Citi’s $3.5 million trigger gears on Russell 1000 Value index not immune to bear market

By Emma Trincal

New York, Aug. 19 – Citigroup Global Markets Holdings Inc.’s $3.5 million of 0% trigger gears due Aug. 19, 2027 linked to the Russell 1000 Value index are likely to see their return eroded by the worst part of the bear market still to come, said Steven Jon Kaplan, founder and portfolio manager of True Contrarian Investments.

If the Russell 1000 Value index return is positive, the payout at maturity will be par plus 1.28 times any index gain, according to a 424B2 filing with the Securities and Exchange Commission.

If the final index level is less than or equal to the initial index level but greater than or equal to the barrier level, 75% of the initial index level, the payout will be par.

Otherwise, investors will be fully exposed to the index decline from its initial level.

The Russell 1000 Value index tracks the large-cap value segment of the U.S. equity universe.

“The value part used to build this index may shelter you from the steepest losses although you’re still going to see a big drop. But the focus on large-cap stocks is certainly going to give you more risk exposure,” said Kaplan.

Less pain

Investors tend to flock into value shares in turbulent markets in a defensive move. But in a bear market, even value stocks are not immune from severe drawdowns, said Kaplan.

“Value stocks may not be as rich as growth stocks. But it doesn’t mean that they’re not overvalued. They’re simply less overvalued.

“So, when the Nasdaq drops as it certainly will, the Russell Value will drop too but a little bit less.

“I’m certainly not bullish on the Russell 1000 Value because the whole market, especially recently, has become very high again.”

The Nasdaq is now pricing three times its fair value, he noted.

“The last time it happened was at the end of 1999,” he said.

Big names

The Russell 1000 Value index is about 7% off its all-time high of Jan. 4, he noted.

Part of this high level has to do with the focus on the large-cap segment of the market.

“This is a large-cap index, like the Nasdaq. People have piled up in large-cap stocks in general. Even if large-cap growth stocks remain the most popular and the most overbought, the average person tends to pick names that they know. Who hasn’t heard of Warren Buffet? Who is not familiar with Johnson & Johnson or Exxon?”

He was referring to the top three index’ constituents, including the largest one, Warren Buffet’s Berkshire Hathaway Inc. Among the top 10 are JPMorgan Chase & Co., Chevron Corp., Pfizer Inc. and Bank of America Corp.

Another factor contributed to push up prices in the value segment of the U.S. equity market.

“Starting in November we had a significant shift from growth toward value. More investors piled into value stocks,” he said.

The same shift happened on March 2000, he noted.

Long bull, long bear

Kaplan said the five-year term was one positive aspect of the deal.

“At least five years from now, the market should be higher,” he said.

The portfolio manager expects the bear market to end toward the beginning of 2025.

“We started in January. I imagine it will take about three years for this bear market to end. Three years is longer than average.”

His prediction was based on a correlation between the length of a bear market and the span of the preceding bull market.

“We could be in the longest bear market in U.S. history or at least one of the longest, which shouldn't be surprising since we had previously experienced the longest-ever bull market of nearly 13 years,” he said.

Kaplan does not rule out an 80% drop from the beginning to the end of the bear market. He noted that between March 2000 and October 2002, the Nasdaq lost 84%.

“One red flag is that we experienced record inflows last year. Global fund inflows in 2021 surpassed the volume of the past 20 years. It’s just not sustainable,” he said.

Kaplan said he disagrees with analysts who claim that “the bear market is over.”

“Stocks are still ridiculously overpriced. Insiders are aggressively selling. The S&P has surpassed its 200-day moving average. It’s time to sell, not to buy.”

The 200-day moving average is a long-term trend indicator used by traders. It represents the average closing prices for the last 200 days.

When prices move above the 200-day SMA, momentum traders spot an uptrend and use the crossover as a buying signal. For contrarian and value investors like Kaplan, the crossing of the line is instead a selling signal.

“I keep on telling my clients to buy Treasuries right now. U.S. Treasuries are now paying 3% to 3.5%,” he said.

“It’s the safest way to go for the next few years, and those yields are not likely to stay as high indefinitely.”

Decent terms

Kaplan said he liked the structure of the notes. The underlying was hardly better than another large-cap benchmark.

“The only advantage of the Russell Value index is that it won’t fall as much as large-cap, growth stocks. But it will go down too,” he said.

But some of the terms of the notes were attractive, he said.

“There is a decent amount of leverage, a reasonable barrier and the five-year is a good period of time.

“All of these things are positive features.

“Unfortunately, you’re starting at the wrong time, just ahead of what’s going to be the worst part of the bear market,” he said.

Although the Russell 1000 Value is not as overpriced as the Nasdaq, it’s still fairly rich because its constituents are big and popular stocks.

“Inexperienced investors have been buying those well-known stocks pushing up their prices very high. As a result, the index is still fairly overpriced relative to long-term averages.

“It’s a good note, but the timing of the trade is just not great.”

The notes are guaranteed by Citigroup Inc.

Citigroup Global Markets Inc. is the underwriter. UBS Financial Services Inc.is the agent.

The notes settled on Friday.

The Cusip number is 17330N849.

The fee is 3.5%.

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