The US markets collapsed another 5-6% overnight amid further deterioration in the economy and no rescue plan yet in sight for their motor industry. Financials were also badly hit because in any major industry failure – banks as financiers will also be affected in terms of bad debt provisions.

At the close the Dow shed 444.9 while the Nasdaq fell 70.3 to 7552 and 1316 respectively. The chart below shows another straight decline with little respite. Fuelling the weakness in the market was a collapse in crude oil below US$50 per barrell and the failure of any concrete rescue plan for the 3 largest US auto-makers. Banks were badly affected with Citigroup down 26% yesterday and down 50% this week alone. More on Citigroup later in this blog.

Citigroup – is it worth a punt ???

Someone asked me in my Blog about whether Citigroup was worth a punt – that was around the US$8.50 level – its now around the US$4.70 level and has fallen 50% this week alone. Remember that GIC’s entry price is around US$29 and the investment was about S$9-10bn. On paper it looks like we have a paper loss of more than 80%.

The chart on Citigroup shows how serious the price decline has been and its probably the next big casualty in the US banking sector. Unlike Lehman – I think it will be rescued but if that follows what happened to Freddie and Fannie – we could be looking at massive dilution for existing shareholders via a preference share issue. There were talks of an Arab investor raising his stake but it did not and could not stop the fall in its share price.

A hedge fund manager told me that Citigroup, since its share price is below US$5 per share is now considered a “penny stock” and many US mutual funds will have to start selling the share – this could account for the sharp overnight fall which was on growing volumes. My message is dont buy even at these very low levels until you can see what form the recapitalisation will take – this is to avoid the massive dilution risk to existing shareholders. Read more…