It’s time to take a close look at Citigroup Inc. (C).

That’s been the mantra of several commentaries here at Money Morning.

But now, Punk, Ziegel & Co. LP analyst Richard X. Bove has made much the same recommendation. As readers know from our news stories and investment research reports, we don’t usually put a lot of stock in what Wall Street has to say. But in the last six months, when it comes to Citigroup specifically and the beleaguered banking sector in general, Bove seems to have consistently made the right calls.

And since his latest opinion is in agreement with ours, we thought it worthy of note. According to Bove’s most recent commentary, Citi shares were selling below expected revenue for 2010, and well below stated book value. The biggest U.S. bank by assets is making some shrewd strategic moves and the latest market scuttlebutt holds that Citi’s capital strength is actually stronger than most investors believe, Bove told Reuters.

If those rumors are true, Citigroup will not take "mammoth" write-offs in the first quarter, meaning that Bove’s earnings estimates also would prove to be too low. Bove also noted that the stock was now selling below expected revenue for 2010 and well below stated book value.

"This is simply ridiculous,” Bove said. “Fear has replaced logic. Buy it.”

[To read Money Morning Investment Director Keith Fitz-Gerald’s investment overview of Citigroup shares, please click here. The report is free of charge].

The Background on Bove

Citi shares closed Friday at $19.78, down $1.29, or 6.12%, each. Citigroup shares are down 64% from their 52-week trading high of $55.55. But they are barely above their 12-month low of  $19.54.
When it comes to Citigroup specifically and the banking sector in general, Bove is one of a very small group of Wall Street analysts whose opinion is well worth consideration. As Money Morning reported, back in early October, Bove took the unusual step of cutting his rating on Citigroup to "Sell" from "Market Perform," and lowered his target price on the stock to $43 from the prior target of $53.

But now Bove has reversed course. And with good reason.

Chief Executive Officer Vikram Pandit is scrutinizing operations throughout the bank in an attempt to cut costs and boost earnings.

Pandit isn’t just restructuring Citigroup’s businesses – he’s also taking steps to make sure there’s no repeat of the credit missteps that landed the bank in its current financial jackpot. Pandit is tweaking Citi’s risk-management operation and has taken the dramatic step of putting Chief Financial Officer Gary Crittenden in charge of efforts to simplify the company’s organization and enhance efficiency.
Last Thursday, the bank said it would cut its home loan exposure by $45 billion, or 20%, a move that would reduce risk reduce risk and save $200 million a year in an overhaul of its U.S. residential mortgage business. Citigroup, which suffered a $9.83 billion fourth-quarter loss tied largely to mortgages, said it plans to fold its Citi Home Equity and Citi Residential Lending businesses into its existing CitiMortgage Inc unit.

Pandit is putting his new operating program in place and more announcements are likely as he reshapes and strengthens Citigroup’s businesses, Bove said.

"What Mr. Pandit is not doing is breaking up Citigroup into a number of large separate businesses,” Bove said. “He is committed to developing working relationships or cross selling among the company’s existing operations.”

Once again, Bove called it correctly.

Citigroup’s Strategies

In a meeting with analysts late last week, Pandit confirmed that Citigroup that the bank plans to shed “hundreds of billions of dollars” in assets to support a turnaround that could take several years to engineer, the Dow Jones News Service reported.

The company has raised about $30 billion to shore up its capital from investors that include Abu Dhabi and Singapore.

The bank also is reviewing its leadership team and plans to make changes before its next meeting with investors, which is set for May 9. At that time, Citigroup expects to disclose more details of the company’s restructuring plan, including which businesses will be kept and which would be sold or wound down.

“We expect hundreds of billions in assets to be shed,” said Susan Roth Katzke, a Credit Suisse Group (CS) analyst who was among the dozen or more sell-side analysts who met with Pandit last Thursday night.

Pandit wouldn’t estimate the proceeds that Citi would reap from selling the non-essential assets. But he did speak “generically about a sizable benefit he expects,” UBS AG (UBS) analyst Glenn Schorr told Dow Jones.

In a research note to clients, Schorr wrote that “[Pandit] didn’t say it, but we got the impression that management thinks this, plus future earnings, adds up to enough capital relief to offset any future write-downs.”

Citigroup also has begun reorganizing its Japanese operations and plans to sell off its stake in Japanese mutual fund company Nikko Asset Management Co. Ltd. The firm also sold eight consumer banking branches in West Texas and closed several underperforming branches across the country.

Credit Suisse’s Katze also expects Pandit to realize that there is a need for a “massive amount of streamlining,” as well as an upgrade of technology and systems infrastructure across the bank.

And while major sections of Citigroup are apparently being put under the microscope, she said that analysts “did not walk away with the impression that management intended to exit any major business lines in whole. [Brokerage] Smith Barney will not be for sale anytime soon, if management has its say.”

Moving On

The challenge with a turnaround is that while the company is working to make itself over, it still has to operate its ongoing businesses profitably.

Citi is doing just that.

The banking giant recently said it plans to hire more people in its Asian commodities business over the next two years as global raw materials prices have soared to record levels because of supply shortages and demand out of China.

The bank expects to roll out more investment products and risk-management services in such areas as coal, freight, agriculture and emissions, said Ananth Doraswamy, the bank’s regional head of commodities.

The bank is "investing in areas of growth," Doraswamy told The Financial Express.

Citigroup is boosting its presence there at the perfect time. Right now, money managers in Asia invest less than 2% of their assets in commodities. That compares with as much as 10% in the United States and Europe. Commodities outperformed stocks and bonds in the past year.

The banking company currently has 17 people in energy and commodities in Asia, including seven in oil and metals trading. Oil, gold and wheat have jumped to their highest-ever levels as raw materials gained for the seventh-straight year.

News and Related Story Notes:

• Reuters: Punk Ziegel Says Buy Citi on Rumor of Further Capital Strength.
• The Financial Express: Citigroup to Hire More Commodities Staff in Asia.
• Money Morning Investment Analysis: Avoid the ‘Resurgent’ Homebuilding Sector and Go Global for Profits.
• Money Morning Investment Research Report: Citigroup: Why This Turnaround Play Has Legs – Big Ones.
• Money Morning Investment Research Report: Why Some of the World’s Savviest Investors are Buying – Gasp! – Citigroup.
• Money Morning Special Investment Report: Global Investing: Has Wall Street Rigged the Game?
• Money Morning Special Investment Report: International Investing: Why U.S. Investors are “Boxed Out” of Big Global Profits.
• Smart Money/Dow Jones News Service: Citigroup Chief Signals Major Asset Sales.

Subprime defaults and the ongoing mortgage crisis could have a "dramatic" impact on the overall economy, as banks and other financial institutions cut back their lending by as much as $2 trillion, according to an economist with Goldman Sachs Group Inc. (GS).

In a Nov. 15 report, Goldman Chief Economist Jan Hatzius said losses related to U.S. home foreclosures could reach $400 billion, as leveraged institutions will struggle to preserve their capital ratios. In that sense, the loss would not be an outright decline, but relative to the normal growth of lending.

"If leveraged investors see $200 billion of the $400 billion aggregate credit loss, they might need to scale back their lending by $2 trillion," Hatzius wrote. 

If this occurred within a one-year period, this could cause such a financial shock that it would result in a "substantial recession," Hatzius said. But if those losses were stretched out over a longer period, however, it would translate in a protracted period of sluggish growth.

Goldman’s forecast already assumes lending will fall by $1 trillion – half the potential decline – over the next two years.

"It’s basically another downside risk to the macro-economy at a time when the macro-economy already isn’t doing that well," Hatzius said in an interview with CNBC TV. 

Hatzius also said in the interview that this is yet "another reason for why the Fed will need to ease monetary policy," presumably when the policymaking Federal Open Market Committee (FOMC) meets again in December. The chance of the FOMC slashing rates by another quarter point at that Dec. 11 meeting stands at 86% according to futures prices on the Chicago Board of Trade, Bloomberg News reported.

But during a speech in New York Friday, Federal Reserve Governor Randall Kroszner talked down the chances of a rate cut.

"The downside risks to economic growth now appear to be roughly balanced by the upside risks to inflation," Kroszner said.

Kroszner said policymakers probably wouldn’t need to reduce interest rates further to help the economy weather a "rough patch" in the coming year.

Goldman Sachs was the only major financial institution to post a third-quarter profit, having limited its exposure to the subprime market and mortgage-backed assets before that market collapsed.

News and Related Story Links:

• Money Morning News:
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• Money Morning News:
  Federal Reserve to Increase Disclosure, Will Now Publish Economic Forecasts Quarterly.

• Money Morning News:
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• Money Morning Investment Report:
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• Money Morning News Analysis:
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• Money Morning Investment Report:
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• CNBC:
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• Bloomberg News:
  Fed’s Kroszner Says ‘Rough Patch’ Won’t Warrant Cuts.

Either way you slice it, Citigroup Inc. (C) is in for a world of pain.

Facing a possible $30 billion capital shortfall, the company may be forced to cut its dividend or sell assets, said banking analysts Meredith A. Whitney and Carla Krawiec of CIBC World Markets, in a report released Wednesday night.

If Citi makes either move it’s likely that shareholders would head for the nearest exist sign.

Exodus Already Under Way?

From the looks of the action in Citi’s shares yesterday (Thursday), shareholders may already have started for the door: News of a divided cut or big possible asset sale caused Citigroup’s shares to decline by about 7% in early morning trading yesterday.

For the day, Citi’s shares fell $2.85 each, or 6.89%, to close at $38.51. The shares traded as low as $38.13, establishing a new 52-week low. Citigroup’s stock has traded as high as $57 in the last 12 months, meaning the shares are down 32% from that high-water mark.

"Since 2006, Citigroup has made $26 billion in acquisitions, taken over $6 billion in recent charges, and increased its dividend against a backdrop off almost no net income growth," Whitney and Krawiec wrote in their research report, downgrading the company’s stock to an "Underperform."

"We believe the stock will be under significant pressure, and could trade in the low $30s," the report also stated.

Citi Currently a Lightning Rod of Controversy

The report intensified resignation calls for Charles Prince, Citigroup’s CEO – especially after Merrill Lynch & Co. Inc. (MER) CEO E. Stanley "Stan" O’Neal was ousted earlier this week

Citigroup posted a 57% drop in third-quarter earnings. Compounding the problem was where those losses came from: Citi’s fixed-income business, usually a strong suit for the banking-and-finance concern, was a big part of the earnings decline – and included a loss of $1.3 billion related to problems with mortgage-backed securities.

Trying to regain footing after the credit rout slammed lenders around the world, Citigroup, Bank of America Corp. (BAC) and J.P. Morgan Chase & Co. (JPM) agreed to start a fund that would enhance the liquidity of the asset-backed commercial paper (ABCP) market, as well as medium-term notes issued by structured investment vehicles (SIVs). The plan has met with substantial controversy, but the goal of the fund would be to pump liquidity back into the commercial paper markets. Unfortunately, other banks haven’t warmed up to the idea because they don’t trust the assets backing the loans.

A sale of Citigroup assets only legitimizes those fears.

News and Related Story Links:

• New York Times:
  Analyst Raises Doubts About Citigroup Dividend

• Reuters:
  Citigroup Net Slides 57% on Write-Downs, Losses.

• Money Morning:
  O’Neal Finally Out at Merrill Lynch

• Money Morning:
  Banks Create Fund to Help to Fight Woeful Credit Market

• Financial News:
  Banks Steer Clear of Super-Fund

Merrill Lynch & Co. Inc. (MER) Chairman and CEO Stan O’Neal isn’t the only worker in the U.S. financial-services sector with a job-security issue. Indeed, once his ouster becomes official, O’Neal will become just one more of the 130,000 casualties that have already made 2007 the worst year ever for layoffs in the U.S. banking-and-brokerage marketplace.

According to outplacement firm Challenger, Gray, and Christmas, those 130,000 job cuts are nearly three times the 50,000 cuts reported for all of 2006, and has already smashed the all-time record of 116,000 layoffs set in 2001.

"It’s the worst year on record for job cuts in the financial services sector," John Pedderson, a Challenger, Gray, and Christmas spokesman told BusinessWeek.

According to Pedderson, about 80% of the job cuts were announced in the past two months, as finance firms suffered epic losses from subprime mortgage problems, a historic housing slump, and a debilitating credit crunch that turned into a global crisis this past summer.

In August, Accredited Home Lenders Holding announced it would cut 1,600 jobs.  That same month, Capital One Financial Corp. (COF) said it would close its Greenpoint mortgage unit, effectively dispatching 1,900 jobs. In September, Countrywide Financial Corp. (CFC) eliminated approximately 12,000 positions – more than 21% of its work force totals from the previous year. Also in September, IndyMac Bancorp (IMB) said it would terminate about 1,000 employees.

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Mortgage lenders have been the hardest hit in terms of job losses, but financiers, traders, and investment bankers have seen their share of layoffs as well. Morgan Stanley (MS) and the Bear Stearns Companies Inc. (BSC) are cutting 300 and 310 jobs, respectively. Credit Suisse Group (CS) is purging 170 positions, HSBC Holdings PLC (HBC) 750, and UBS AG (UBS) is eliminating 1,500 jobs.

Overall payroll growth has slowed sharply in the past year. Private payrolls were growing about 140,000 a month at the end of 2006, but that growth slowed to just 90,000 a month over the past three months. Economists expect only modest job growth in October, with a median forecast of 80,000 new non-farm payroll jobs for the U.S. economy, MarketWatch reported.

Economists have forecast modest job growth in October, and the unemployment rate is expected to remain at 4.7%. Monthly figures for initial jobless claims, the unemployment rate, and non-farm payroll additions are set for release later this week.

News and Related Story Links:

• Business Week:
  A Record Year for Layoffs in Finance.

• MarketWatch:
  Fed likely to cut rates despite stellar growth.

• Money Morning:
  "Shocker" Jobs Report Brings Rate Cut Closer.

• Money Morning:
  Surprisingly Dismal Jobs Report Unleashes Its Fury on the Federal Reserve and Wall St.

• Money Morning:
  Countrywide and SunTrust to Start Layoffs.

Companies raised more than $12.5 billion via initial public offerings (IPOs) in the U.S. financial markets during the third quarter. That’s 67% more than the $7.5 billion raised in the third quarter a year ago, Dealogic said. The third quarter is typically the slowest of the four quarters because of a summer lull from the middle of August to the middle of September.

But there was a wild card this year – or, rather, two of them – as in $4 billion worth of offerings from U.S. brokerage firm M.F. Global Ltd. (MF) and software maker VMware Inc. (VMW).

Although the dollar value of the IPOs soared dramatically, the volume of offerings only rose modestly, with 43 new issues coming to the market in this year’s third quarter, up from 40 a year ago.

That huge dollar jump despite the moderate increase in the number of deals demonstrates "how a couple of large issues can dominate the sector," Francis Gaskins, president of IPO research firm IPOdesktop.com, told Reuters.

Finance companies raised the most cash, with nine IPOs raking in proceeds of $4.3 billion during the quarter.

MF Global, spun off by hedge fund firm Man Group PLC raised $2.9 billion in July in the second-largest IPO in 2007, after private equity giant Blackstone Group’s (BX) $4.7 billion IPO in June, according to Dealogic’s data.

Software and Solar Energy

But where finance deals raised the most cash, technology deals were the most plentiful. There were 12 new issues in the sector, raising $2.5 billion.
VMware, the year’s fifth-largest IPO – and a deal that’s been closely followed by both Money Morning and its sister publication, The Money Map Report – led the charge, raising $1.1 billion with a sensationally performing IPO.

VMware caters to a new sector known as "computer virtualization." One use of this new technology actually solves a problem that has confounded computer users since the dawn of the Mac vs. DOS debate. On a computer network, the software enables a computer to reconfigure itself to run whatever operating system is needed at a particular moment. For instance, a server might be running Windows N/T one moment, Linux the next, and Apple the moment after that. It makes computers and networks more efficient, and saves money, too, since a company doesn’t have to operate different networks for each computer language it utilizes.

VMware is expected to reap $1 billion in revenue this year. And the overall computer virtualization market is projected to double and reach $12 billion in revenue in five years.

The software maker has also posted robust gains since its IPO. Its stock closed on Thursday at $85 a share, up 193% from its IPO price of $29 per share. That stellar return ranks VMware as the second-best performing IPO stock this year, trailing only JA Solar Holdings Ltd. (JASO), a China-based solar-energy-technology company whose shares have more than quadrupled in value since its Feb. IPO. In fact, rival Chinese solar companies LDK Solar Co Ltd (LDK) and Yingli Green Energy Holding Co Ltd (YGE), were the No. 3 and No. 4 best-performing IPO stocks so far this year. [To see related story on China-based solar-energy-technology companies that have gone public this year, please click here].

Lululemon Athletica Inc (LULU), a Canadian retailer of yoga apparel, rounded on the top-five best-performing IOPS of 2007.

Concerns about "global warming" – caused by a big spike in the use of fossil fuels and by the scorching growth rate in China – has caused a big uptick in interest in alternative energy sources. And it’s not just the environmental impact that concerns investors and consumers alike – the spiraling costs are also a huge concern. That is part of what helped drive the widespread development of the China-based solar-energy companies – more than a half dozen of them this year alone.

IPO Market Rises 40%

Through the first three quarters of 2007, IPOs in the U.S. market raised $43.5 billion – nearly 40% more than the $31.2 billion raised during the first nine months of last year. The number of IPOs rose 21%, from 156 in the first nine months of 2006 to 188 in the first three quarters of 2007. A fairly full pipeline has boosted optimism for the rest of this year: 171 companies have filed for IPOs with securities regulators, a set of deals that could raise $35 billion, if they come to fruition.

Said IPOdesktop’s Gaskins: "The Dow is up, Nasdaq is up: The appetite is there for companies that have a solid income statement. But people are looking more critically at income statements now, as a ripple effect" from the subprime-mortgage crisis and the evolving worldwide credit crunch.

News and Related Story Links:

• Reuters:
  
  Value of U.S. IPOs soar in Third Quarter, Year to Date.

• Money Morning News:
  U.S. Tech Firm Boosts its IPO Offering, Despite Volatile Stock Markets.

• Money Morning News:
  VMware Tech Shares Soar 76% in IPO Trading Debut.