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Two months ago, most bullish investors believed that the financial sector is the one that offers a more attractive opportunity to make money; or at least they thought so.

Financials recovered from its lower values; particularlly, Citigroup (stock ticker: C), recovered since the March low of $17.99 to $29, but fell to $19.5 today.

The high of $55.55, almost 10 months ago, shows as that recession fears aren´t a joke; the world´s largest  financial company lost almost 70% of its market value.

After a bullish April, fear has return and investors don´t really know that to do with the Citi stock; the downtrend of these last few days might continue. Therefore, we decided to make a detailed Citi stock analysis to predict their outlook for 2008 and 2009.

As we all know, Citi is the largest financial company worlwide. That gives C a bonus of confidence to investors, but the reality shows us that their management isn´t transparent; they have raisen billions in capital, diluting it´s shares after Pandit, Citigroup´s CEO, told publicly that Citi wouldn´t raise capital. Warren Buffett suggests to invest in companies whose management you can trust; clearly not Citigroup´s characteristics.

Citi´s earnings growth are worst than the industry average, PER (Price to earnings) of 49 worst than the industry average of 30, recently down momentum, recommendations by Merrill Lynch and other banks to sell Citi, recession expectations by most analysts, tighter controls by the US regulators, etc.

I believe that Citigroup and most companies of the financial sector will go down not less than 20%. Maybe the worst is over, but their stock prices will approximate to their March lows. The old Wall Street saying “Sell in May and walk away” definetly applies for 2008.

Citi´s stock price might trade sideways, irregularly for a few months. But eventually, reality will show the true colours of Citigroup, and then fear will dominate shareholders, causing a huge downtrend to $15. The fact that dividends weren´t cut by Citi is good for a very short term investors, but eventually that will cause more problems.

As we recommended a month ago, SKF (ultra short financial ETF) is the right play, and has gained 50% since then. Financials are in a difficult moment, that could turn around next year, but fundamentals won´t get any better in 2008.

Some analysts expect the 2Q season to be slightly negative, and a very pessimistic 3Q season that will take Wall Steet to their worst levels. The worst maybe passed, but the scenario continious to become darker, just not as quickly as it did some months ago.

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