Nothing New

Stocks took a walloping today on widely expected news tied to Financials' health and mortgage-related asset write-downs.

Story Highlights:

  • Citigroup's announced asset write-down tied to mortgage-related securities was widely expected, making today's negative subsequent market reaction more likely a symptom of short-term volatility than a bearish harbinger.
  • Don't be surprised if fourth quarter earnings feature another round of write-downs for big Financials firms.
  • Yes, these write-downs are legitimate problems for Financials. But no major players are in imminent danger of going under, nor are these problems likely to spread to the wider US, let alone global, economy.

(Editor's Note: MarketMinder does NOT recommend individual securities; the below are simply examples of broader themes we wish to highlight.)

There really isn't much to say. Stocks took a walloping today on stuff we already knew. Or at least was widely anticipated. Today's big story is Citigroup's big asset write-down tied to subprime related securities.

Citigroup's $10 Billion Loss Is Worst Ever
By David Ellis,

Citigroup announced Q4 earnings resulting in a net loss of nearly $10 billion, but full year 2007 earnings managed to squeak out a $3.6 billion gain. Not outstanding, but not horribly bleak either. Like many Financials lately, Citi got a $12 billion cash infusion from investors including a Singapore-affiliated fund, Alwaleed (the Kuwait Investment Authority), and even the state of New Jersey. Fughedaboudit!

So, the story remains the same. Big Financials bought too many subprime related mortgage securities and are now paying the price. There's no denying the market for SIVs and MBSs is pretty dead right now, and that makes those securities worth substantially less. (For more on how those securities work, see "Writing Off Write-Downs," 11/13/2007.)

But folks are probably extrapolating the negative economic effects of this development way too far. There's a substantial difference between the market for those securities and the health of the underlying assets. Default rates on corporate debt (the type underlying stocks as opposed to real estate) are near all-time lows and have been stable for some time—even in the latter half of last year. In some fashion, these asset write-downs are more a feature of accounting than true health of the companies themselves. (For more, see "Junk Bonds and Green Skies, 01/09/2007.)

None of this is new news. Even existing bad news is being framed as Apocalyptic, which means today's market reaction is probably more a feature of continued short-term market volatility than a harbinger of coming ruin. The fact remains Citi's "worst loss ever" won't bring the company down. As a going concern, its operations and capitalization are intact, as evidenced by capital infusions from a variety of investors (foreign and domestic). If Citi were truly doomed—would so many investors offer up capital?

The US economy could indeed show some softness in 2008. But that slowdown—should it even materialize—is likely to be far more benign than most anticipate. Recall, there have been plenty of weak quarters in the current economic expansion only to result in further growth later on. Most importantly, the broader global economy, of which America is only a minor component, is growing robustly today. Global investors who take a pervasively bearish view on stocks based on one component of one economy across the vast global scene simply aren't seeing the big picture.

Citi's earnings report is less a symbol of economic Apocalypse than it is a symptom of an economic sector undergoing a difficult period. Scaling those problems to their proper proportion is absolutely necessary to navigate today's stock market effectively.

If you would like to contact the editors responsible for this article, please click here.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.