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Citigroup Drags on Financials


Banks continue to get battered.

Last week was a tough one as stocks slipped under the weight of doubts that stretched from the health of financials to the overall health of the nation.

Ironically, cracks in the crude oil trade, which was supposed to be a catalyst for stocks, didn't work out that way. Things were so whacky that by the end of the week even the financials were bifurcated. Still, the most glaring aspect of what happened last week was the feeling that all the air seeped out of the balloon of hope, which wasn't a zeppelin to begin with. Tuesday was the decisive session and set the tone for the remainder of the week- all down hill.

Tuesday's Critical Session

Goldman Sachs (GS) beats the consensus on the top and bottom lines wowing investors with prowess that becomes more impressive each quarter. Still, the company's shares fell back to earth after soaring early. It was comments on the overall industry, however, that put pressure on the broad market. Best Buy (BBY) also beat expectations and yet there was an interpretation the numbers masked problems of a slower economy that is only on temporary life support via stimulus package checks that have begun to snake their way through the system. Then of course there was the Producer Price Index result that came in hotter than expected and tossed kerosene on the burning idea of a sharp change in Fed policy that has many pundits expecting a rate hike this summer. The best companies in their respective spaces delivered the goods and couldn't spark a rally. It was demoralizing.

Fridays Exclamation Point

The so-called quadruple witching that saw stock and index options and futures expire was supposed to be marked by volatility but the stocks opened under pressure and never recovered. Sure, crude rebounded a bit but the weakness that closed out the week was centered on worries about investment banks and the overall economy. The 220 point drubbing on the Dow was like a sharp exclamation point that went through the already wounded heart of the market. The linger warning of "substantial" write-offs at Citigroup (C) darken the pall that was already hovering low and ominously.

Then there was the early morning news on Friday that Moody's (MCO) lowered its ratings on Ambac (ABK) and MBIA (MBI). Apparently the downgrade to A2 (five levels lower than the Aaa rating it had on Thursday) will trigger payments of $7.4 billion for MBIA to cover certain payments and collateral postings. According to its website Ambac says the downgrade has no material impact on obligations to collateralize its guaranteed investment contracts and swaps.

These stocks have been at the lead of what has become the financial Bataan Death March which has lasted long enough to threaten the future existence of many key players. Something has to give with the following companies.

While nobody believes Citigroup will go under there is still a lot of speculation the stock will get hammered to new lows as management comes to gripes with problems and takes appropriate action, i.e. cuts dividends and sells more prized assets. From the very beginning bank analyst and market maven Meredith Whitney has been right on the company and stock. So when she comes around the stock could stage a strong rally off the bottom. As for Lehman (LEH) it seems like some doubters are warming up to the stock in the sense that it has put away its black suit (at least that's how I read company critic and bank analyst Dick Bove latest opinion release), but still think the company languishes.

The financials have led the market lower but even with the 3.7% and 3.1% bashing of the Dow and S&P last week, broad market indices are holding up much better. Maybe the capitulation old school pundits are looking for could be happening in the financial sector.

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