David Gaffen

David Gaffen’s Profile

Citigroup Is the Economy

August 12, 2009

It used to be that Citigroup was one of the market’s most important stocks, if not the most important. At the nexus of the banking, securities and lending industries that benefited most from the easy-credit boom of the middle of the decade, its success as a stock mirrored the market and the economy.Somewhere around 2006, when people started to call for a breakup of the company, it was supplanted by a company even more tied to the derivative-fueled mess that masked the holes in the economic landscape – Goldman Sachs.

But Goldman continued to earn massive profits while Citigroup nearly died a painful death. Shares eventually fell to less than $1 a share, it was kicked out of the Dow and investors started to view other consumer banks as better indicators of the market’s health.

Still, there’s a chance that Citigroup may become more important once again, provided it survives (with substantial help from the government). Kevin Depew, recently writing on Minyanville.com, noted that most of Citigroup’s short-term debt has returned to spreads present before the blowup of Lehman Brothers, suggesting that bond investors believe the debt crisis has receded. He notes (using a bit of technical analysis) that “Citigroup right now might again be The Most Important Stock in the Universe.”

But one could argue it never stopped being important . It’s clearer now that those in search of a proxy for the economy, investors should have stuck with Citigroup all along. (Not that they should have stuck with owning the shares.) Its plunge came at a time when many thought a second Great Depression – or something close to it – was on the way, and its status as a ward of the state mirrors the economic situation as well: second-quarter GDP would have been worse had it not been for government spending.

Shares of the stock continue to struggle. It trades at less than $4, but the company recently saw a boost in trading volume as a result of an increase in its influence in the S&P 500. This may increase again if certain preferred shares held by the government are converted to common stock and then end up in the public’s hands.

The market can’t be blamed for ignoring Citigroup, washing their hands of it as it slumped.

But Citigroup never stopped being a bellwether for the economy. Its likely path in the next several years: slower growth, forced reduction of leverage, and government help, is the one the broad economy is likely to follow.

Eventually, when the banking system is smaller, and has delevered, and consumers and businesses have pulled out of the mountain of debt piled on over the years, Citigroup will be just another company. Until then, the health of the economy is the health of Citigroup.

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