Blogvesting

The recent fall in the Citibank’s stock price has brought home the dangers of writing put options to me painfully; I have closed out my Jan $5 put positions in Citibank at a siginificant loss, enough to offset all gains I had reaped from put writing in all stocks.

Previously, I believed that while Citi’s intrinsic value is unclear because it may have to incur further writedowns (most worrisome is its $1.2 trillion off balance sheet liabilities), as long as the government holds to its template of rescuing banks with reasonably priced loans and obtaining stock warrants in return (as has just happened with BoA), Citi will survive in reasonably good shape. Citi had an earnings power of $10 billion annually from its assets, and while a large part of that cash flow will go to servicing government loans in the future, a very low share price of $5 should more than compensate for this. Several aspects of this thesis have since gone awry, or is threatening to go awry. Pandit has begun selling off key assets of Citibank, even the crown jewel of Smith Barney. The government loan is supposed to prevent exactly such a fire sale, which is very disadvantageous to Citi, and makes future earnings even more difficult to estimate. Worse still, the government itself appears to be reconsidering the way it is rescuing banks. Congress have been agitating to put additional conditions onto the loans it provides to banks, and this threatens to undo the rescue template in the future.

My mistake is in buying a stock in a very fluid and unpredictable market. I have decided to stay the hell away from financials in 2009. The government needs to inspect every bank and declare each healthy or not, and insolvent banks should be closed while healthy banks must have troubled assets taken off their hands into a government funded entity, and then declared healthy and prevented from making additional fire sales of their cash-generating assets. As long as banks are still fluidly shifting between the healthy and unhealthy categories. I’ll stick to selling options in solid companies like Walmart.