Why Citigroup Took a Dive This Week

Each of the Big Four banks fell off a cliff Tuesday morning, but none fell quite as far as Citigroup (NYSE: C  ) , which was down 4.83% as the markets closed for the week. Blame major market negativity in general and a single analyst's pessimistic take on Citi's position in the currency markets in particular.

We have nothing to fear but the Fed
That big drop in U.S. equities on Tuesday came as the dollar fell by 3% against the yen. Global investors had been hoping that the Bank of Japan would temper its aggressive policy stances on interest rates and assets purchases -- which have sparked fears of worldwide currency wars -- but the BOJ stayed steady, causing severe turbulence in the Japanese stock market that then rippled across the globe.

So that explains Tuesday's plummet, but what kept it going? Fears of exactly how and when Federal Reserve Chairman Ben Bernanke is going to begin dialing back QE3: the third round of quantitative easing that's boosting the nation's housing market as well as the rest of the economy. Everyone knows it's not a question of if but when.

The irony of the situation is, the more good economic news that comes in, the sooner Bernanke will begin his drawdown. So for right now, the markets are in a damned-if-he-does, damned-if-he-doesn't scenario. It's impossible to say when or exactly how these fears will be calmed. The situation will likely just have to play itself out. But QE3 and essentially 0% interest rates couldn't have gone on forever, anyway.

As for the single analyst wreaking even more havoc on Citi's week, that's Charles Peabody, head of research at Portales Partners. In an article that got wide play this week, Bloomberg reported that "[Citi] may lose $5 billion to $7 billion in regulatory capital this year if the dollar gains against the yen, euro, and currencies in emerging markets."

Foolish bottom line
None of the Big Four banks had a good time of it this week, and Citi went along for the downward ride, aided and abetted by Peabody, who, according to Bloomberg, is one of only four of 34 analysts they track who rate Citi a sell.

For me, Citi's overseas exposure is its greatest strength, not its greatest weakness. Globalization isn't going anywhere, no matter how much countries try and fence in their banking systems, and Citi is better positioned than most to capitalize on the inevitable needs of global customers.

And as for the dollar gaining against the yen, well, it just fell. And even if Bernanke does begin winding down the QE this year while the DOJ is cranking its own version up, it's far from a given that the dollar will make up enough lost territory to make Peabody's dream come true.

So we have two proximate causes for Citi's bad week, but in many cases it's difficult, if not impossible, to say what's moving a stock on a day-to-day basis, which is why here at The Motley Fool we counsel investors to take a long-term view of investing. Obsessive ticker checking will likely lead to more trading, which costs money, and has been shown to hurt portfolio performance.

So tune out the market noise and focus on the fundamentals of the companies you're invested in. Your portfolio will thank you, even if your broker won't. 

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  • Report this Comment On June 16, 2013, at 11:30 AM, MountainEdge wrote:

    I always get a kick out of the long range predictions of economists and analysts, given no one can tell what the market is going to do this week. The magnitude of Peabody's error on last year's Mexican Peso call should be something investors consider before bailing out of CitBank. Peabody saying he got the direction right is laughable, given he has a fifty-fifty chance of getting it right.

    I must say however, I am not clear as to what type of currency losses we are talking about. One moment commentators seem to referred to them as financial statement translation losses and then it seems they refer them as trading losses.

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