Daily Insight

Fears about the health of our nation’s largest financial firms sent U.S. on a wild ride lower on Friday. Talk of nationalizing troubled banks pushed the S&P 500 near its November 2008 lows, but markets jumped after the White House insisted nationalization was not in the cards. Of course, it’s hard to believe statements like these since the government has made similar comments in the past, only to change their stance later.


Market Activity for February 20, 2009

Economic data
The Consumer Price Index (CPI) rose 0.3%, showing the cost of living in the U.S. rose in January for the first time in six months. The CPI year-over-year rate remained unchanged for the first time since 1955, according to Bloomberg.

The core rate, which excludes food and energy items, advanced 0.2% last month and was up 1.7% on a year-over-year basis. Both measures came in slightly above expectations. These increases were largely due to higher prices for autos, clothing and medical care.


Bank nationalization
After Citigroup’s shares fell below $2 to an 18-year low, reports surfaced over the weekend that Citigroup is in talks to have the government take a larger stake in the company by converting a substantial portion of its preferred shares into common stock. The government holds $52 billion of preferred shares in Citigroup, five times the bank’s market value as of Friday.

Multiple reports say that the government could wind up holding as much as 40% of Citigroup’s common stock, which would dilute the stakes current Citigroup shareholders. The positive for U.S. taxpayers is that such a move would not cost them any additional money. Citigroup is also encouraging Government of Singapore Investment Corp, Abu Dhabi Investment Authority and Kuwait Investment Authority to convert their preferred stakes into common stock, which will only further dilute current shareholders’ stake more.

The idea behind Citigroup’s strategy is that converting preferred shares to common stock will bolster the company’s tangible common equity (or TCE) ratios – one of several gauges of a bank’s financial strength. Until this point, banks and regulators have referred to the Tier 1 capital ratio to determine a bank’s ability to absorb future losses. I will talk about these ratios in more detail in today’s Afternoon Review, which you can access by visiting our blog at http://www.acropoblog.com/ (the Afternoon Review is usually posted around 4PM CST).


Looking ahead

Futures are up this morning, which may be a sign that investors would embrace a temporary nationalization. The news of government’s potentially increased stake in Citigroup overshadowed the Obama administration’s announcement that they will seek to cut the deficit in half by 2013, through tax increases and spending restraint. The idea of raising taxes during a period of economic weakness makes a lot of people cringe, but it is likely the market has already priced in the expiration of the Bush tax cuts in 2010.

This is a big week for economic data, and Brent will be back tomorrow to guide you through it all.


Have a great day!

Peter Lazaroff, Junior Analyst