Many of the largest publicly held companies have seen their stock prices take a nose dive. The problems with the massive depreciation is after a stock is down that amount, many average investors start to dive in.

This reminds me of a time when Tyco had lost over half of its value. A large corporation that had turned itself from a small business, had become a conglomerate that could easily compare itself to GE (GE). Even though this company had a great history, it was eventually going to lose yet another half of its value. No one could have seen that their CEO would go to prison, or that they had lied on their financials, just like all of the other companies, or at least most, on the Street. I had believed that the stock had to go up after its massive fall and although I received compensation from the lawsuit, I was still sitting their with a $2,200 loss.

After that, I learned that any company can go bankrupt. There is no magic carpet to safe me from the abyss. With that in mind, it is important for those who have not done much investing to be careful. For example, AOL was never thought of as a company that could be knocked off its pedestal, but ask Ted Turner about that one. Ever notice that the Braves are no longer America's team and they also aren't on their own network anymore. It's ok we still have WGN, but the world is a complicated place and it is ok to be bullish, but always have an exit plan and follow trends and these things will have much less of a chance of affecting you.

If it were my money, one of the first companies I would be worried about is Citigroup (C). With respect to the financials, always check the dividend in times of trouble; if it is high it can be cut. Second, don't be a hero as we are not all Princes (and I am not talking about entertainers) with tons of oil money to throw at things for our own amusement. Next, check the transparency - if they have hit you with a doozy of information that seems awful and complete, then you probably know how bad it will get. Companies that either won't or can't tell you all the gory details are still in trouble. They will want you to know what their stock is worth and in turn will give you the worst case scenario, and hence you know the value of what you are buying. If you do not know, they probably don't want you to so that you will still invest and they can dilute their stock out of your own pocket.

C's new plan entails a three-pronged attack on how to turn the company around. The first is to "get fit by reducing legacy assets, focus on returns, increase productivity, manage risk and re-engineer cost base." The second is to "restructure through clear goals, transparency and accountability". Third, Citi wants to "maximize through performance based, innovation, keeping talent, and lastly to harness information and its advantages". If we are to look at their current legacy positions as of the first quarter of this year, they have $2.2 trillion in GAAP assets. Of this, approximately $500 billion are in legacy positions. This number can be broken down into 35% real estate, 39% other, 11% SIV/CAI, 6% highly leveraged, 5% subprime CDO's and 4% auto.

C would like you to focus on their $1.7 trillion in core assets, not that there is still 23% of their company that may be up in the air with respect to how much will have to be written off in the upcoming years. 39% of this number is not even listed with regard to its possible impact on the business in upcoming years.

They would like you to focus on their company being "75% annuity-based", and that they have a global presence, as overseas markets look to have much better growth going forward. Places like Latin America and Asia are predicted to exceed North American growth in financial services by 6% to 10% as estimated by C. Their financial statistics are based on North America and not just the US as the United States financial system could be a mess for some time. This includes Mexico and their growth skewing the numbers somewhat.

Another argument C has is based on growth in their various areas of business. Their revenue breaks down as follows: 33% consumer banking, 25% securities and banking, 21% global cards, 13% global wealth management and 8% transaction services. 52% of this revenue comes from North America. 16% comes from Japan and Europe. This is another area that may have problems as Europe looks to be ready for a possible real estate bubble. C will focus on projected revenue growth as they will not have to estimate how much of the losses will affect them. Most of their platforms are in areas of high single digit to low double digit gains, but the write-offs could easily erase gains and then some. Citi's legacy assets are a major concern for me. The rest of their business looks very sound and in good order.

As C tries to get out of these businesses, they have their global credit card and transaction businesses, which I think are great. If you want to be a part of this, invest in Mastercard (MA) or Visa (V). I would guess this part of the business will be spun off in a few years as this segment will help to offset upcoming losses. With respect to assets, 9% of their business is in this area with no legacy assets locking them down. As an investor I would like to see C spin these off, as they are very attractive assets, but I think this will be at least three years down the road if it happens.

86% of C's assets are in Consumer Banking and Securities and Banking. These two divisions have 97% of all the legacy investments. In the next two to three years, this company is planning to divest themselves of these investments from $500 billion to under $100 billion. This means we could see up to $400 billion in write-downs over this time frame. I am sure that the number will not be that high, but even 25% of that could mean $33 billion in write-downs per year for the next three years.

In summary, I do not believe that Citi is going bankrupt, and I do see a resurgence of the company in the upcoming years. I just think there will be more pain through stock issuances, dividend cuts and massive write-downs. I think this stock can be shorted to $11 or so in the short term. The interest rate cuts have stopped by my estimates and there margins on refinancing loans will probably stabilize. I think you can short this one through the end of the year with some resistance around $10.

Disclosure: None

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Michael Filloon

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