A $7.5 billion Abu Dhabi deal to buy Citigroup shares may have created a model for acquisitions by Gulf and other emerging-market investors scouring the ruins of the U.S. mortgage crisis for bargains. The Abu Dhabi Investment Authority sought no role in managing Citi
, allowing the world’s wealthiest sovereign fund to invest as a saviour of the largest U.S. bank without the risk of being perceived in the United States as an Arab predator. Citi, which could book $17.8 billion in second-half credit-market losses, said ADIA would buy 4.9 percent of stock, eventually becoming the largest shareholder of a bank that has lost 42.5 percent of its market value in the past five months. Other Gulf investors, backed by $1.2 trillion in state reserves, say they could follow, depending on when they expect the worst of the crisis triggered by defaults on high-risk home loans to have passed.
Wells Fargo, the second-largest U.S. mortgage lender, said on Tuesday it expects to incur a $1.4 billion pretax charge in the fourth quarter, largely for higher losses related to home equity loans. The company, which is also the fifth-largest U.S. bank, said it also is significantly scaling back its business of making home equity loans through brokers, citing “declining market demand for such products.” It said four months ago that it will close its subprime wholesale lending business.
Countrywide the largest U.S. mortgage lender, moved to reassure investors Tuesday that it is not borrowing too much and will not be constrained in its ability to provide home loans. Countrywide, based in Calabasas, California, has faced heavy criticism over its lending practices as defaults mounted, leading to a $1.2 billion third-quarter loss.
Freddie Mac halved its dividend and unveiled plans to sell $6 billion of preferred stock to bolster the mortgage investor’s finances in anticipation of more losses, the company said Tuesday.
U.S. consumer confidence fell unexpectedly sharply in November to its lowest since after Hurricane Katrina in 2005 on worries about rising gas prices and financial market volatility.
Prices of existing U.S. single-family homes in the third quarter slumped 4.5 percent from a year earlier, matching a record decline from the previous period as the housing downturn deepened. For the period ended September 2007, the index’s 10-city composite shows a year-over-year drop in prices of 5.5%. The 20-city composite notches a 4.9% drop. Finally, the nationwide index shows a 4.5% drop. That number isn’t just big, it’s getting worse.
Keep away from financial and housing stocks for now. If you think they are cheap right now, wait 3 months and it will get even more cheaper. If anything I would short them. I believe this market trend is not a correction, but clear recession.
Disclosure: Short position in DHI and BZH