Declining Volumes Slow U.S. Treasury's Exit of Citigroup

Includes: BAC, C, JPM, XLF
by: Linus Wilson

Recent data reported in the Monday, September 27, 2010, edition of the Financial Times makes it seem increasingly unlikely that the government will exit Citigroup (NYSE:C) by year end. I said in an earlier blog that the chances that the Treasury would complete its share sale of Citigroup by its promised December 14, 2010, deadline were slim.

Yet, this new data further supports that prediction. There are only 57 trading days between the end of August and December 14, if we exclude the earnings blackout period in October. Yet, the U.S. Treasury has sold just 3.5 billion of its 7.7 billion share stake in Citigroup as of August 31, 2010. In particular, the U.S. Treasury has been slowed by abnormally low volumes for Citigroup’s shares in July and August.

My analysis of the volumes of Bank of America (NYSE:BAC), JPMorgan Chase (NYSE:JPM), and a popular financial sector exchange traded fund (NYSEARCA:XLF) indicate that the volumes of Citigroup over the U.S. Treasury’s selling period of July 23, 2010, to August 31, 2010, are much lower than Citigroup’s financial sector peers over that period.

Thus, subtracting out the U.S. Treasury’s average share volume of 34 million shares over that period, Citigroup’s volumes are down by 43 to 109 million relative what would be indicated by the volumes of the stocks of its peers. My methodology for estimating share volumes is in table 3 of my paper “Did the TARP Share Sale Drive Down Citigroup’s Stock Price?” The U.S. Treasury has averaged between 6 to 10 percent of the daily volume of Citigroup’s shares, according to my calculations.

I still can find no evidence that the U.S. Treasury’s pace of selling is negatively affecting the share price over July and August. This is similar to what I found in April, May, and June. The drops and rises in Citigroup’s share price are consistent with its sensitivity to drops in the market and the stock’s volatility as implied by short-term options.

The U.S. Treasury will pause its selling on September 30, 2010, just prior to third quarter earnings. I expect sales to resume in the last week of October. The U.S. Treasury is unlikely to do a secondary offering to complete the share sale before the end of 2010. The U.S. Treasury is probably too concerned with its General Motors IPO to conduct a $5 to $10 billion secondary offering of its holdings of Citigroup shares at about the same time. Thus, it seems almost certain that the Citigroup share sales will continue in early 2011 as long as Citigroup’s share price stays above the government’s cost basis of $3.25 per share.

Disclosure: I have long positions in broad-based index funds. I do not have long or short positions in individual securities issued by the companies mentioned.