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Author: Chris Ciovacco
Date: April 19, 2009
Before we get into the NASDAQ (QQQQ) recent new high and our possible approach to the markets, let's shed some light on Citigroup's earnings. Citigroup posted a $1.6 billion "profit" this morning, after a $2.5 billion "gain" because their bonds are worth less in the open market (you read that right, worth less). Note the use of the word "possibility" in the Bloomberg story:
Citigroup posted a $2.5 billion gain because of an accounting change adopted in 2007. Under the rule, companies are allowed to record any declines in the market value of their own debt as an unrealized gain. The rule reflects the possibility that a company could buy back its own debt at a discount, which under traditional accounting methods would result in a profit.
The bank still faces speculation about its survival prospects, as reflected in the elevated prices for its credit- default swaps, a type of instrument that investors use to insure against a debt default. Citigroup’s credit-default swaps as of yesterday were trading at 557, up from 193 at the end of last year. By comparison, rival New York-based bank JPMorgan Chase & Co.’s swaps are trading at 174. Lehman Brothers Holdings Inc.’s swaps were at 322 a week before the U.S. securities firm filed for bankruptcy last September.
When a credit default swap moves from 193 to 557 (188% gain), it shows the market thinks the chance of Citigroup defaulting has increased quite substantially since January 1, 2009.
Our Approach To Current Bullish Conditions: This detailed article acknowledges the possibility of a bottoming process in some risk assets and stresses the need for patience.
This old Bloomberg article sites research that found "retests of bear market lows occur 86% of the time", which clearly supports remaining patient.
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