Citi "Proves" Financial Bottom Is Not Here Yet

Major indices are again at important technical levels. The small-cap Russell 2000 is again at 52-week low; and if we close here the Dow Industrials and the S&P 500 will both be at 10-month lows.

The problem is principally with Citi and the realization that the bottom is not in. The equation here is simple: no "kitchen sink" quarter + consumer deteriorating = stock dead in water.

Or so the bulls believe. Remember the hope for the bulls was that Citi would throw in everything into the quarter and we can move on. Not happening.

Citi missed by nearly a dollar (loss of $1.99 vs. $1.03 expected).The biggest part of the miss (about $0.40 of the downside variation), was significantly higher than expected reserve build in the consumer business .

This seems to have been a surprise, though it shouldn't have been. There was a significant deterioration in consumer credit quality. Net credit losses totaled $1.56 billion (that's 5.55 percent of the business, the highest level in over two years) and they took a net charge of $3.85 billion to increase loan loss reserves.

In plain English, the number of consumers who can't pay back their debts is increasing.

Goldman Sachs, which has been bearish on the economy and U.S. consumer recently, noted that building of reserves for potential losses signals that tougher times are ahead in the U.S. consumer channel, which has accounted for 30 percent-40 percent of Citi's recent profits.

The bottom line: the lack of a "kitchen sink" quarter, combined with the increase in reserves for consumer credit, means that the bulls cannot call the bottom in Citi yet, or other financials.

Most bulls now feel that these stocks are somewhat dead in the water for the next few weeks at least.

The wild card here is the Fed.


1) The concern about consumer credit deteriorating is very much impacting retailers, on top of the poor retail sales numbers.

2) Energy is weak due to the growing concern over effects of high crude oil on the economy. President Bush said this morning OPEC needs to increase output.

Questions? Comments?