Interest Rates

  • 12 Nov
    Want to bet on financials? C isn’t a smart gamble yet

    Want to bet on financials? C isn’t a smart gamble yet

    One of the rising concerns that has helped keep the market on edge for the last couple of months now is the spectre that since interest rates are likely to keep rising, economic growth in the United States will inevitably have to slow or, worse reverse into a new recessionary cycle. I do think that it is true that the longer the latest expansionary cycle – which could begin to stretch into an unprecedented full decade in the next few months – continues, the more likely a new extended downward cycle becomes. That doesn’t mean the end is near, or that we know when that reversal will come; it just means that a cycle, by definition has a beginning and an end, and that in a market economy, every bullish cycle eventually and inevitably turns bearish, and every bearish cycle eventually and inevitably turns bullish.

    One of the real tricks to being able to keep your money working for you no matter what the broader economy and market’s trend is doing is being able to recognize that opportunities exist in every kind of cycle. I was reminded about that recently while listening to a few analysts talking about current market conditions. The discussion closed with the moderator asking these experts where each one thought some of the smartest places to put their money right now would be. It wasn’t too surprising when a couple of them singled out the financial sector.

    The premise is simple enough: rising rates are good for fixed-income investors, because they can get a higher yield on “safer” investments like bonds and short-term instruments. That’s usually just one piece of positive news for banks, as they see increased volume in bond purchases as well as flows into shorter-term instruments like money markets, Treasury bills, and certificates of deposit. That also gives them more money to offer to borrowers at higher interest rates, which often means that while other parts of the market are experiencing turbulence and increased volatility, financial stocks like banks become part of the “flight to quality” that are often typical of the end of a bull market.

    It is a bit of a double-edged sword, however; rising interest rates can only continue for so long before the economy inevitably begins to slow, because at some point interest rates become high enough that borrowing becomes prohibitively expensive. In the financial crisis that triggered the last recessionary cycle from 2008 to 2009, the store was made even worse by the realization that mortgage companies and banks had over-leveraged themselves with subprime loans – loans that charged higher interest rates to borrowers with poor credit quality. The problem was that when the economy began to slow, these loans became almost completely non-productive. The federal government took steps in the years following to regulate subprime lending more closely, and so there isn’t likely to be the same kind of risk now that existed ten years ago. Even so, it is a cautionary tale worth noting, because the truth is that even banks, insurance companies and investment institutions remain at risk when the economy slips into recessionary conditions.

    If you want to watch the financial sector right now, it’s smart to keep a cautious eye, and to look for stocks that represent an excellent value. Citigroup Inc. (C) is a good example; since hitting a 52-week high at nearly $81 in late January of this year, the stock began an extended slide downward, falling all the way to the $65 level by the beginning of July. It stages a short-term bullish trend from that point, rallying to around $75 in late September before dropping back to a new 52-week low around $63 in late October. As of this writing, the stock is back around $65 price level – a price that might offer a tempting opportunity for somebody looking for a good value play in the financial sector. But is C really a stock that is worth investing your hard-earned dollars right now? You decide.

    Fundamental and Value Profile

    Citigroup Inc. (Citi) is a financial services holding company. The Company’s whose businesses provide consumers, corporations, governments and institutions with a range of financial products and services, including consumer banking and credit, corporate and investment banking, securities brokerage, trade and securities services and wealth management. The Company operates through two segments: Citicorp and Citi Holdings. Citicorp is the Company’s global bank for consumers and businesses and represents its core franchises. Citicorp is focused on providing products and services to customers and leveraging the Company’s global network, including various economies. As of December 31, 2016, Citicorp was present in 97 countries and jurisdictions, and offered services in over 160 countries and jurisdictions. Global Consumer Banking (GCB) provides traditional banking services to retail customers through retail banking, including Citi-branded cards and Citi retail services. C has a current market cap of $165.5 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings increased 22.5%, while sales increased almost 10%. Growing earnings faster than sales is difficult to do, and generally isn’t sustainable in the long-term; however it is also a good indication of management’s ability to maximize their business operations. The company’s Net Income versus Revenue tells an interesting story, since over the last twelve months it was actually -5.4%, but in the last quarter improved to more than 18.5%, pointing to major improvement in the company’s margin profile.
    • Free Cash Flow: C’s Free Cash Flow is strong, at more than $21.5 billion. This is a number that has increased throughout 2018, but before that point had declined from a high in late 2015 of about $65 billion.
    • Debt to Equity: C has a debt/equity ratio of 1.32, which appears high, but it should be noted that most banks carry higher debt levels as a normal course of their business. It should be noted that despite the high debt/equity ratio, the company’s cash and liquid assets are more than 3 times higher than the total amount of long-term debt on their balance sheet.
    • Dividend: C pays an annual dividend of $1.80 per share, which at its current price translates to a dividend yield of about 2.73%.
    • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for C is $69.58 per share. At the stock’s current price, that translates to a Price/Book Ratio of .94, which at first blush seems very low; however, the stock’s historical average is only .8. The stock is also trading about 22% above its historical Price/Cash Flow ratio. Together, those two measurements put the stock’s fair value at somewhere between $52 and $55 per share, which is well below the stock’s current price. The stock would actually have to drop below $45 to be considered a useful discount relative to its historical Price/Book value.

    Technical Profile

    Here’s a look at the stock’s latest technical chart.


    • Current Price Action/Trends and Pivots: The chart above displays the stock’s price action for the last year. The decline from the stock’s September peak at about $75 marks a decline over the past six weeks or so of about 12% at the stock’s price as of this writing. It has strong support between $63 and $65 per share, while near-term resistance should be seen around $69, with $72 and $75 acting as secondary resistance points if the stock can begin to stage a bullish rally.
    • Near-term Keys: A short-term trade right now is pretty speculative on this stock, no matter whether you want to trade the bullish side by buying the stock outright or to start working with call options. A bearish trade also is a very low probability proposition right now given the stock’s current support level; the only decent signal on this side would come if the stock break below $65. In that case, the next likely support level would be in the $57 to $58 range, so there could be an interesting opportunity to short the stock in that case or work with put options. While the company has some interesting fundamental strengths, I think that it remains a bit expensive right now, even with the stock’s current decline for most of the year. I wouldn’t really be very interested in working with this stock unless and until it drops into the $44 to $45 range. That would take a decline from its current price of a little more than 30%, which really the biggest reason I don’t think this is a risk worth taking right now.

  • 09 Oct
    Interest rate fears are making the market jittery – that could be a good thing for defensive stocks like TAP

    Interest rate fears are making the market jittery – that could be a good thing for defensive stocks like TAP

    Over the last few days, one of the things that has put the market a little bit on edge is concern that interest rates could be forced higher sooner than possible. Fed chair Jay Powell gave investors room to start feeling anxious last week when during a televised question and answer session, More →

  • 28 May
    This Stock Is A Canary In A Coal Mine For The Economy & You Should Be Paying Attention

    This Stock Is A Canary In A Coal Mine For The Economy & You Should Be Paying Attention

    History tells us that when the FED starts to raise interest rates, sooner or later the economy will be hit.

    Today, we’ll discuss what’s going on with rates and the economy, and where we are in the current economic cycle in order to determine portfolio risk exposures.

    The Relationship Between Interest Rates & The Economy

    If we take a look at the chart below representing the effective federal funds rate, we can see that usually but not always, a tightening period is followed by a recession depicted by the grey columns. More →

  • 24 May
    What’s Going On With Dividend Stocks?

    What’s Going On With Dividend Stocks?

    • Dividend investments have been loosing ground lately.
    • If the FED raises rates 4 times in 2018, there will be more ground lost.
    • However, there is a dividend strategy that will do well no matter what happens.


    One of the most loved investing strategies is dividend investing.

    Dividends are something that we can see giving us a reward at least once a year and are a much more sure thing than many other possible investment returns. However, lately dividend investors haven’t been having a great time as, while dividend years have been going up, asset prices have been going down, especially for many of the most beloved dividend stocks. More →

  • 21 May
    Here’s Why You Should Stop Chasing Returns & Focus On Managing Risk Instead

    Here’s Why You Should Stop Chasing Returns & Focus On Managing Risk Instead

    • Despite rising inflation, copper prices have been declining.
    • Higher interest rates are putting pressure on emerging markets and their $19 trillion of debt.
    • However, the best investing opportunities usually arise when things aren’t good.


    I was really bullish on copper when it was around $2 per pound a year ago, but now I’m not that bullish anymore as it is above $3. More →

  • 18 May
    Financial Markets Are Rigged & The Whole Economy Is Fake

    Financial Markets Are Rigged & The Whole Economy Is Fake

    • Low interest rates have created a unique situation.
    • Economies are fake because you don’t know what’s real value or smoke.
    • What you should do might surprise you as to play along isn’t such a bad idea.


    Something that’s easy to forget is that the current financial environment is rigged and not many discuss this because it’s done in a legal way.

    In today’s article, I want to quickly explain what has been going on in the financial environment over the last decade and how natural market forces are distorted in order to increase asset prices and enable the economy we live in to continue as it has for at least a while longer. More →

  • 15 May
    Are We In Another Real Estate Bubble?

    Are We In Another Real Estate Bubble?

    • The data resembles 2007, but there are other factors to think about.


    Recently, I was listening to an interview with Robert Shiller where he was explaining how they predicted the 2000s housing bubble. This got me thinking so I went to dig deeper and found the following chart.

    More →

  • 14 May
    Can You Hear The Economic Warning Bells Ringing?

    Can You Hear The Economic Warning Bells Ringing?

    A quick investment perspective on the current economic news will give us insight into what to do with our portfolio, what the best risk reward portfolio allocation is at this point in time, and what one can expect to happen.

    I’ll look at U.S. economic data, emerging market yields, and touch on Italy which is becoming a bigger and bigger risk.

    Economic Data – Strong, But Also Weak

    The headline consumer price index came in at 2.5% which is good, but might lead to higher interest rates which is a dance that has to stop at some point. More →

  • 27 Apr
    Is Kraft Heinz A Bargain Or A Falling Knife?

    Is Kraft Heinz A Bargain Or A Falling Knife?

    The Kraft Heinz Company (NASDAQ: KHC) is one of Warren Buffett’s strongholds and as we often discuss Buffett here, it’s appropriate that we also discuss his holdings.

    KHC is especially interesting now that it’s 40% cheaper than it was a year ago.

    Today, we are going to discuss:

    • What happened to KHC.
    • Is it an opportunity or trap?
    • Packaged foods trends.
    • What can we expect on the business side of returns?
    • Berkshire buying Kraft for $40 billion.
    • How to invest in KHC – Strategy.

    More →

  • 26 Apr
    Here’s How A Defensive Investor Should Think About Stocks

    Here’s How A Defensive Investor Should Think About Stocks

    We all like common stocks, but in this stage of the economic cycle we should also be defensive. Therefore, it’s a perfect time to discuss Chapter 5 of Benjamin Graham’s book The Intelligent Investor – The Defensive Investor and Common Stocks.

    The topics we’ll discuss today are:

    • Four rules to follow when buying stocks.
    • Growth stocks.
    • Dollar cost averaging.
    • Investor’s personal situation.

    More →

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