CNBC Big Mouth Says You Should Buy Citigroup. Think Twice Before Banking on that Advice.

In December 2009, CNBC Jim "Crapshoot" Cramer once again reiterated his buy recommendation for Citigroup (Ticker: C); as far as I am able to tell, he previously recommended the banking giant in August 2009 and August 2008 -- the stock is down roughly 80% since his August 2008 stock pick. There is a saying, even a blind squirrel finds a nut every once in awhile -- it could very well be that Cramer finally has it right on Citigroup. That is possible - but I wouldn't bank on it.

There are reasons to be a little bit optimistic for a Citigroup recovery. First, because it has laid off over 100,000 former employees over the past two years (yeah, you read that right... tragic isn't it?), the company has been able to substantially reduce its cost structure. Second, the bank recently announced a plan to pay off the remainder of TARP funds it received during the bailout frenzy. Third, it has made efforts to simplify its business model by divesting itself of certain assets; one account states that Citigroup has made 20+ divestitures since 2008 amounting to a reduction in assets of roughly $300 billion.

To rebut these: (1) even after cutting 100,000 employees from its payroll, according to new numbers released today, the company is still unable to turn a profit; (2) the only way the company is able to pay back TARP is that it had to issue $17 billion in new shares (that means it had to greatly dilute ownership) and take on an additional $3.5 billion in a mixture of equity and debt; and (3) because of past banking practices (supposedly set to change with new banking rules to go in effect this year), investors still do not have a clear picture of the nature of its assets not recorded on the balance sheet (referred to as off-balance sheet assets).

There is another reason to avoid Citigroup for the foreseeable future (and for that matter, just about any other bank): according to the latest figures from the Federal Reserve, loan delinquency rates remain at all-time highs. In 3Q-2009, residential real estate loans had a delinquency rate of 9.81% and commercial real estate loans were at a delinquency rate of 8.74%; in 2006, both of these rates were less than 2%. Further, in the same quarter, consumer credit card delinquency rates stood at 6.58%; in 2006, this rate was less than 3%. As unemployment remains very high, there is no reason to assume these figures will improve any time soon.

Citigroup's stock has not rebounded as well as other banking stocks have in the past year; Fifth Third Bank, for example, is up almost 900% since February of last year. This suggests that large investors with industry-specific knowledge, have so far shown an aversion against Citigroup's stock. I wouldn't bet against the "smart" money on this one.

I could be wrong on Citigroup - and I hope I am, but I can tell you that right or wrong, the risk involved does not warrant gambling on Citigroup -- and a gamble it is.

Lesson: I will say again, take what you hear on CNBC with a grain of salt.

Peace

Jeremy