The Financial Trifecta

The market is rallying nicely today with some of the upside attributable to Citi (C) CEO Vikram Pandit’s internal memo stating that the company has had a “very successful” first two months of the year. Is this the first sign that TARP dollars are working their way into the financial system and yielding positive results? We certainly hope so, but will wait for something more tangible than an encouraging memo. Operationally, Citi should be making money presently as the company is borrowing money from the government at very low rates and is lending at much higher rates. However, we would not be surprised to see another write-down of assets when the quarter ends.

CIt is just refreshing to see the market solidly in the black, even if for only a day, in what has been a rough few weeks. The Citi memo is certainly one catalyst but financial stocks also got an boost from the possibility that the “up-tick rule” will be reinstated. Rampant short selling has brutalized the financials for the better part of the last two years and the “up-tick rule” will at least provide a modest braking action to short sellers who like to pile on to a declining stock. Although this action will do nothing to fundamentally fix the problems which plague the financial system, it is a time-proven mechanism to provide some downside protection to stocks or industries which come into the sights of shorts in an unrelentingly bearish market.

The last development that is boosting the market–financials in particular–today is the comment by Fed Chairman Ben Bernanke stating that “improvements” to the mark-to-market accounting requirement are needed in order to stabilize the financial sector. This somewhat vague statement by Bernanke was echoed by Chairmen of the House Financial Services Committee Barney Frank as well.

This is just the sort of news that stock investors needed to hear. Three major market concerns were addressed and stocks are responding positively to each. The unexpected good news from Citi could bode well for other banks that have taken TARP funds. And the government is starting to look at two regulatory issues that have negatively affected nearly all financial firms.

What a difference a day makes, as the financial media on Fox Business have begun to see the rewards of TARP:

“We’ve been pouring this money into Citigroup and Bank of America with TARP and everything else. I think at the end of the day we will find out the American taxpayers’ going to get a 4% return on all these investments in the banks.”

This is quite a difference from what a guest said on the same network just yesterday:

“…Don’t defend these guys please, let this thing work itself out. A little tough for me to swallow… too big to fail. Talking about potentially Citi, some of the big banks being too big to fail. Going forward we shouldn’t do this should we. We still give them money if they’re too big to fail? Listen, I say cut them off now. Don’t give them more.”

The Financial Trifecta

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Ockham Research is an independent equity research provider based in Atlanta, Georgia. Security analysis at Ockham Research is based upon the principle known as Ockham's Razor, named for the 14th- century Franciscan friar, William of Ockham. The principle states that a useful theory should utilize as few elements as possible, because efficiency is valuable. In this spirit, our goal is to make the investing environment as simple and understandable as possible, yet no simpler than is necessary.

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