Summer Doldrums and Earnings Slow the U.S. Treasury's Citigroup Share Sales

Includes: C, SPY, XLF
by: Linus Wilson

The U.S. Treasury announced that it has so far sold 2.6 billion shares at an average price of $4.03 per share raising a total of $10.5 billion. This is still higher than the U.S. Treasury’s break even price of $3.25. The news that the U.S. Treasury has only sold a total of 2.6 billion shares is disappointing. I had hoped that they would have unloaded at least 3 billion shares by this time. This slower pace of sales of about 55.3 million shares per trading day indicates that there is a 54.6 percent chance that the U.S. Treasury will either have to sell some shares at a loss or get an extension from Citigroup to postpone the December 14, 2010, deadline for the completion of the sale. This ups my estimates of a delayed sale substantially. My estimates are based on Monte Carlo simulations of the stock price which are discussed in my paper “Selling Citigroup.” The U.S. Treasury should seriously consider a secondary offering of all or most of the shares if the stock rallies from a surprisingly good earnings announcement on July 16, 2010.

The average daily volume during the first 1.5 billion share sale from April 26, 2010, to May 26, 2010, was 980 million shares, and the U.S. Treasury sold about 65 million shares per day or about 6.65 percent of the average daily volume. The average daily volume from April 27, 2010, to June 30, 2010, was 642 million shares, and the U.S. Treasury sold about 44 million shares per day or about 6.85 percent of the average daily volume. Thus, it appears that the U.S. Treasury is selling about 6 to 7 percent of the daily volume in the stock. If they maintain that pattern, then the speed of the share sale depends on the volumes of Citigroup stock traded. We should expect the share sales to be slow in the summer months which traditionally have lower volumes and they should pick up pace in the fall.

Since the U.S. Treasury is pausing its selling from July 1, 2010, to July 16, 2010, it will be interesting to see if the stock performs significantly better over that period. There are two hypotheses. The first says that the fundamental value of the stock is unchanged by the U.S. Treasury’s 55 million shares per day sales. The second hypothesis is that the share sales are depressing current prices. The two week pause gives us the opportunity to see if one hypothesis is clearly correct or not. I expect the results will be indecisive.

The current pace makes it very likely that the U.S. Treasury will have to be willing to sell the shares at a loss or get an extension from Citigroup. My expectation is that the Citigroup shares will rise to compensate current investors for the systemic risk they are bearing. Nevertheless, in the short-term, with time horizons in the months, expected returns can be easily wiped out by the short-term volatility of the stock.

The dribble out Citigroup stock sale represents an indecisive attitude of the U.S. Treasury towards re-privatization of the banking sector. On one hand, they support a compromise to end TARP early, but in the same week they attempt to pass the $30 billion Small Business Lending Fund (SBLF), which will greatly expand the number of banks with stock owned by the U.S. government. That plan has the U.S. Treasury buying preferred stock stakes in banks with less than $10 billion in assets. As points out the administration was unlikely to announce new TARP programs in the next three months. Thus, this is more an accounting game. Yet, with the SBLF the U.S. Treasury and the administration seem to be moving expanding not contracting state ownership of the banking sector in their deeds if not their rhetoric. Likewise, with the Citigroup share sale, the Treasury’s late start and slow pace could delay the privatization of Citigroup by not just days but months and years. The success of their slow, at-the-market sales depends on short-term stock returns. Current buyers are depending on the U.S. Treasury to exit its stake quickly. It is not clear how those investors would react if the stock price fell so low that the U.S. Treasury suspended its stock sales.

Disclosure: This is not investment advice. I do not have any long or short positions in the companies mentioned. I have long positions in broad-based index funds.