Bruce Berkowitz buys Citigroup!

[vinod1]

What is with all the talk about not being able to understand Citigroup's financials. Did they really clean up all that much in the last one year?

 

http://www.dataroma.com/m/holdings.php?m=fairx

 

Vinod

 

 

[Grenville]

I didn't believe it, but the Citigroup position shows up in their Nov. 30 2009 annual report on their website.

 

 

[txlaw]

Whoa, I hadn't seen the annual!

 

-SHLD is top holding as of end of November -- 10.6%!

 

-BRK was 10% of the portfolio at the end of November.  Could be more when the BNI deal closes.

 

-PFE has been dramatically paired down.

 

-C at 4.2%!

 

-GGP at 4.2%

 

 

No wonder in the last interview I saw with him (Fox Business, I think), he mentioned with a smile that there would be a lot to talk about after he disclosed his holdings in a few weeks.

 

[arbitragr]

Are you still holding Vinod?

I remember you bought some a while back.

 

[ERICOPOLY]

Berkowitz owns Citigroup... probably because he thinks the recovery is happening:  “I’m optimistic about the economy—we are in the spring of a recovery,” .

 

Watch the video:

http://www.cnbc.com/id/34749475/site/14081545?__source=yahoo%7Cheadline%7Cquote%7Ctext%7C&par=yahoo

 

He also said:

"We own a large position in Sears which means we'd be buying, because if we're holding it it's like buying it".

I like his thinking there -- perfectly in line with mine which is that... holding is buying.  We've had that discussion before on this board.

 

[Guest dealraker]

Hey guys...

 

This old fellow was an initial investor in the Fairholme Fund.  Ha!  I'd read about Bruce in Outstanding Investor.  If I had to guess I'd say that Bruce has beaten Mr. Market by somewhere between 3 to 1 to 5 to 1 since the early 1990's.  That guess is based on the returns stated in OI and his public performance.

 

[A_Hamilton]

I think Berkowitz is looking at C and thinking a few things:

1.) If C earns a 1% ROA going forward, we are talking about $19 billion of net income annually (on current $1.9 trillion b/s), or, ~$0.65 per share...so at today's $3.30 per share you are paying 5x normalized earnings.

2.) The company is overcapitalized and could write down $20 billion tomorrow and you'd still be an owner at below tangible book.

3.) The company is over reserved with reserves to NPA's of 112%.

4.) If the government pushes the banking industry to create more plain vanilla products, the biggest banks will be the biggest beneficiaries as economies of scale will be more important than they've ever been.

5.) The question that I would have for Berkowitz is how much more does he think C will have to shrink the balance sheet?

Any thoughts?

[vinod1]

Are you still holding Vinod?

I remember you bought some a while back.

 

 

I never had a stake in Citigroup. The reason I brought this up is because Berkowitz said that he did not invest in many of the financials like Citigroup is because he could not understand their Balance Sheets. I am wondering what has changed so much with respect to the BS that he can understand them.

 

Of the troubled financials, I only bought COF LEAPS during the March lows. But it is unfortunately only a tiny amount so the 70 bagger did not mean much to my portfolio.

 

Vinod

[txlaw]

am I right in reading that his GGP stake is all debt?

 

Yeah, I think that's right.  Convertible debt and a tranche loan.

[arbitragr]

Are you still holding Vinod?

I remember you bought some a while back.

 

 

I never had a stake in Citigroup. The reason I brought this up is because Berkowitz said that he did not invest in many of the financials like Citigroup is because he could not understand their Balance Sheets. I am wondering what has changed so much with respect to the BS that he can understand them.

 

Of the troubled financials, I only bought COF LEAPS during the March lows. But it is unfortunately only a tiny amount so the 70 bagger did not mean much to my portfolio.

 

Vinod

 

Oh sorry. I do remember someone made a post about buying C.

I confused you with Mandeep: http://cornerofberkshireandfairfax.ca/forum/index.php?topic=806" data-ipsquote-contentclass="forums_Topic" 6672#msg6672

 

"Remember GE at 5.73? or AXP at 9? USB (my fav) at 8? come on guys, relax. This is not GM or citigroup (which I also own)."

 

[ERICOPOLY]

Here is a video of Berkowitz discussing his purchase of Citigroup.

 

http://cosmos.bcst.yahoo.com/up/player/popup/?rn=289004&cl=17974680&src=finance&ch=4535474

 

(I own Citigroup shares now so I'm sort of interested)

[txlaw]

Here is a video of Berkowitz discussing his purchase of Citigroup.

 

http://cosmos.bcst.yahoo.com/up/player/popup/?rn=289004&cl=17974680&src=finance&ch=4535474

 

(I own Citigroup shares now so I'm sort of interested)

 

Great video.  I actually bought a little bit of C right after they sold shares in order to pay back their TARP preferred.  Seeing that Berkowitz was in Citi gave me a little more confidence in my decision, and I've been adding to my position.

 

The pig in a python analogy also was my rationale for buying ETFC last year after the debt exchange went through.  ETFC's portfolio is in runoff though and won't be replaced with new loans.  Instead, once the losses lessen, their core business' earnings potential will show through and should hopefully reflect in the market valuation. 

 

It sure feels like I've been waiting a long time for that to happen though -- even though it's been less than a year!  I imagine that's what it could feel like waiting for Citi to work out.

[jasonw1]

Eric, nice call on Citi. Your options are certainly doing very well!

 

Unlike many other value investors who often fall into value trap and end up holding undervalued security for a long time, I found Berkowitz's not only great at fundamental analysis, he's also great with getting the "catalyst" and his timing, his BRK and Citi purchase were right on the rhythm.

[ERICOPOLY]

Eric, nice call on Citi. Your options are certainly doing very well!

 

Unlike many other value investors who often fall into value trap and end up holding undervalued security for a long time, I found Berkowitz's not only great at fundamental analysis, he's also great with getting the "catalyst" and his timing, his BRK and Citi purchase were right on the rhythm.

 

I have the straight Citi shares, not the options.  But yes, I've been guilty of watching the market price everyday this week  :)  I own options on BAC -- there was (and still is) hardly any premium in the $7.50 2012  BAC calls.  

 

Soros bought Citi in Q4.  Given that he fled the Nazis, I think he thinks about risk more than many people give him credit for.  It's just nice to see a big macro speculator type in it -- we already have Berkowitz, Paulson, etc...  It brings more confidence to the market to see Soros I think (a lot of people follow his lead, as many do Buffett).  I care about stock prices too much perhaps, but in my experience I've found it pays well to have price go up.

[UhuruPeak]

[...] but in my experience I've found it pays well to have price go up.

 

Quote of the month!  :D

[Hoodlum]

The banks may have some downward pressures in the coming months if the rating agencies follow through on their threats to severely downgrade the larger banks.

 

http://online.wsj.com/article/SB10001424052748704904604575262522147920814.html?mod=WSJ_latestheadlines

 

The financial-overhaul bill passed last week brings big banks closer to what could be major credit-ratings downgrades that would sock them with billions of dollars in additional financing costs.

 

Implicit government support for "too big to fail" banks such as Citigroup Inc. and Bank of America Corp. means those banks get higher marks from rating companies Moody's Investors Service and Standard & Poor's than they would if the possibility of collapse weren't ruled out. The theory is that an implied government safety net makes owning the banks' bonds less risky. The rating companies have warned that they will cut bank ratings, possibly severely, if that safety net thins or goes away.

 

The regulatory-overhaul bill passed by the Senate weakens that safety net significantly, while also curbing bank risk-taking and, some analysts argue, profitability. If the final bill, currently being negotiated between the House and Senate, shares those characteristics, then the rating companies will almost certainly lower credit ratings for some of the biggest banks.

 

[Cardboard]

IMO, even if S&P and Moody's do downgrade, these big banks will still be seen as too big to fail and the implicit guarantee will remain in investors minds. It may hurt the value of their bonds somewhat, but it won't impact them so much since they have access to cheaper funding via the Fed window. The government just can't afford to have one of them go down in flames.

 

Actually with derivatives, there is no size that is not too big to fail. Every player involved in this game has such massive notional positions that book value or percentage of revenues means nothing. Think about AIG. They had a massive book value, their main business was plain vanilla insurance but, they wiped out everything with the issuance of some credit default swaps. I say some since these guys are tiny in the derivatives world.

 

I have a really hard time understanding how, for example, this massive decline in the Euro has been absorbed with no major loss anywhere. None that we have heard anyway. How is it possible for these large banks to always be delta hedged perfectly? Euro/USD contracts are in the trillions. What about very large hedge funds, especially when there was a strong consensus not that long ago that the Euro could only keep going up?

 

Cardboard

[frog03]

What is interesting to me is that two superstars such as Berkowitz in the US and Sprott in Canada can have such different views on financials in the US.  It is hard for both of them to be right unless Berkowitz subset of financials seriously outperform the US financials in general.

[ERICOPOLY]

I guess Goldman Sachs doesn't care, they upgraded Citi:

 

http://wallstreet.blogs.fortune.cnn.com/2010/05/24/citi-rallies-on-upgrade/?source=yahoo_quote

 

 

[frog03]

C is exactly like many financials Sprott stays clear off.  Take equity in the latest quarter, remove goodwill/intangibles, you arrive to 5% tangible equity to assets ratio.

This is living dangerously...

[ERICOPOLY]

C is exactly like many financials Sprott stays clear off.  Take equity in the latest quarter, remove goodwill/intangibles, you arrive to 5% tangible equity to assets ratio.

This is living dangerously...

 

You are forgetting to add back in the loss reserves.  They offset some of the assets that you include in your tangible equity to assets ratio, so I think it's fair to include them in your ratio.  The ratio seems to only serve to give you an idea of the leverage involved -- I think that's the point right?  So the loss reserves help mitigate the risk.  The higher the loss reserves as a percentage of total assets, the more it mitigates the risk.

 

When you say 5% ratio, it implies 20:1 leverage.  But they have a loss reserve of 6.7% (I think that's just for CitiCorp but I could be wrong).  I believe their leverage is more like 12:1 -- accounting for the loss reserve. 

[frog03]

Thanks for the info re the loss reserves.

Yes, my ratio is to indicate the amount of leverage.

This being said, the track record at C (complete erosion of book value per share over the last 5 plus years) is definitely lacking.  So a 5% or a 12% given the track record (sure some folks have changed at the top) would not leave this investor very comfortable.

 

[ERICOPOLY]

I guess even the assets:loans ratio isn't that meaningful.  Like you suggest, the issue is really more one of loan quality, and past history is enough to scare you away from this company.

 

The reason why I say that assets:loan ratio isn't that meaningful is that this is after all the banking industry we're talking about.  A bank can have a very high amount of absolute leverage (12:1) while taking on very little risk.  Imagine if the loan book of a bank today were entirely comprised of real estate first mortgages where the buyer put 30% down.  The bank could lever that 12:1 without much risk at all.  Even if we saw yet another 30% decline (after already suffering one the past few years) the bank would still be making money as it is the borrower losing that 30% of equity, not the bank. 

 

Berkowitz (in January 2010) stated that "we are in the spring of a recovery".  That's why he owns Citigroup -- he believes the economy has already crashed, and he also stated that Citigroup is "overcapitalized".  That's not an unreasonable viewpoint if you start with the premise that the economy is truly in recovery.  Sprott on the other hand doesn't agree with this macro view.

[Cardboard]

Regarding Citigroup, the stock trades now at $3.78 while book value is $5.22 and 2010 EPS are around $0.55.

 

In comparison, a company of similar size (book value, assets, revenues) and exposed to the same risks or JP Morgan trades at $38.62 while book value is $39.38 and 2010 EPS is $3. JP Morgan also has just over $20 billion more in goodwill than Citigroup.

 

The ROE and ROA at JPM is worst than C, but it trades at a higher multiple because it has not experienced the same issues and people think now that Jamie Dimon can walk on water.

 

So I can see why some investors like Berkowitz, Watsa and Paulson are plugging money into C. Relatively speaking it's a cheap bank and if the economy keeps on improving C should outperform JPM based on valuation.

 

IMO, a better trade could be a pair trade between the two. This way you avoid making a bet on the economy.

 

Cardboard

[wiessman]

I've always respected Bruce and try to read everything he writes.  It seems like in the past he has publicly stated that he shies away from the financials precisely because he can't underwrite the quality of the assets, ie, the loan base.  Now I believe he's saying the equity at C is so cheap that such a view doesn't matter - at least I guess that's what he must be saying.

 

To take that view don't you have to then underwrite the reserves - in other words do they fairly represent the loss potential of the loan base.  FWIW, the view of this "man on the street" is that we haven't seen the end of loan problems owing to the much advertised hangover awaiting us in commercial real estate.  Maybe they have already taken their licks on the balance sheet, maybe not.  But based on their history who can be sure.

 

Seems I've read that this is why Buffett has always been so high on Wells Fargo - he trusts their culture to properly take the correct marks.

 

I've come to this conclusion much to late.  I've lost my butt in the stock and don't expect to recover.  I bought in the 40's and view it as a permanent loss of capital.

 

Thanks for the various viewpoints.