Citigroup, Inc. (NYSE: C) was believed by many to be on the verge of death just six short weeks ago.  But alas, the shorting and the selling doesn’t go on forever even if some feel this latest move is not going to hold.  There had been an ongoing question at one point earlier this year and even in November 2008 about what would happen if Citi shares fell under the $5.00 threshold based upon the marginability of the stock and the ability for many large mutual funds to hold the stock at that point.  Citi even got as low as $0.97.  But now we have a monster rally in the financial stocks, and suddenly there is a completely different question… What happens if and when Citi breaks over $5.00?

The long and short of it is that Citi is likely going back up over the $5.00 threshold either way.  The debate you will have to have now is whether Mr. Pandit and friends get the stock back up over $5.00 all organically via the merits of the banking sector or if it comes from inorganic means.  The inorganic method is going to be from this reverse stock split that is expected to occur.  And then there will be the “when-issued” status as well.

Regardless of how the stock gets back over $5.00, that threshold will likely have been crossed.  So you have to wonder who will win or which side of the equation will win.  Investors will be able to use it on margin again (many can still short it regardless), but suddenly many of the larger mutual funds can own it again if they decide to.  There are some funds and money managers out there which actually have a $5.00 limit as a minimum bid price on stocks.  This keeps them from owning many junk companies.  But with so many stocks breaking under $5.00 (and even the $1.00 listing requirements) it is a wonder of what these funds and managers did for their investment policies.  Did they make amendments or did they take an exception to the rule in this case because of the market free-fall?  Or did they just bite the bullet and unload it?

It will be interesting to see how this plays out.  We have heard how traders and arbitrage players have been making their bets that certain series of preferred stocks would be converted above and beyond what has already been seen.  The $5.00 threshold won’t really matter in that respect, but you have to wonder when you witness not a 100% recovery, not a 200% recovery, but more than a 300% recovery.  That is where we are now.

Citi is crushing those who have tried to keep pushing their bets against it.  Shares are up 16% at $4.42 today on massive volume.  We also have stock options expiration date this Friday.  When you add up the open interest of the $3, $4, and $5 calls for April alone you get a total of almost 900,000 contracts still listed as the open interest.  That represents another 90 million shares for those contracts alone on a fully leveraged basis.  Another factor to consider in price moves.

To make matters even more unpredictable, we have earnings coming out on Friday morning.  The government is actually looking like they timed the Citi investment rather well at this point.

JON C. OGG

Thank you for reading! Have some feedback for us?
Contact the 24/7 Wall St. editorial team.