Economic Headwinds May Choke Citigroup Stock Despite Positive Earnings

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Love them or hate them, when it comes to bellwether stocks, you don’t have to look further than the big banks. With their unrivaled resources and influence on the economic machinery, financial institutions like Citigroup (NYSE:C) carry significant clout. In particular, analysts dissect their earnings report, seeking clues for what may lie next. And if you’re heavily vested in Citigroup stock, now might be a time to consider “un-vesting” yourself.

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Next Tuesday, Citigroup earnings for the third quarter of 2019 are scheduled for release before the opening bell. While all the big banks’ financial disclosures are important, the upcoming report has serious implications for C stock, along with the broader economy.

That’s because over the last few months, the Federal Reserve has lowered borrowing costs. Just by itself, this is a clear indication of no confidence in the economy. Worse yet, the world’s most powerful central bankers disagree on how to modulate monetary policy. According to The New York Times, a multi-year record number of dissenters voiced their displeasure.

On the flipside, President Donald Trump has adamantly pushed for rate cuts; thus, at least one person is happy about the Fed’s dovish monetary policy. But as it relates to Citigroup stock, lowered borrowing costs should theoretically drive more business activity.

From basic economic principles, a lower yield in the bond market disincentivizes saving and instead, encourages spending. That’s all the more true if businesses and consumers believe that rates will eventually climb back up.

Again, in theory, this dynamic should encourage borrowing. Thus, whatever opportunity costs Citigroup incurs with lower yields, it should make up for with increased loan volume. Unfortunately for C stock, theory and reality don’t always align.

Citigroup Stock Faces a Can’t Win Proposition

On paper, the upcoming Citigroup earnings report should deliver a profitability and revenue beat. As Zacks Equity Research noted, the company has consistently beat earnings estimates in the past. Plus, in recent history, Q3 tends to be among the strongest quarters for C stock.

Specifically, covering analysts are looking for earnings per share of $1.95. This would represent a nearly 13% lift from the year-ago quarter. Moreover, the consensus target is closer to the optimistic end of estimates, which ranges from $1.86 to $2.03.

On the revenue front, consensus forecast calls for $18.5 billion. The estimate range here is between $18.3 billion and $18.8 billion. In Q3 2018, the Citigroup earnings report disclosed top-line sales of $18.4 billion.

While these estimates are well within reason, I don’t see Citigroup stock benefitting. My caveat would be if the big bank produces a resoundingly positive report. However, the chances of that are unlikely.

Here’s my main problem with Citigroup stock: with the Fed lowering benchmark interest rates, big banks like JPMorgan Chase (NYSE:JPM), Bank of America (NYSE:BAC) and Wells Fargo (NYSE:WFC) must see volume increases for actual activities like lending. Since borrowing costs are lower, so too is each loan’s profitability margin.

Naturally, the biggest opportunity for banks to increase lending volume is real estate. With a robust labor market, people should be buying homes like wildfire. Currently, the number of new one family houses sold is on par with levels seen during the mid-1980s. That’s hardly what I would call progress.

Of course, the major rate cuts occurred last month. But even with the latest data, the housing market is mostly resoundingly positive in affordable markets. In high-dollar and high-density markets like San Francisco or New York, they’re barely chugging along.

C Stock Has Presidential Headwinds

Cynically, one could make the argument that President Trump wanted his rate cuts to gloss over the economic pain that his policies have engendered. Ironically, despite a pro-business POTUS, this environment is the least friendly for business.

First and foremost, you have the U.S.-China trade war. Politically and morally, I understand why the Trump administration is aggressively prosecuting this ongoing conflict. But let’s be real: having beef with the world’s second-biggest economy isn’t conducive for commerce.

Second, even though Trump is a registered Republican, he’s taking a very un-Republican like approach with the vaping crisis. Conservatives love talking about deregulation and small government. However, imposing a federal ban on vaping is the exact opposite of the typical conservative ethos. And while it’s a small impact relative to other industries, such measures would invariably hurt small businesses.

Along the way, Trump has either angered or at least frustrated some of our closest allies. This too hurts commerce, but on a bigger scale.

Ultimately, then, I don’t have the warm and fuzzies over Citigroup stock. While the underlying company may be doing just fine, the broader economic picture is problematic.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. Tweet him at @EnomotoMedia.


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