Goldman Sachs recommends "sell" on Citigroup

(Reuters) - Goldman Sachs reinstated Citigroup Inc (C.N) with a "sell" rating and recommended a "paired" trade in which investors sell Citigroup short, betting on a decline, and buy Morgan Stanley (MS.N) shares.

Shares of Citigroup, the giant U.S. bank, fell 5 percent to

$14.35, while those of Morgan Stanley rose 3 percent to $20.36 in morning trade on the New York Stock Exchange

"We believe weak economic data will keep the (Citigroup) stock under pressure over the next six months and it is tough to see why the stock would head higher over this period," analyst William Tanona wrote in a note to clients.

Adding Citigroup to Americas Conviction Sell list, Tanona said it will be difficult for the company to generate profitability over the next 12 months primarily due to additional write-downs and deteriorating credit market.

Even as Tanona expects government investment to help the company's overall capital position, he does not see Citigroup returning to profitability until the second half of 2009.

Citigroup, the nation's largest bank by assets until the third quarter, posted its fourth straight quarterly loss and $13 billion of write-downs and credit losses, driven by housing and credit market turmoil.

The company has not only been hit by rising losses from its traditional lending operations, but also by slowing profitability from emerging markets and its stock has lost 64 percent of its value over the past one year.

Tanona has a six month price target of $11 on Citigroup.

On Morgan Stanley, the analyst said the company has very limited exposure to consumer credit, which is an area the brokerage believes will provide the most significant headwinds for Citigroup in 2009.

For the third quarter, Morgan Stanley's profit beat expectations, helped by robust equity and commodities trading results and record prime brokerage fees.

Morgan Stanley will generate profits over the next four quarters, thus adding to its capital base, whereas Citigroup will lose money, thus reducing its capital base, Tanona added.

(Reporting by Sweta Singh in Bangalore, Editing by Dinesh Nair, Deepak Kannan)