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Thread: Citigroup

  1. #1
    God/dess scarlett_vancouver's Avatar
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    Default Citigroup

    Are citigroup (an other analyst) valuations worth listening to? I'm new to trading, using the money I have in th market as tuition of sorts. One particular stock of mine was downgraded by Citigroup the other day, to 'sell', and like 2 seconds afterwards lost 10% of its value!

    I know stocks go up and down- I'm not concerned about the values, as I'm in long term and can afford to lose anyways (though would rather not!), but am curious as to the psychology of the market: it seems counterintuitive to sell when everyone else is also selling, ie. when a newswire has just been released suggesting the sale.
    Why do people do it ? Is citigroup, or are other analysts, often right? I was under the impression that analysts are generally not worth listening to, as by the time an analyst says something, the money to be made from his/her suggestion has already been made.

    Thoughts?

    Feature costumes for sale!

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    Banned Melonie's Avatar
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    Default Re: Citigroup

    Scarlett, you've hit upon a favorite subject of the 'wall st. conspiracy theorists' ! Citigroup, JP Morgan, and a bunch of other financial houses have been theorized to be playing 'both sides of the street'. This stems from the fact that they often are involved directly with a particular company's financing (bond issues, loans, stock IPO's), while at the same time they are supposedly in a position of having to make 'objective' buy/hold/sell recommendations to their brokerage clients. A side wrinkle to the direct conspiracy theory is that Citigroup, JP Morgan et all are also directly involved with the US Fed on such 'open market' issues as coupon passes, securities lending etc. which also have an effect on market prices.

    As to the psychology of the market, there are as many theories to attempt to explain this as there are different opinion re the future of a particular stock. The one you appear to be referring to in general is generally called 'contrary investing', and stems from the supposed observation that humans like animals have a 'herd mentality' ... which leads groups of people to buy or sell particular stocks simply because other people are buying or selling particular stocks, and not because the economic fundamentals behind that particular stock necessarily justify a rise or fall in price. Some people hold a 'contrary view' that when the 'herd' is buying or selling it's actually a very good time to consider taking the opposite position.

    In truth, a lot of people who are invested in the stock market today do NOT take an active role in directly evaluating particular stocks. Instead they simply put money into mutual funds / IRA's / hedge funds / retirement funds, and trust in the financial judgement of a fund manager to pick individual stocks and to time the buying and selling. The natural extension is the fact that a large amount of total stock shares wind up being under the control of a comparatively small handful of people. Thus if 10 fund managers decide to sell a particular stock on a particular day, the volume and price impact can be enormous. A stock called KKD was probably the best example of this phenomena last year, and obviously GOOG is a pretty good example right now !

    Always remember that for every winning stock market trade, by definition there must also be a loser on the other end of the trade ! That's not exactly true all of the time (lately some stocks seem to only go up and never come down), but it is something to keep in mind.

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    God/dess montythegeek's Avatar
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    Default Re: Citigroup

    Analyst reccomendations often produce a "rush to the exits" effect on the day they are made--they are also often ignored by Wall St., because analyst C is often late, or early.

    It all depends. The way the news is disseminated matters. If a really hot stock like Google gets downgraded it may be from a buy to a hold--essentially the stock is going from outperform the market to perform like the market. For a day or so it may fall 5-10%, then get it back over the next week--or tank and the stock is no longer considered hot. It also could come out on a low volume day and have an overstated effect for that reason, or be used as a convenient excuse, like every time the stock market goes down people call it profit taking, but when they go up they never call it loss taking.

    Melonie's conspiracy theories aside, brokerage houses are watched like a hawk for any sign of inside trading, and conflict of interest issues are much less than 5-7 years ago.

    A downgrade, or upgrade may be a trigger to reevaluate if it is based on the business, rather than the price of the stock. Often this is early, and often this is late. Very often it is WHO is doing the change--some analysts are very good and others suck. As you would expect, a lot of them copy other analysts and add nothing original.

    Sorry to be wishywashy but there are too many possibilities.

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    Banned Melonie's Avatar
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    Default Re: Citigroup

    A downgrade, or upgrade may be a trigger to reevaluate if it is based on the business, rather than the price of the stock. Often this is early, and often this is late. Very often it is WHO is doing the change--some analysts are very good and others suck. As you would expect, a lot of them copy other analysts and add nothing original
    Lately, there is also the factor of 'program trading' - wherein big fund managers will pre-program their computers to enter buy or sell orders on a particular stock at a particular threshold price. Last I heard, 'program trading' now accounts for more than 50% of total shares traded on the stock exchange. 'Program trading' may explain the case you refer to where a particular stock dropped 10% in a matter of minutes. Consider the following scenario TYCO is selling at $31 a share ... a published downgrade by a big financial house causes a total of 100,000 privately held shares to be sold by individual investors, which depresses the price of TYCO stock below $30. The computers at the big funds pick up TYCO's fall below a pre-programmed $30 'sell' threshold, and proceed to instantaneously issue computer generated 'sell' orders for 1,000,000 more shares held by the big funds. After the 'program trades' are through, TYCO shares have dropped all the way to $27 !

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    God/dess Deogol's Avatar
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    Default Re: Citigroup

    Not to mention "program trading" is coming to a local PC near you with the additional goodies brokerage houses are providing in their software.

    I know five years ago the same people in Silicon Valley were getting rich off every new start up - with permission to sell stock immediately unlike the poor suckers who had to wait a year or two AND got to pay AMT on it to boot. There have been a couple of reports on these people in the news media.

    As has been mentioned before, the analyst part of the finance companies are becoming more seperated from the offering's sections precisely because of what was happening in Silicon Valley.

    And if I may insert more opinion, I think tech stocks are having a problem these days (except for the usual super stars) because so much underhanded dealing went on in the technology sector.

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    Banned Melonie's Avatar
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    Default Re: Citigroup

    Not to mention "program trading" is coming to a local PC near you with the additional goodies brokerage houses are providing in their software.
    True ... ScottTrade and a couple of others do 'limit' buy and sell orders already, which is the most basic form of 'program trading'. However, even if the ScottTrades of the world set up 100,000 individual customers with 'program trading', the likely amount of stock trading volume this will collectively generate still pales compared to a single large fund' s buy/sell order volume.

    And if I may insert more opinion, I think tech stocks are having a problem these days (except for the usual super stars) because so much underhanded dealing went on in the technology sector
    I tend to agree. No matter how much publicity SEC scrutiny of the big financial houses might receive, it still bugs me when one branch of the financial house is holding a s#$tload of bonds or institutional shares from a particular company, while another branch of the same financial house is in a position to make 'recommendations' which ultimately affect the price of those bonds and shares.

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    God/dess montythegeek's Avatar
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    Default Re: Citigroup

    Quote Originally Posted by Melonie
    Lately, there is also the factor of 'program trading' - wherein big fund managers will pre-program their computers to enter buy or sell orders on a particular stock at a particular threshold price. Last I heard, 'program trading' now accounts for more than 50% of total shares traded on the stock exchange. 'Program trading' may explain the case you refer to where a particular stock dropped 10% in a matter of minutes. Consider the following scenario TYCO is selling at $31 a share ... a published downgrade by a big financial house causes a total of 100,000 privately held shares to be sold by individual investors, which depresses the price of TYCO stock below $30. The computers at the big funds pick up TYCO's fall below a pre-programmed $30 'sell' threshold, and proceed to instantaneously issue computer generated 'sell' orders for 1,000,000 more shares held by the big funds. After the 'program trades' are through, TYCO shares have dropped all the way to $27 !
    Melonies description of program trading is inacurate.
    From http://www.econlib.org/library/Enc/ProgramTrading.html
    The New York Stock Exchange defines program trading as any trade involving fifteen or more stocks with an aggregate value in excess of $1 million.
    Single stock trades are not program trading, and would be nothing more than if you had a stop-loss order on your stock. the usual form of program trading is index arbitrage which keeps the futures market and the underlying basket of stocks in line with each other-not equal, but in line. If the S&P futures gets overpriced on Nasdaq there are two ways to get them in line, buy the stocks on the exchanges, or sell the option on the futures market. A program can do the math and figure profitable trading opportunities quickly and closes the gap on the more liquid exchange--the stock market. A real world example would be if the price of gasoline at Miami was higher than the cost of buying it in Tampa and delivering it, someone would move gasoline to get it where the price was higher to make money--rising the price in Tampa and lowering it in Miami until the difference was less than the cost of driving it there.

    Large volume traders can do this much better than an individual because it can move faster and execute before the individual can submit the orders--because it can send the orders straight tothe floor

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    Default Re: Citigroup

    limit and stop orders are nothing new, especially in this age of electronic exchanges.

    The larger cap and/or high volume stocks will take a bigger beating over a day or two on a dowgrade. If analysts information was so great, they wouldn't need to be in the business of giving it out.

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    Banned Melonie's Avatar
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    Default Re: Citigroup

    Melonies description of program trading is inacurate.
    This is obviously true ... however I was trying to keep the discussion at an easy to understand level, and to address Deogol's point about increasingly sophisticated 'programmed trading' becoming available through online individual brokerage accounts, as opposed to full blown 'program trading' strategies involving million share trades, arbitrage, and direct to market floor order entry (which are obviously beyond the realm of any individual investor).

    Your mention of index futures and arbitrage, however, seem to be a very worthwhile subject for further discussion ... and to that end I'm going to start a new thread based on your comments.

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