Citigroup Float May Experience Dramatic Upside Velocity

Never underestimate the unintended consequences of a change to the number of shares outstanding and the resulting float. Citigroup (C) finds themselves right in the middle of this phenomenon. In a financial environment that is anticipating new mark to market accounting regulations on April 2nd, the Citigroup float is a major issue to understand. Less float means more directional velocity. If the direction for financials is heading up, the 36% stake by the U.S. government in Citigroup will put additional upside pressure on the stock. Not good for shorts, very good for the long side speculators.

It is expected that in April Citi will exchange $27.5 billion in preferred shares to common stock and the U.S. government will tender up to $25 billion of its preferred holdings into common stock. This scenario would give the government a 36% stake in the company and it would increase the number of shares outstanding from the current 5.5 billion to anywhere between 13 billion and 21 billion depending on how many investors participate. (See here.) This dilution is positive for Citi because their tangible common equity will rise to approx. $81 billion, up from $30 billion at the beginning of 2009.

With all of this dilution Citi is at risk of becoming a stock that is virtually impossible to move because of the ridiculous amount of shares outstanding. However, this week the company announced they will be seeking shareholder and government approval to do a reverse split with a range anywhere from 1-for-2 to 1-for-30. This move makes a lot of sense for Citi. It’s looking like they may end up with a total number of shares outstanding below the current 5.5 billion, it could end up lower than 1 billion and the government would have a 36% stake.

Until now, most have viewed the government stake as a negative for the stock but that perception might change quickly. A float of less than 1 billion with 36% of it stable. The government won’t be selling, and most other investors who have ridden this stock down to its depths won’t be selling either. It is conceivable that 80% of the shares outstanding won’t be sold in the near term which leaves only a 20% float for investors to buy and sell. Many firms try to manipulate their stock price by restricting the percentage of tradable float. According to a research report release by Robin Greenwod of Harvard Business School, “prices rise when the float is contracted and fall when the float is released.”

For a current example just look at the price action of Sears (SHLD). CEO Eddie Lampert has been buying back shares for years and has dramatically reduced the available float. As a result, Sears has been able to keep its stock up near $40 a share even though most on Wall Street feel it should be in the single digits. Citigroup appears poised to be the next stock to experience the gift of a tight float. If financials do rise, expect Citi and also AIG (government has a 79.9% stake) to be the percentage gaining leaders because of the unintended consequences of government ownership on their price velocity.

Disclosure: Author holds a long position in C

Comments

[PROXIMO:]

Split it or reverse split it. A piece of sh#t is still a piece of sh#t.

Mar 21 06:11 PM

[Mad Hedge F...:]

When Citigroup (C) fell below $1 two weeks ago it become the first Dow stock to be offered on McDonald’s dollar menu.

Mar 21 08:33 PM

[ZeroCred:]

Or at Family Dollar!


On Mar 21 08:33 PM The Mad Hedge Fund Trader wrote:

> When Citigroup (seekingalpha.com/symbol/c) fell below $1 two
> weeks ago it become the first Dow stock to be offered on McDonald’s
> dollar menu.

Mar 21 08:46 PM

[the no noth...:]

i believe city will bounce back with vengeance no matter what the government owns. you must realize the stock is going to split and or reverse split and the stock is going to be hard to come by. naturally it is going to rise sharply until one wants to sell their stock. i own the stock and will keep it for a long time to come. i would advise you to buy some while you can at any price. anything below 3 dollars is a steal i think. i don't see how i could be wrong with the fact they hold 52 million people hostage in the credit card business which is going to run this country for the next 5-10 years it looks like. the banks are going to be very strong in the coming years due to the fact they can borrow money for just about nothing and lend it out and get huge profits. trust me i know what i am talking about.

Mar 21 10:16 PM

[Paul H. M.:]

Good call.

On Mar 21 06:11 PM PROXIMO wrote:

> Split it or reverse split it. A piece of sh#t is still a piece of
> sh#t.

Mar 21 10:16 PM

[whisperonth...:]

Those of you who don't like it can take that price down at least one more time - I'm ready to get more.

Mar 21 11:01 PM

[Dave Wrixon:]

Pump and Dump at its best!

Mar 22 06:47 AM

[D Ramses:]

I will say this; his theory is a good one if only for the following reasons.
Citi will not be allowed to fail as long as the United States of America is viable and capable. They are printing money because of the low interest rates. They are a $2 stock.

This is when fundamental investor's and technical trader's worlds collide. This is a stock not a company, the company it represents is purely an abstraction, it serves as an Oracle into the direction we should value the stock. By all accounts Citi should be negative from a fundamental viewpoint but market mechanics only allow a stock to go to zero. That simple little fact tells you this is a stock, not a company, a device for trade and trade only.

This theory is about trading, not the company's fundamentals, not the company's viability. If you have a brain cell in your head you can accept this, not to be mean or anything but it’s not hard. The company's float is going to decrease substantially and not be available to short.

Kind of like FWLT, and GOOG and other low float stocks with ridiculous stock prices because there is no supply to satisfy demand. This is a STOCK not a company!

Mar 22 08:46 AM

[Hedge Fund ...:]

Less float means "directional velocity?"
I'm not sure if the comments about this being a good theory are sincere or sarcastic.
But I agree with you. Citi's stock price will certainly have directional velocity once the reverse stock split.
However, I probably disagree on the directional part of "directional velocity."

Mar 22 09:36 AM

[vreporter:]

I don't know if it was a misprint but I read an article that referred to the possible reverse action in June 2010. Is that right? If so, too far down the road to support you principle. If not, I agree that it's a biggie!

Mar 22 12:00 PM

[JudeJin:]

if you bought at $1, you should've sold at $3. if you bought $3 and now hope that it will go up further. my only reaction to you is that you just landed on earth from mars.

proximo has the best call on c;)

On Mar 21 06:11 PM PROXIMO wrote:

> Split it or reverse split it. A piece of sh#t is still a piece of shi#t

Mar 22 12:02 PM

[morning reader:]

its only matter of time before citi bounces back....the question is how long?

Mar 22 01:27 PM

[Leonard the...:]

I get to short C in the double digits again - Yeah!!!

When it goes back down to $2 do you think they will do another reserve split?

Being that it's such a great idea and all.

Mar 22 05:26 PM

[Northstar10000:]

A reverse split is deadsville for all current share holders. there are hundreds of reverse splits over the last few years. Only 2 worked out after continuos pain. sorry folks it's over.

Mar 22 06:11 PM

[MaineLobster:]

"Disclosure: Author holds a long position in C"


Should you say that you hold a highly leveraged long position in C??

Mar 22 08:48 PM

[Harry Tuttle:]

The increase in tangible equity is supposed to be offset by the coming write-downs. That is the reason for the exchange.

The number of shares should have no effect on the value of the bank. Although I am aware that people like to focus on splits and reverse-splits for reasons that I can not understand, these are economically meaningless.

Mar 22 10:32 PM

[Marianthi:]

Before anyone gets to thrilled about reverse split, look at WHI...that reverse split was a gift to short sellers...

Mar 23 01:23 AM

[TaurusTrader:]

I look at it from a different point of view .... City needs to bounce back for govt plans to suceed .... govt plans needs to suceed for stock markets to bouce up .... if the stock markets do not bounce back, the country is screwed .... No body wants this to happen, right?

So, City will and should go up in value!!!

TaurusTrader
www.taurustrader.wordp...

Mar 23 11:25 AM

[Seen All It...:]

Citi is significantly reducing the credit limits on the Sears credit cards that it services. While that resolves Citi's credit exposure, it will kill Sears and CEO Eddie Lampert will own a whole lot of inventory.

Mar 23 08:28 PM

[Ezz:]

C stock is an attractive gamble at best. Why not buy some with a little money that you don't mind losing. Buy it at $2 to $3, won't make much difference cause if it does bounce back the upside will probably be huge. If it dives, well that's what gambling - not investing - is about. I'll give it a go myself just for fun and so as not to kick myself in the near future if it does soar. Good luck to all.

Mar 24 04:29 AM