With Citigroup, It’s All About Expectations

This morning the financial wires brought ‘good’ news to a banking sector. Citigroup (C) boosted the markets as AP/Yahoo reported:

“Citigroup has become the latest big bank to assuage Wall Street’s worries about the financial sector, posting a $2.5 billion second-quarter loss that was smaller than the market expected.”

Let’s think about this for just a second. For our purposes, let’s assume we’re talking about another sector, say manufacturing. If you were CEO of a large manufacturing company and you just informed shareholders your company lost $2.5 billion, what would you expect? I mean, what would you expect besides an unemployment check? For one, you would expect your company’s share prices to tumble. When your company just posted a -7.7% loss of their enterprise value, stakeholders would be outraged. You also might expect the manufacturing sector to also take a hit, since your company could spell trouble for the entire industry. In short, you would normally expect a $2.5 billion loss to be bad news.

But the market doesn’t think that way. Instead of punishing Citigroup’s shares and demanding another head on the platter (Citi CEO Charles Prince resigned last November), the market bought more Citi. C closed up +7.7%. The question is, why would this happen?

In the market, it’s all about expectations. Citi exceeded estimates for the first time since October. Since consensus was a $3.67 billion loss, the market thought they were getting a $1.1 billion bonus. Not really. But expectations are what matters when it comes to earnings. When companies beat expectation, this is usually a good thing for companies, even when they lose a lot of money.

In addition, crude oil is finally falling. Time will tell if the trend continues. For now, banks are rising on the news, Fannie Mae, Freddie Mac, Wells Fargo, and Citigroup being the chief recipients of the market’s good graces. The broad market was little changed at the end of the day. Our best guess is the bounce in financials will be short lived. Monday is a new day without institutional naked short selling for select stocks. Not knowing what will happen makes it interesting.

Have a great weekend.