Citigroup & JP Morgan

After hours, JPM was up nicely after passing the Fed stress test, declaring an increased dividend and announcing a surprisingly large buyback in their stock. Unfortunately, Citigroup did not pass the test and cannot get Fed approval for the dividend and stock buy back. C went down in price after hours. The purpose of the hedge is not to make money both on JPM going up and C going down, although that could happen. Usually, there is a price to pay for the hedge, namely, you make less on the long because the short does not pan out. But you are hedged with both a short and a long just in case there is a very sudden selloff in the banking industry. In which case you would make money on the short and probably lose on the long.

 

If you play the current news, then you are making a short-term, momentum bet that C will go down some more, and JPM will go up for another day or two. Longer term, hedge fund investors may want to wait for C to bottom on this news and JPM to blow off higher. At that point, they may see the long-term opportunity is to buy C and go short JPM. The thesis here would be that all the good news is out on JPM, and price may be a little too frothy. Likewise, C will do everything possible to pass the test down the road and, eventually, do the dividend and buy back stock. Let's look at the fundamentals and charts to see what the possibilities are both over the short term and long term for this pairs trade.

 

For the short-term pairs trade, let's go right to the charts to see the possible targets for JPM and C. The-point-and-figure chart for JPM ( click here) shows Tuesday's jump up before the close to $43, up 7% on the good news. On this chart you can see the long-term triple top at $47. There is some resistance at $43 to $44, so no surprise the price stopped at $43 on the close and remained there in the after market. It may be slow going from $43 to $47 but that looks to be the target on this chart. One possible strategy would be to go long at $43, target $47, but settle for $44 to $45 to close the pair.

On the short side, C dropped below $34 after hours, down from $36, and ended up above $35. The point-and-figure chart ( click here ) shows support at $34, the last high before the current one of $36. And the next support is the last runup in price that ended at $32. Let's presume the short gets off on the open Wednesday at $35 and your target is $34. Theoretically, you get long JPM on the open at $43 and short C at $35. By Thursday or Friday, JPM hits your target of $45 and you close both positions. You make 2 points if C does nothing but provide you with hedge protection. If you are lucky, C dropped to $34 and you make a total of 3 points instead of 2 on the trade. You did not have to worry about holding the trade over night because you were hedged against a market selloff, where your short position could make more than the long position. In this unlikely scenario, you would close the position when C hits $32, making 3 points while you may lose a point or more on your long position in JPM.

Now let's take a contrarian view, one more appealing to professionals, like hedge funds. They will be interested in shorting the frothy high of JPM and going long the dog, C. A possible thesis would be that all the good news is out on JPM and the price has run up too much. And C, on the contrary, has all the good news still ahead of it. Namely, C will eventually pass the stress test and, like JPM, will eventually announce a dividend and a buyback of stock to boost price higher. C has the worst news behind it, crowned by its reverse split.

For the long term, we need to look at the fundamentals. Just because C failed the stress test, doesn't mean it will fail the earnings tests going forward. The current drop in price reflects the discount the market places on no dividends and buybacks this year. The analysts are 20 to 7 positive on C and the mean target is $41. That is not going to change because C failed the stress test. Price just broke above the 200-day downtrend and the 50-day is in an uptrend challenging the downtrend. Price may go down to test the 50-day uptrend at $32. There is a classic double bottom in place and price has moved up bullishly from that bottom. According to StockpickerUSA.com ( click here ) it is a buy and this will not change as a result of the stress test. The thesis here is that C, at $32, with a mean target of $41, is very attractive. "Buy on weakness" makes it attractive to the professional.

JPM on the other hand, has a mean target of only $48. That will move up as analysts upgrade targets slightly for the increased dividend and perhaps more than slightly for the buyback in stock.

StockpickerUSA.com ( click here ) also has JPM as a buy. Until we see the new targets for JPM, it looks as if price is running ahead of itself. For the time being, this supports the trading plan that JPM is overvalued and C is undervalued. It is a contrarian thesis to buy C on the weakness created by the stress test failure, perhaps at $32; the other half is to short JPM when price really is overbought, perhaps at $48. To complete the trading plan for this long-term pairs hedge, let's slot in some targets from the chart.

The next test of support, after this run-up in JPM's price, could take it back to price support at $41 or even lower to test the 50-day moving average. For C, let's plan on a bounce up to retest $37 resistance where price has just fallen from. There are two possible triggers to close the pair hedge, namely when JPM falls back to $41 or when C retests the $37 resistance. Thus there is a possible 7-point gain on JPM and a 5-point gain on C. Whichever comes first will close the pair. A more likely scenario is that JPM never falls much below $48 and there is no gain on the short, but C does eventually bounce back up to $37 for a 5-point gain (or something less, depending on how low C goes for the entry price.)

The worst-case scenario is that C keeps falling and JPM keeps moving up and you have to close the position at a loss with stops at $50 for JPM and $30 for C to trigger a close of the pair. The most probable scenario is that JPM will come back to test $43 and C will retest $35 for the gain of a few points.

Conclusion: Short term the opportunity is to play the quick trade, going short C and long JPM, riding the wave of positive news and closing the trade before the wave crashes on the beach. Longer term is the professional, contrarian play of going long C to take advantage of the selloff, bargain price and going short JPM to take advantage of the over-valuation created by the positive news. The key to success is having targets for the trade and stops to exit, if it goes badly. Stock pairs hedging lowers risk and lowers profits on the trade, but sometimes you win both on the short and long positions and optimize profits on the trade 

Credits -marketwatch

An Executive Leaving Goldman Sachs

Talk about drama, I think its a little weird because Goldman Sachs always say that they put clients on top of their list.

Guys, I strongly, strongly recommend that you guys read through the letter. Its not boring at all trust me! I will pen down my opinions in the next post :)

TODAY is my last day at Goldman Sachs. After almost 12 years at the firm — first as a summer intern while at Stanford, then in New York for 10 years, and now in London — I believe I have worked here long enough to understand the trajectory of its culture, its people and its identity. And I can honestly say that the environment now is as toxic and destructive as I have ever seen it.

To put the problem in the simplest terms, the interests of the client continue to be sidelined in the way the firm operates and thinks about making money. Goldman Sachs is one of the world’s largest and most important investment banks and it is too integral to global finance to continue to act this way. The firm has veered so far from the place I joined right out of college that I can no longer in good conscience say that I identify with what it stands for.

It might sound surprising to a skeptical public, but culture was always a vital part of Goldman Sachs’s success. It revolved around teamwork, integrity, a spirit of humility, and always doing right by our clients. The culture was the secret sauce that made this place great and allowed us to earn our clients’ trust for 143 years. It wasn’t just about making money; this alone will not sustain a firm for so long. It had something to do with pride and belief in the organization. I am sad to say that I look around today and see virtually no trace of the culture that made me love working for this firm for many years. I no longer have the pride, or the belief.

But this was not always the case. For more than a decade I recruited and mentored candidates through our grueling interview process. I was selected as one of 10 people (out of a firm of more than 30,000) to appear on our recruiting video, which is played on every college campus we visit around the world. In 2006 I managed the summer intern program in sales and trading in New York for the 80 college students who made the cut, out of the thousands who applied.

I knew it was time to leave when I realized I could no longer look students in the eye and tell them what a great place this was to work.

When the history books are written about Goldman Sachs, they may reflect that the current chief executive officer, Lloyd C. Blankfein, and the president, Gary D. Cohn, lost hold of the firm’s culture on their watch. I truly believe that this decline in the firm’s moral fiber represents the single most serious threat to its long-run survival.

Over the course of my career I have had the privilege of advising two of the largest hedge funds on the planet, five of the largest asset managers in the United States, and three of the most prominent sovereign wealth funds in the Middle East and Asia. My clients have a total asset base of more than a trillion dollars. I have always taken a lot of pride in advising my clients to do what I believe is right for them, even if it means less money for the firm. This view is becoming increasingly unpopular at Goldman Sachs. Another sign that it was time to leave.

How did we get here? The firm changed the way it thought about leadership. Leadership used to be about ideas, setting an example and doing the right thing. Today, if you make enough money for the firm (and are not currently an ax murderer) you will be promoted into a position of influence.

What are three quick ways to become a leader? a) Execute on the firm’s “axes,” which is Goldman-speak for persuading your clients to invest in the stocks or other products that we are trying to get rid of because they are not seen as having a lot of potential profit. b) “Hunt Elephants.” In English: get your clients — some of whom are sophisticated, and some of whom aren’t — to trade whatever will bring the biggest profit to Goldman. Call me old-fashioned, but I don’t like selling my clients a product that is wrong for them. c) Find yourself sitting in a seat where your job is to trade any illiquid, opaque product with a three-letter acronym.

Today, many of these leaders display a Goldman Sachs culture quotient of exactly zero percent. I attend derivatives sales meetings where not one single minute is spent asking questions about how we can help clients. It’s purely about how we can make the most possible money off of them. If you were an alien from Mars and sat in on one of these meetings, you would believe that a client’s success or progress was not part of the thought process at all. 

It makes me ill how callously people talk about ripping their clients off. Over the last 12 months I have seen five different managing directors refer to their own clients as “muppets,” sometimes over internal e-mail. Even after the S.E.C., Fabulous Fab, Abacus, God’s work, Carl Levin, Vampire Squids? No humility? I mean, come on. Integrity? It is eroding. I don’t know of any illegal behavior, but will people push the envelope and pitch lucrative and complicated products to clients even if they are not the simplest investments or the ones most directly aligned with the client’s goals? Absolutely. Every day, in fact.

It astounds me how little senior management gets a basic truth: If clients don’t trust you they will eventually stop doing business with you. It doesn’t matter how smart you are.

These days, the most common question I get from junior analysts about derivatives is, “How much money did we make off the client?” It bothers me every time I hear it, because it is a clear reflection of what they are observing from their leaders about the way they should behave. Now project 10 years into the future: You don’t have to be a rocket scientist to figure out that the junior analyst sitting quietly in the corner of the room hearing about “muppets,” “ripping eyeballs out” and “getting paid” doesn’t exactly turn into a model citizen.

When I was a first-year analyst I didn’t know where the bathroom was, or how to tie my shoelaces. I was taught to be concerned with learning the ropes, finding out what a derivative was, understanding finance, getting to know our clients and what motivated them, learning how they defined success and what we could do to help them get there.

My proudest moments in life — getting a full scholarship to go from South Africa to Stanford University, being selected as a Rhodes Scholar national finalist, winning a bronze medal for table tennis at the Maccabiah Games in Israel, known as the Jewish Olympics — have all come through hard work, with no shortcuts. Goldman Sachs today has become too much about shortcuts and not enough about achievement. It just doesn’t feel right to me anymore.

I hope this can be a wake-up call to the board of directors. Make the client the focal point of your business again. Without clients you will not make money. In fact, you will not exist. Weed out the morally bankrupt people, no matter how much money they make for the firm. And get the culture right again, so people want to work here for the right reasons. People who care only about making money will not sustain this firm — or the trust of its clients — for very much longer.

Credits -nytimes