Newsflash For Citi Pumpers
Q: A lot of things you might already know. The preferred conversion is going ahead at $3.25, after the stress test results are made public. This means that Citi expects to still be worth $3.25 at the end of April. Common shares, however, are still hard to find and getting more expensive to short. The housing crisis is mostly priced at having hit the bottom, but Freddie Mac reiterated that it should be at a bottom, so more confidence doesn't hurt, and that improves Citi's bottom line. Rumour has it, after Citi's treading-water earnings, that they'll "fail" the stress test, so that will keep getting priced in until the results come out. If "buy the rumour, sell the news" was what drove the latest rally and fall, then I'm expecting a slow decline to $3.4x over the next week, with some short covering spikes along the way, and recoveries driven by short-term investers calling bottoms. We should see a rise when the stress tests come out, even if they're relatively bad. Citi's bottom line is still looking long term. Have fun, and remember the only advice you should ever take is your own.
A: How would the preferred stock/common stock conversion ( which is expected to take place soon ) effect the current common stock ( C ) holders now? Are we gonna be better off with this deal? If so, how? For example, if you have 10000 shares of C now, and if the deal goes thru, how many C shares will you have after the deal? How is this conversion to take place? Could somebody break it down? I mean if I have preferred stocks,,, when those stock convert to common stock sometime in the future, theoretically even if I sell it at 3.26 I will make money. So wouldn't it lead the common stock price close to 3.25 before conversion happens? In other words, Why would I buy now at 3.65 and wait the stock diluted by more future outstanding shares? They can sell at any price above 3.25 and still make money. Am I right! Please explain. Alright , here is a simple explanation . Lets say you own common stocks of citi and dilution takes place via conversion of preferred , then your stock holdings decrease in value; no doubt about that and don't listen to anyone who says otherwise. However, the management is doing conversion at a price which they think is fair value BUT the market might not agree with them. Market might think stock is valued higher or lower. Market might think that having equity capital means the balance sheet is strong and hence the price might increase after conversion or the price can even decrease if the market thinks that the problem is not solved. So now, the stock is priced at 3.65 while you can convert your preferred for 13.08 common avg price of 3.25, So what does it mean ? That the market thinks the stock should be valued higher. Ofcourse the management cannot keep chasing the higher price for conversion everyday as they have to go through regulatory approvals. So they stick to the price they announce couple of months back . (At that time, the market felt that the problem will not get solved, hence the price was sub 2) Having said that, it does not mean arbitrage opportunity is not there. One can short common and go long preferred till the conversion date, though it seems cost of borrowing has increased which wipes out the arbitrage. At the same time, for those who own the stock it might not be wise to sell it at 3.65 and buy preferred cuz maybe in a months time the price might again drop to sub 3 levels if the market feels so.
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