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Buy, Sell or Hold: Citigroup Inc. (NYSE: C) Is a Turnaround Play that Investors Can't Afford to Miss

Citigroup Inc. (NYSE: C) is truly a global bank.  With operations in more than 100 countries, it leads in consumer banking, credit cards, corporate lending, investment banking and brokerage.  But its forays into the U.S. mortgage market, and its huge exposure to the U.S. retail and corporate banking markets, created huge losses from which the company is still recovering.

Citi, guided by a prudent and savvy investment banker, Vikram Pandit, has embarked in one of the most ambitious and difficult transformations ever attempted by a financial institution.  It is shedding bad assets, cutting costs, raising capital and has segregated the impaired assets and businesses that Citi would like to dispose into a so-called "bad bank," a subsidiary by the name of Citi Holdings.  The success of the restructuring will depend on both Citigroup's execution and on the underlying strength of the U.S. and global economies.

But therein lies the huge upside.  As I have written before, there are few investment opportunities more profitable than the restructuring and turnaround of a business.  And given the huge size of Citi's balance sheet and the fact that banks are pro-cyclical to the economies in which they operate, the potential gains are extremely large.

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China's Explosive GDP Growth May Force Government to Raise Yuan and Interest Rates

China's economy raced ahead in the first quarter at the fastest pace in almost three years, underscoring concerns about overheating and prompting speculation that the government will be forced to raise interest rates in addition to scrapping the yuan's peg to the dollar. China's gross domestic product (GDP) rang up unexpectedly strong annual growth of […]

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Congress May Double Taxes on Private Equity Firms in Search for New Revenues

Democrats in Congress, seeking new sources of revenue after passing President Barack Obama's $940 billion health-care reform measure, may double tax rates on executives at private-equity firms.

The U.S. Senate has taken up a House proposal to levy a new tax on executives who make long-term investments, including venture capitalists, managers of real- estate partnerships, hedge-fund and private-equity managers, Bloomberg News reported.

The proposal, expected to raise $24.6 billion over a decade, eliminates a tax provision which allows money managers at privately held partnerships to treat most of the revenue they bring in as capital gains.

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Money Morning Mailbag: Short-Term Maturities Are the Best Bet for Tax-Free Municipal Bonds

Question:  We have some money invested in tax-free municipal bonds, but read in the local newspaper that with the potential rise of interest rates these bonds tend to do poorly. Can you better explain this, and if this is the case, what do you recommend?  I appreciate your input. Thank you.

- Joan


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How to Protect Yourself – And Even Profit – if Foreign Creditors "Strike" U.S. Treasuries

The odds are good that China won't dump its holdings of U.S. Treasuries anytime soon. But by substantially reducing its purchases of U.S. debt - or halting them completely in the form of a buyers' strike - the Red Dragon could absolutely shatter the myth that it is the U.S. Federal Reserve that controls U.S. interest rates.

And that could also crater the bond market in the process.

To find out how you could protect yourself if foreign creditors ditch the dollar read on...

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Obama Reveals $14 Billion Housing Program Aimed at Unemployed and Underwater Homeowners

The Obama administration on Friday announced a $14 billion program to shore up the housing market by giving lenders incentives to slash some mortgage debt and reduce mortgage payments for the unemployed. As the housing market struggles under the weight of an epidemic of foreclosures there was disturbing evidence last week that the malaise is […]

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Money Morning Mailbag: The Capital Wave That Could Blunt the U.S. Recovery

Question: How can banks justify not giving out mortgage money in light of the fact that they can now qualify their applicants to a level not previously seen? I am talking about literally millions of people applying for loans with 800-plus FICO scores and Loan-to-Value (LTV) Ratios that are better than ever before.

How can banks and lending institutions take our money and then turn around and shut nearly everyone out - which simply prolongs this recession? Can anyone explain why the present administration and regulatory bodies are not forcing the banks to loan monies to qualified applicants?

At this rate, we will be dead soon.   Without borrowing, we will die.  

•  (Signed) Living in Costa Rica

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Money Morning Mailbag: Capital Wave Investing Strategies Spotlight the World's Top Profit Plays

Question: Shah, your article on capital-wave investing was outstanding. In fact, I would love to see a follow-up piece for those of us who are not traders and who are not out and about following the current short-term market trends.

For example, when you talk about the Obama administration's determination to keep interest rates low - this has consequences. What will those rates be in, say, a three-year to five-year time frame? What if the European countries keep having implosions like Greece - meaning that countries like Portugal, Spain and Italy follow suit?

In your opinion, will that eventually sink the euro, or does the Eurozone have to bail out those countries with a plan that's similar to the one that it is developing for Greece? What happens to other currencies in either of these scenarios?

Finally, is it your opinion that China is trying to curtail its growth to keep itself from overheating? Can Beijing successfully continue to do this - or will this blow up in China's face? If you look down the road, say, three to five years, what do you believe the consequences, if any, will be?

Again, Shah, this was a really informative article. I would love to hear your views on what you actually see playing out in each of these areas during the next few years.

Answer: Thank you for your kind words about the article and for taking the time to pose your questions - which are excellent ones, by the way. Let's take a look at them, one at a time...

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With Inflation Accelerating Around the World, Will the United States be Next?

Inflation is now thoroughly entrenched in India's economy, and some analysts fear that the United States could suffer the same fate if adjustments to monetary policy aren't made soon.

India's wholesale price index-based inflation rate in February accelerated to 9.89% from a year earlier. That was the fastest pace in 16 months, blowing past the Reserve Bank of India's (RBI) estimate for an 8.5% inflation rate at the end of March.

Soaring food prices were the primary driver of inflation. An index measuring wholesale prices of lentils, rice, vegetables and other food articles compiled by the commerce ministry rose 16.3% in the week ended March 6 from a year earlier after a 17.81% gain the previous week.

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How Capital Waves Are Creating the Biggest Profit Opportunities in Today's Markets

Back when oil was trading at a record high of $145 a barrel - and was generally expected to go higher - I concluded that the forces at play were speculative, not fundamental - driven by new institutional money looking to diversify away from too many concentrated equity bets. I argued these forces were temporary, and not entrenched, meaning that oil prices were actually headed for a fall.

The "forces" I was referring to are called "capital waves." Capital waves create some of the biggest trading opportunities in the markets today. Investors who are able to spot capital waves and identify their likely impact have a huge advantage over those who don't.

With oil, for instance, pundits were calling for new highs of $200, $250, $300 and even $500 a barrel. But behind the curtain, there was a major capital wave at play: I knew that oil was being pumped out of the ground like mad, and that shipping rates were exploding because oil was being stored in offshore, idled tankers. I knew that as little as $20 billion had been "re-allocated" out of the equity markets and into this new-asset-class investment for pension fund accounts.

As a speculative frenzy seemed to be enveloping the oil market, I called for oil prices to plummet - to more than a few looks of incredulity or outright guffaws.

When the secondary capital waves took hold, the speculative advance in oil prices first stalled - and then oil prices plunged as capital exited in another wave.

Don't feel bad if you missed this opportunity. That's the important thing to remember about capital waves - they're out there if you know where to look and how to interpret them. In fact, as good as this oil play was, I see even better opportunities ahead.

To learn about the Top Five "capital waves," read on...

Producer Price Index Drop Supports Fed's Position on Keeping Low Interest Rates

The Producer Price Index (PPI) saw its biggest drop in seven months in February, fueling the U.S. Federal Reserve's argument that interest rates can remain low "for an extended period" without yet facing dangerous inflationary pressures.

Wholesale prices were down a seasonally adjusted 0.6% in February, the Labor Department reported today (Wednesday), a day after the Fed's one-day policy meeting where it reiterated the need to encourage economic growth through low interest rates.

The central bank's position to keep the federal funds rate at a record low range of zero to 0.25% since December 2008 has sparked inflation concerns among many investors. However, proof of tame inflation buys the Fed more time in deciding when to continue with its "exit strategy" and pull the trigger on a rate hike. The Fed has remained firm on its stance that there is no evidence of rising inflation due to low interest rates.

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Fed Plan to End Mortgage-Backed Securities Purchase Program Brings Market Anxiety

Anxiety surrounds Tuesday's Federal Open Market Committee (FOMC) meeting as the central bank's year-long mortgage-backed securities (MBS) purchase program nears its scheduled March 31 close, opening the door for mortgage rate increases and surprising market fluctuations.

The Fed spent billions of dollars on MBS guaranteed by Fannie Mae (NYSE: FNM), Freddie Mac (NYSE: FRE) and Ginnie Mae weekly for the past year, topping out its portfolio at $1.25 trillion.

As the program ends, investors and analysts are speculating that mortgage rates could rise - and rise fast.

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Weak Job Market and Low Inflation Stall Fed's "Exit Strategy"

Any speculation that U.S. Federal Reserve Chairman Ben Bernanke had his finger on the "exit strategy" trigger has been silenced.

Bernanke yesterday (Wednesday) faced the House Financial Services Committee to instill public confidence in the Fed's ability to exercise a smooth exit strategy and quell continued fears of a tightening monetary policy.

The Federal Open Market Committee (FOMC) "continues to anticipate that economic conditions -- including low rates of resource utilization, subdued inflation trends, and stable inflation expectations -- are likely to warrant exceptionally low levels of the Federal Funds rate for an extended period," he said.

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The Essential Eight: The Only Economic Indicators Investors Need to Know

Housing starts. PPI. Same-store sales. Weekly jobless claims. Philly Fed. Lagging indicators. Core CPI. Industrial production.

When it comes to economic indicators, the list is almost endless. One economic indicator follows another, filling an entire calendar - weekly, monthly, quarterly, annually. But on the specific day an indicator is announced, it seems to be the biggest deal going: Commentators comment, pundits pontificate, analysts and economics analyze, predict and forecast, and financial markets around the world react - often violently.

The next day brings a new batch of indicator reports. Yesterday is forgotten as the frenetic cycle plays itself out all over again.

Given this pattern, it's not surprising that the economic-indicator game seems confusing - and perhaps even pointless. In the eyes of many investors, the only thing these indicators seem to "indicate" about the economy is that it can be highly confusing and extremely difficult to predict.

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Fed's Discount-Rate Increase Illustrates Exit-Strategy Challenges That Await the U.S. Central Bank

Is the U.S. Federal Reserve finally launching its "exit strategy?"

When the nation's central bank boosted the discount rate last week, it assured investors that this wasn't a monetary tightening. The assurance didn't seem to matter. The move late Thursday touched off a furious global-market reaction and U.S. dollar increase on Friday. This demonstrates the challenge the central bank will face as it crawls toward an ultimate increase in interest rates.

In a move that surprised the markets, the Fed announced Thursday that it was increasing the rate it charges banks for emergency loans to 0.75% from 0.50%. The also reduced the central bank also slashed the maximum-loan-maturity length from 28 days (it was once as high as 90 days) to overnight.

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