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Five Things You Need to Know: Citigroup's Good News/Bad News; Mortgage Advice: Just Don't Pay; Model Suggests Dollar Decline to Continue Indefinitely; Next Victim of Subprime: Art Prices


What you need to know (and what it means)!


Minyanville's daily Five Things You Need to Know to stay ahead of the pack on Wall Street:

1. Citigroup's Good News

By now everyone knows that Citigroup (C) is taking another $8-$11 billion writedown related to declines in the firm's approximately $43 billion net exposure to Collateralized Debt Obligations (CDOs). It's a big firm, taking a big loss, but other than that is there anything we can gather from the report - either good or bad?

  • Well, yes.
  • The good news is that during the Citigroup conference call this morning, Chief Financial Officer Gary Crittenden was adamant that the firm was "fully committed to maintaining the dividend at its current level."
  • You may recall that last week a report by analyst Meredith Whitney of CIBC World Markets said the company cannot continue to pay out its large dividend as long as its net income remains stagnant.
  • Whitney, who over the weekend reported receiving death threats for making the negative comments about Citigroup, was on the call this morning and asked point-blank about the firm's payout ratio.
  • CFO Crittenden replied, "Meredith, I am pretty confident on our ability to manage the balance sheet."
  • "I really believe that we are staring to get the right processes in place to focus on the highest return elements of our business and to ensure that we're growing the balance sheet in ways to make a lot of economic sense and that will enable us
    overtime to produce the kind of cash flow that will be very attractive for doing the things that we want to do which include obviously maintaining a very strong dividend."
  • That's the good news. Citigroup is confident in its balance sheet management and its ability to maintain the current dividend... for now.

2. Citigroup's Bad News

OK, so the firm is confident that the current dividend is safe. Here's the bad news from the call. The firm is equally confident that the market's view of forward-looking real estate pricing is wrong. How so?

  • Citigroup CFO Crittenden put it like this: "Now, when we have thought about taking these marks we have obviously if you look at what the ABX would imply in terms of real estate price reduction it starts to imply very, very high numbers of price reduction in real estate. I guess our view is that it's unlikely that those very high levels of price reduction in real estate will take place so what's actually happening is implicitly the market is saying that the cash flows associated with those securities have become more risky and so as we have thought about valuing those cash flows we have put different discount rates on those cash flows and that's reflecting the range that you see in the estimate here and we'll see obviously how that actually plays out over time."
  • OK, what does that mean? What is the ABX?
  • The ABX Index is a series of credit-default swaps based on 20 bonds that consist of subprime mortgages.
  • ABX contracts are used to speculate on or to hedge against the risk that the underlying mortgage securities are not going to be repaid as expected.
  • A decline in the ABX means the market expects mortgage holders (including Citigroup) will suffer increased losses in their investments.
  • In other words, according to Citigroup, the market as reflected by how the ABX trades is incorrect, and so the firm is going to try to wait it out and see who winds up being right over time.
  • So the bottom line here is who do you believe? Citigroup's mark-to-model? Or the implied prices derived from the ABX as it actually trades in the marketplace?
  • Perhaps the ABX is irrational.
  • But what's that old saying - the market can stay irrational longer than you can stay solvent?
  • Maybe Citigroup is different.

Let's hope Citigroup is right.

3. Mortgage Advice: Just Don't Pay

According to a stunning article this weekend in the Wall Street Journal, homeowners looking for mortgage relief from their lenders are running across a weird message: We can't help you unless you first fall behind on payments.

  • That's right. If you want help with your mortgage you have to first stop paying.
  • The Journal story leads off with the bizarre tale of a homeowner facing an increasingly common situation: she owes more on her home than it's worth, and is asking the lender to allow a "short sale" to avoid foreclosure.
  • A "short sale" is an agreement where a lender agrees to accept less than the total amount due.
  • In many cases it is in the lender's best interest to do this since it allows them to avoid the costs of foreclosure and assuming ownership of the property.
  • In the case the Journal cites, the lender - in this case Countrywide Financial (CFC) - told her she would first need to fall at least two months behind on payments in order to enter a short sale agreement.
  • Elizabeth Schomburg, senior vice president of the Family Credit Counseling Service in Chicago, told the Journal that about 10%-20% of the 1,000 families who sought help last month were current on their mortgages and thus considered "ineligible" for loan modification by their lenders.
  • Meanwhile, demand for loan modification is only going to grow.
  • Fitch Ratings estimates that modified loans could account for 5% to 10% of all loans outstanding over the next 12 to 18 months, the Journal reported.
  • As we noted last week, more than 635,000 properties entered foreclosure during the third quarter, according to RealtyTrac.

4. Model Suggests Dollar Decline to Continue Indefinitely

According to Bloomberg a model is suggesting that the decline of the U.S. dollar will continue indefinitely. 1).jpg" width="247" align="right" />

  • Gisele Bundchen, the world's richest model, is insisting that she be paid in just about anything but U.S. dollars so that she can stay that way.
  • Bundchen, the Brazilian supermodel who Forbes magazine says earns more than anyone in her industry, is demanding payment in euros rather than dollars, her twin sister and manager told Bloomberg.
  • "Contracts starting now are more attractive in euros because we don't know what will happen to the dollar,'' Patricia Bundchen, the model's sister said in a telephone interview back in September from Sao Paulo.
  • When Bundchen signed a contract in August to represent Pantene hair products for Procter & Gamble (PG), she demanded payment in euros, according to Bloomberg.
  • Bundchen earned $33 million in the year through June.
  • You know, although we haven't formally backtested this, we're going to go out on a limb and suggest that of all the potential contrarian strategies now available to the modern day investor, taking the opposite side of the macro views of a supermodel probably ranks near the top in terms of successful contrarian investment strategies.

5. Next Victim of Subprime: Art Prices

According to the Financial Times, art prices may be the next victim of market turmoil originating in subprime mortgage losses. (We're paraphrasing and extrapolating; the newest form of multi-tasking.)

  • Collectors are expected to buy up to $2 billion in Impressionist, modern, postwar and contemporary art at some high profile auctions set to begin tomorrow here in New York.
  • However, according to Ian Peck, the chief executive of Art Capital Group, this could mark the beginning of a significant correction in art prices.
  • "A lot of Wall St guys now, the ones who were buying contemporary art, are worried about losing their jobs, their bonuses, and when your financial wellbeing is under threat the first thing you stop doing is buying multi-million dollar artworks," he told the FT.
  • Art prices rose by 13% in the 12 months to June, less than the 20.5% rise in the S&P 500, according to the Mei Moses All Art index, the FT said. In the past ten years, the Mei Moses index had risen by an annual average rate of 15.5%.

What happens when wealthy Wall Street types fall on hard times?

Ask Gustave Courbet.

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