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Plot thickens for Citigroup

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Shares of banking giant Citigroup (NYSE:C) $35.18 will be under some selling pressure this morning after the Wall Street Journal reported that New York Attorney General Eliot Spitzer is widening his investigation into former Salomon Smith Barney analyst Jack Grubman to include his boss, Citigroup CEO Sandy Weill.

Weill reportedly nudged Grubman, the former telecom analyst that was widely followed by Wall Street, to reconsider his bearish rating on AT&T (NYSE:T) $12.38 as part of an effort to win a lucrative investment banking job as one of three lead underwriters of the massive $10.6 billion AT&T Wireless (NYSE:AWE) $5.99 IPO in April of 2000.

The IPO deal yielded approximately $45 million in fees for each of the three underwriters.

Sources familiar with the matter reported that Weill, a member of AT&T's board, had been asked by AT&T CEO C. Michael Armstrong to urge Grubman to revisit the merits of AT&T's cable strategy. Armstrong was also a member of Citigroup's board at the time.

Grubman, a long time AT&T bear, upgraded the company to a "buy."

Spitzer is tracking the AT&T Wireless transaction as part of a probe into whether firms violated state laws by hyping stocks of companies that were also investment banking clients and thereby misleading investors.

In May, Spitzer announced a landmark agreement with Merrill Lynch (NYSE:MER) $38.27 to separate the investment banking and research activities at the brokerage giant.

Last week, Jack Grubman stepped down from Citigroup.

Stock futures lower

Stock futures have been trading lower since early this morning and S&P futures (sp02u) currently trade down 6.10 points at 955.00. NASDAQ futures (nd02u) are lower by 11.00 points at 1,041 and Dow futures (dj02u) are down 50 points at 8,990.00.

Fair value for the S&P 500 today is $0.34. That price will not change during the session. HL Camp & Company has their computers set for program buying at $2.06 and set for program selling at $-1.30. Fair value for the NASDAQ-100 today is $1.70.

Goldman says Taiwan Semi to cancel orders

Look for semiconductor equipment stocks to feel some downside heat at the open on this morning's call from Goldman Sachs saying that recent channel checks lead them to believe that Taiwan Semiconductor (NYSE:TSM) $9.18 intends to cancel "significant" orders that had previously been placed with their equipment suppliers. Goldman says possible cancellations seem to be focused on 300mm orders, and believes Novellus' (NASDAQ:NVLS) $29.00 mid-quarter update on August 29th is likely to reflect some incremental weakness from TSM.

Separately, Merrill Lynch is cautious on TSM due to high levels of inventories and potential downside risk to orders in Q3 and Q4.

I think bearish traders can be looking short/put Novellus (NVLS) on this news. As noted in recent sessions, the Semiconductor Index (SOX.X) 357.26 has been struggling with its 50-day MA as resistance and lagging the broader market averages on a technical basis. Similar technicals found in the SOX.X are present in Novellus (NVLS). Traders short can place stop just above $31.20, target $25 ahead of NVLS' August 29th mid-quarter update.

Jeff Bailey
Senior Market Technician
Option Investor

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