Market Report: Investing in Financial Stocks: Death Threats and Citibank Shares

Now my feelings are hurt!

For the better part of the past five months, I have been warning investors off of the big banks. It might take a genius to work out all the myriad details. And there is no doubt that teams of forensic accountants will be deciphering perversely opaque ledgers and memos for years to come.

But the basic idea was pretty straightforward, really: The banks were deep into the subprime mess eight ways from Friday, be it as mortgage originators, mortgage holders or buyers and sellers of twisted mortgage-based derivatives.

So deep, in fact, that disgraced CEOs like Merrill Lynch’s Stanley O’Neal and Citi’s Charles Prince just might be telling the truth when they admit that they have lost track of just many billions of dollars of their client’s money that was mired in this sinkhole.

Back in June, I told readers that the banks would be forced to buy red ink wholesale just to finish their quarterly reports. And when the Fed rode to the rescue, I shouted from the rooftops that keeping the banks from closing their doors wouldn’t correct the gaping holes in their balance sheets.

On October 1, I tried to get investors to run away from Citibank (C:NYSE), warning that they would be writing down billions in losses, and strongly suggested the purchase of puts against C shares. On October 25, I reiterated this advice, noting that the Fed would not be able to float the sector again.

And yet I have not received a death threat in weeks! Months even!

I am referring, of course, to Canadian Imperial Bank of Commerce analyst Meredith Whitney’s claim to have received several such gruesome threats after her downgrade of Citi. It appears that she has broken Wall Street’s secret pact: She actually told the truth, noting that the billions Citi has fessed up to don’t even begin to describe the problem. She even suggested that shares of C would not perform up to snuff!

Heck, I will stand up right now and call them more worthless than discount toilet paper. And I will lump Bank of America (BAC: NYSE) and Wachovia (WB: NYSE) shares in with them. Burn ’em! Trash ’em! Short ’em! Buy puts against ’em!

Do it now, because we have still not heard the end of this!

Those of you who took me at my word and ditched C shares back on October 1 have ducked out on a 25% loss. If you bought the mid-dated puts I mentioned -- C January 2008 47.50 puts (C MW) fits that description rather neatly -- back on October 2 for $223, you would be looking at $1,190 a contract right now, a gain of 433%.

And if you are still holding bank stocks after all the times I warned you not to, send the death threats to our lawyers at
e-news@taipanfinancialnews.com. Be sure to include your contact info. Otherwise, the Baltimore police must look you up, and this makes them grumpy.

Adam