Two hours into the trading day, Citigroup (NYSE:C) is up by just over a point, with investors riding the market wave and shrugging off concerns of a $250 million hit to the income statement.
A possible return to normal
Chalk the market wave up to the country's most recent set of jobs numbers. On Friday, the Labor Department reported that the U.S. economy added 195,000 jobs in June. Economists had only forecast gains of 165,000. Previous months were revised upwards, as well.
Markets were obviously happy to get this news, but it wasn't initially obvious this would be the case. Investors knew that the better the jobs data, the better the chance the Federal Reserve's quantitative easing would start tapering this year. Since the Fed's announcement, similar good news has been met with market drops.
It's still very early, but Friday's and today's reaction to the June jobs numbers might signal that investors have begun adjusting to the idea of a world without quantitative easing.
A billion-dollar bargain
Last Monday, Citi investors found out that the superbank had settled with Fannie Mae for $968 million over 3.7 million soured residential mortgages sold to the government-run housing giant. The good news was, this cleared out a major hurdle in Citi's attempt to finally atone for its housing-boom sins. The other bit of good news was, Citi's existing mortgage-purchase reserves covered the settlement.
But now, the stock-analyst group Trefis is reporting that the settlement has cleaned out Citi's mortgage-purchase reserves and the superbank will have to replenish them, which means a $245 million hit to the income statement.
But put into context, this billion-dollar-plus payout is a bargain for investors. Bank of America's (NYSE:BAC) settlement with Fannie Mae in January cost the bank more than $10 billion. And theoretically, Citi's settlement should clear out any remaining issues with Fannie. A major hurdle cleared, indeed.
Next up for Citi investors? The superbank reports its second-quarter earnings July 15. With rising interest rates and the bond markets in an uproar, look for the potential impact of asset writedowns, which will affect not just Citi, but all of the big banks to one degree or another.
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