. As banks are the largest owners of dollar-denominated assets in the world, and Citigroup is one of the largest U.S. banks, the “global” worth of its asset base has begun to rapidly decline. Citigroup held some $2.3 TRILLION in dollar assets at the end of June. And, this huge balance was backed by just $173 billion in common equity (book value) and $147 billion in tangible book value, making Citigroup one of the most leveraged (risky during recession) money center banks in August 2020.

I have talked about the ultra-weak technical picture for Citigroup in several articles since May. My first mention was May 3rd here, a story discussing its rotten trading momentum alongside Wells Fargo (WFC). A second article here from June 3rd had the company lumped into a group of the worst performers in the S&P 100 universe. And, the technical trading backdrop has remained near the bottom of the barrel in relation to other stocks throughout the summer.

Traditionally, Citigroup and other large U.S. banks have had equity performance issues when the value of our accounting currency has been under pressure. The U.S. dollar has zig-zagged lower by 10-12% vs. other fiat currencies like the euro, Yen, Pound and Yuan since the peak spike in pandemic fear regarding the COVID-19 virus and economic shutdown during March. The subsequent record money printing campaign engineered by the Federal Reserve bank has quickly created relative selling pressure in bank shares, as investors question the long-term viability and worth of dollars in international commerce and trade. Already since early March, Citigroup has sharply underperformed both the S&P 500 index of U.S. businesses and its peer financial/bank industry grouping on the magnitude of 20-40%.

Headquartered in New York, the coronavirus outbreak in the city and surrounding area has also raised questions on debt repayment and loan quality, a major component of company assets measured in the hundreds of billions. I wrote an exclusive article for Seeking Alpha on M&T Bank (MTB) in May questioning loan loss reserves and book value quality in the aftermath of the Northeast-centered pandemic of March-April. Citigroup will have similar issues the remainder of 2020 into 2021 from its local loan portfolio assets. High unemployment and slow to return to normal circumstances for businesses/consumers will likely be a bigger long-term loan repayment headache than was expected several months ago for the whole nation.

2020 = 1987 Redo?

My first experience with weak bank gains alongside a declining dollar value was during 1987, a year after I started investing. During the terminal phase of that year, 6-7 months of straight-up price moves by the Dow and S&P indexes in the +50% neighborhood, saw the financials/banks lag badly, rising half as much or less. Then foreigners had enough of the daily bludgeoning of losses from the quickly devaluing U.S. currency situation and began dumping bonds and equities in America. Last but not least, we got computer program selling (new at the time), a function of sliding futures trading leading price lower. We ended up with a 40% price crash for the whole stock market in September and October.

The scary part of this story is the 2020 market situation feels and looks a whole lot like the 1987 setup. A sharp rise in the averages of +50% over five months, with banks/financial lagging badly, including rotten breadth participation by a limited list of securities (big tech carrying the advance today) is/was a real issue. A potential late summer top during 2020, with nearly out-of-control investor euphoria, is almost a carbon copy of the data prints between the two years! [Not to scare you, but 1929 peaked around Labor Day also!]

Without doubt, Warren Buffett’s large purchase of Barrick Gold (GOLD) shares several months ago is a consequence of his desire to hedge the dollar-focused portfolio of Berkshire Hathaway (BRK.A) (BRK.B) assets. Owning positions in the largest U.S. banks and hundreds of billions in dollar-denominated stocks/bonds through insurance subsidiaries, Mr. Buffett may have had a eureka moment, realizing a major decline in the exchange rate of each dollar would be problematic for his global net worth and purchasing power.

Dollar Decline = Weak Banks?

Not only will the recession put profitability under pressure for Citigroup, but a continuation of a lower dollar vs. hard money gold/silver and other paper currencies could still tank the share price dramatically lower. I explained the logic/rationale of a major multi-year drop in the dollar in early July with a post here. While a falling dollar is not always a negative for bank values, sharply lower dollar translations generally are problematic. On top of this historical correlation, weak dollar values in the face of a rising stock market have even better odds of big bank underperformance vs. other equities. Often, the recessionary belly flops in financial services are a mirror image of a declining dollar.

Below are charts of the last four instances of oversized dollar declines vs. the S&P 500 of at least 15% the past 17 years, and today’s setup. Alongside each dollar chart is a Citigroup chart over the same period. At the bottom of the charts are a direct relative performance comparison for both the dollar and Citigroup against the S&P 500.

January 2003 – December 2004

January 2006 – June 2008

May 2010 – August 2011

December 2016 – January 2018

December 2018 – Present

While you can see a lower dollar by itself does not guarantee a Citigroup sell-off, statistically it is an important headwind. Using all the examples above as our data set, the stock quote underperformed the S&P 500 by -11% annualized when the U.S. dollar was in a steeper decline than the general stock market.

Excessive Leverage and Weak Margins

Citigroup today has one of the most exposed risk profiles to ongoing economic recession of the biggest U.S. money center banks and financial service companies.

Below are some of the concerning comparisons to Wells Fargo, M&T Bank, JPMorgan Chase (JPM), Bank of America (BAC), Goldman Sachs (GS), Morgan Stanley (MS) and Bank of New York Mellon (BK). The standout issues are its high leverage position and weaker returns on capital than peers. I have drawn Total Liabilities to Assets, Debt to Assets, and Cash Flow to Assets. In aggregate, Citigroup is currently the worst performing money center bank from this group, with the trading-focused operators using slightly elevated leverage.

Net Profit Margins, after taxes, are also quite low for 2020 and projected for 2021. Below you can review this situation, and the low profit estimates for 2020-21 by Wall Street analysts.

Horrible Technical Momentum

Other investors and traders are coming up with the same conclusion for Citigroup shares, namely avoid or sell the company. The momentum indicators I watch closely are almost universally bearish right now. Below you can review the down-trending technical activity in the Accumulation/Distribution Line [ADL], Negative Volume Index [NVI] and On Balance Volume [OBV]. While the overall market averages are near all-time highs today, Citigroup’s share price is under the simple 200-day moving average, and may be about to fail under the shorter-term 50-day moving average in coming sessions.

The green arrow points to the dismal ADL in consistent decline all year. ADL measures intraday buying/selling activity. A falling line means the stock is closing each day nearer the low of the session vs. the high trade. NVI was healthy and rising nicely into mid-March, marked with the red arrow. Then the wheels fell off. NVI looks only at trading days with declining volume vs. the previous session. The idea is professional investors and institutions play a bigger role in trading on low volume, less newsworthy days. The underlying long-term trend is more apparent in the NVI, more often than not. Lastly, the blue arrow points to OBV. OBV is the easiest form of momentum to understand and calculate. It is basically price change multiplied by volume, then added or subtracted daily. The falling OBV line means net volume selling over time has been Citigroup’s reality. OBV just above a 52-week low is quite concerning for bulls.

Final Thoughts

If you believe a vastly lower dollar value is in the cards through 2021, Citigroup should be near the top your sell list, even a short candidate to hedge your long exposure. The record +45% M-1 money supply increase over the last year, and $4+ trillion in new Treasury debt since last summer, on top of the FED Chairman Powell’s expressed desire to shoot inflation above 2% annually (a ‘soft default’ for Dollar/Treasury values), all point to real trouble ahead for the U.S. paper currency.

Citigroup’s strong propensity to sell off during weak U.S. dollar spans, its negative business exposure to the ongoing coronavirus recession, and a lagging technical position will likely be difficult obstacles to overcome for some time. Will 2020 repeat the 1987 experience of a stock market crash into the November election? Heaven only knows for sure, but don’t say it is impossible. In my estimation, a big coronavirus spread in the fall, Trump cancelling the election, and/or a dollar crash in value are all risks not easily argued away.

The odds of a large dividend cut or elimination, another equity raise similar to what followed the 2007-09 Great Recession real estate loan bust, or a second 2020 investment portfolio disaster caused by a stock market crash this autumn could each (or all) sink the Citigroup stock quote materially lower from today.

Citigroup has been one of the weakest performers in its peer group since early March. The bank’s stock has severely underperformed the industry SPDR Financial Select ETF (XLF) and the S&P 500 pictured below. Only Wells Fargo and M&T Bank have fared worse.

I am using the stock as a short position in my diversified long/short portfolio, as a period of “underperformance” of the S&P 500 index may continue well into next year. For my money, I will look to cover the short position if Citigroup begins to “outperform” the S&P 500 index for a month or two. Cutting your losses in an individual short pick is important to manage overall portfolio risk.

Investors should understand that shorting involves greater risks than a regular long approach to investing. You can lose more than you invest initially, if good news propels a stock higher unexpectedly. I suggest shorting a large number of individual stocks with your capital only as a hedge against your investments on the long side. Small short positions and a net-neutral to somewhat net-long portfolio design overall will keep bearish short-sale picks from ruining your day, when one or more invariably outperform the market.

Thanks for reading. Please consider this article a first step in your due diligence process. Consulting with a registered and experienced investment advisor is suggested before making any trade.

Want to read more? Click the “Follow” button at the top of this article to receive future author posts.

Disclosure: I am/we are short C, BK, MTB, WFC, XLF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This writing is for informational purposes only. All opinions expressed herein are not investment recommendations, and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisor capacity and is not a registered investment advisor. The author recommends investors consult a qualified investment advisor before making any trade. This article is not an investment research report, but an opinion written at a point in time. The author’s opinions expressed herein address only a small cross-section of data related to an investment in securities mentioned. Any analysis presented is based on incomplete information, and is limited in scope and accuracy. The information and data in this article are obtained from sources believed to be reliable, but their accuracy and completeness are not guaranteed. Any and all opinions, estimates, and conclusions are based on the author’s best judgment at the time of publication, and are subject to change without notice. Past performance is no guarantee of future returns.

Be the first to comment

Leave a Reply

Your email address will not be published.