The US Economy - Headed in the Right Direction?

Today, Barack Obama announced that the US economy is "still headed in the right direction," a comment that induced a great deal of ridicule, especially after this week's dismal employment figures. Yet, Barack Obama is right - the economy is headed in the right direction, though it has little to do with his great leadership, or his lack of it.

Interest rates are low & housing prices are low, together creating the best affordability rates since the 1950s. At the same time, many stocks are trading at below book value (net asset value). These are prime conditions for economic recovery. No matter what other government programs or policies are in place (or not), the economy will be in far better condition two years from now than it is today.

The economic cycle is playing itself out, textbook style. If Bill Clinton, George Bush, Ronald Reagan (also a chronic spender) or anyone else were still in office, we would be at exactly the same point.

The tendency for people to overemphasize the significance of an individual's actions is known as "fundamental attribution bias." As an example, the Vice-President of a bank recently told me that he became Vice-President at the "worst possible time" – just before the recession hit - thereby making his sales and leadership abilities look terrible. The economy is still bad and people are frustrated, so they are blaming Obama for everything except breathing.

Now that the major requirements for recovery are in place, the actual pace of the recovery is not within Obama’s – or anyone else’s – locus of control. Just as Bush was unable to prevent the crash, Obama is unable to speed up the recovery.

This time of maximum pessimism is, as I have stated on previous occasions, a buyer’s dream. Take advantage of it by purchasing the stocks of great companies at low prices. That is, buy low and sell high – unless you really believe that the world is ending.
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"Until people feel better about their own lives, they're not going to feel better about the president."

Bill Clinton, regarding Barack Obama, 2010
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Stocks I Like - Citigroup

Citigroup – the company that almost went bankrupt in the subprime credit crisis, that received billions of dollars in government aid, and whose management has been called inept – is on my buy list.

Collectively, mutual funds and other large retail investors cannot buy Citigroup, because their unit holders would go berserk with worry. After all, the news surrounding Citigroup has been nothing short of scandalous. This situation presents an opportunity for the astute investor. For those who invest using logic rather than emotion and who can think beyond the next quarter, the big “C” is a great buy.

First off, the price: $3.79 per share at last close. This puts Citigroup shares at well below book value. As I wrote at the end of May, “At the moment, you can buy $5.61 worth of Citibank assets for $3.81, and get all their clients, brand names, and worldwide businesses for free.” And what a franchise it is.

Outside of the US, I have used Citigroup banks in Delhi, London, Tokyo and Beijing. Citigroup is a global business powerhouse, and its image - though tarnished at home - is relatively unscathed elsewhere. Citigroup’s worldwide reach is enviable.

The price of C has been hovering at just under $4 for weeks, and will likely stay there until the US government finishes selling its ownership - 2.6 billion sold so far, with 5.1 billion more to go. So, there is certainly no rush to get in. However, once the government’s stake is gone, Citigroup’s price will likely move sharply upward.

In a couple of years, I would not be at all surprised to see Citi’s EPS rise to the $2+ range, which at a modest P/E of 10 would give the shares a price of $20. Nice.

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"If a person is not willing to make a mistake, you're never going to do anything right."

Sandy Weill, former CEO of Citigroup
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Disclosure
Do not buy stocks, or take this or any other financial advice without doing your own analysis; including, but not limited to: reviewing business models, financial statements, management style and philosophy, recent developments, market macroeconomic analysis, and chart analysis. If you do not know how to do these things, you shouldn't be buying stocks in the first place. Seek the advice of professionals, as appropriate.