As Citigroup (C) brings its formally hidden, off balance sheet loans back onto its balance sheet, some analysts are heralding the bottom. This is the capitulation they have been looking for. The bad news is out and the stock is cheap. Buy on the news.

Unfortunately, I disagree. Citigroup bringing $58 bln of loans onto its balance sheet is due only to what we pointed out when the super fund was first proposed by Mr. Paulson: it won’t work. There is no one left dumb enough to finance this debt. It’s that simple.

Is this the bottom or top?

So now Citigroup has even less capital to collateralize its loans. It will have less ability to re-activate lending activity in the future.

Folks, those that think the bad news is out and this is a buying opportunity are still operating under the assumption that this is some type of bull market correction. I think people thinking that way haven’t seen or lived through a real bear market before. They are operating under little experience. These are the same people that thought there was no problem to begin with.

Bear markets don’t work that way. Throw all those sentiment indicators and stochastics out the window. Stocks don’t get “oversold” for long in a bear market. The financial stocks are in a bear market. Take your clues from how they have acted and apply that to the rest of stocks when cyclical stocks finally understand what is happening: no credit expansion creates a recession.

Inflation is credit expansion. When credit expands, nominal prices rise as there is more debt to buy things. The more debt, the more that currency devalues relatively. Deflation is credit contraction. When credit contracts, people have less debt to buy things and prices begin to drop. As the market tries to pay off debt a currency will rise relatively as debtors need the currency to pay back or destroy (foreclosure) that debt.

C’s move today is a sign of deflation: the recognition that the debt cannot be financed or sold to investors. The dollar is much stronger today against all currencies because of these deflationary pressures.

Risk is high.