Citigroup’s capped trigger gears tied to Financial Select SPDR to play financial bull momentum

By Emma Trincal

New York, Dec. 14 – Citigroup Global Markets Holdings Inc.’s 0% capped trigger gears due Dec. 31, 2019 linked to the Financial Select Sector SPDR fund are designed for investors who believe that the current financial stock rally is not about to lose momentum anytime soon, sources said.

The payout at maturity will be par of $10 plus double any fund gain, up to a maximum return of 35% to 39%, according to a 424B2 filing with the Securities and Exchange Commission.

Investors will receive par if the fund falls by up to 20% and will be fully exposed to the decline if the fund finishes below the 80% trigger level.

Toppish

“The notes express a fundamental view on financials, the idea that we’re at a turning point,” said an industry source.

“Yes, the sector has rallied a lot since the elections, but financial stocks seem expensive today because they were so cheap for so long.”

The underlying ETF, which counts among its top holdings the big U.S. banks such as JPMorgan, Wells Fargo, Bank of America, Citigroup and Goldman Sachs, has seen its share price surge 17.5% since the elections.

The ETF, which closed at $23.47 per share on Wednesday, is approaching its 52-week high of $24.64.

Rates, rules

Investors have to be sufficiently bullish to believe that there is more upside in the next three years. This source said there is a case to be made for further appreciation over that period.

“The zero-interest-rate environment has been dragging the sector down for so long,” this source said.

“Regulations like Dodd-Frank or the Volcker rule did not help.

“A lot has changed now. Rates are rising, which will improve the margins of most banks. And many expect the new administration to reduce the over-regulation which has been a drag on the banks.

“Even if the rules are not changed, the implementation, the interpretation will be a lot less taxing than has been the case up to now.”

Even if the sector may be overpriced amid the post-elections rally, the barrier should limit the risk of misjudging the timing of the trade, he added.

Overbought

Andrew Valentine Pool, main trader at Regatta Research & Money Management, looking at the sector from a technical analysis standpoint was more skeptical.

“It could easily go down and very quickly. It already had a 17% run-up since the elections. We’re too close to the Nov. 8 catalyst.”

Sit and wait

He would wait a few months before considering a similar product.

The share price of Goldman Sachs for instance has jumped by nearly a third since the elections. The bank’s stock is the best-performing component of the Dow Jones industrial average.

“I wouldn’t do anything before three to six months from now. Then reality will set in.

“Some of those stocks will continue to rally, but so far a lot of it has been jumping up much too fast.”

UBS Financial Services Inc. and Citigroup Global Markets Holdings Inc. are the underwriters.

The notes are guaranteed by Citigroup Inc.

The notes will price Dec. 27 and settle Dec. 30.

The Cusip number is 17325E390.

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