Tuesday, March 30, 2010

Passing the Bucket: the Citibank bailout story.

In early 2009, the American government bailed out Citibank, the world’s largest bank, by buying treasury shares. The USA wound up with 25% of the outstanding shares and Citibank got $25 billion of cash in the kitty. (In addition to buying shares, American tax payers loaned Citibank another $20 billion. Citibank has already repaid that loan.) And this week, the US Treasury announced it will start to sell its 25% stake, 7.7 billion shares.

What effect do you think this sale might have on the price of Citibank’s stock?

Well, on the day the sell announcement was made March 29, 2010, Citibank shares dropped 3% with a trading volume of over one billion shares. One billion shares is hightrading volume for this stock, but it has traded over 2 billion shares per day several times in the past two tumultuous years. As a market technician, I judge today’s trading action to be a significant indicator of things to come, but not an outrageously obvious danger signal.

One of the most important influences on any stock’s price is the presence of a large seller or buyer in the market. The sheer size of gigantic buy or sell orders can move the stock’s price up or down. Big institutional traders know this, and use stealth in their buying or selling. But when a shareholder of the size of this one (the US government) sells a stake as big as this one (25%), securities law requires the big buyer or seller to disclose their intention so as to be fair to all the smaller shareholders. That’s why the US Treasury made this week’s announcement. If it wasn’t a legal requirement, it would have been more effective for them to sell their giant stake quietly, with no fan fare. But they couldn’t do it this time. They had to announce their intention.

How do you think potential new investors in Citibank might react to this news that a giant seller will be in the market place until it sells 7.7 billion shares? Would it not be logical for new investors to postpone their purchase in hopes that this mega-sale might push the stock price lower? If it were you, wouldn’t you delay your investment in Citibank for a few months just to see if the price drops? After all, if the share price were to go up, the US treasury would flood the market with its 7.7 billion shares and cool the price back down. The risk that a new investor in Citibank will miss out on a big rise in the price of the stock vanished when the treasury announce their sale. The real risk is that government selling will drive the price lower.

And what about investors who currently own the stock and have been thinking of selling? What should they do? Most will sell now, before the government sells. This week’s announcement has put a lid on the price of Citibank shares until the government’s selling program is complete.

The government bailed out Citibank in the 2008-9 banking crisis: and now they will try to pass the bailing bucket to the investors of America.

In my book, Beyond the Bull, I discuss why stock markets were invented in the first place: to help large investors sell large investment positions. The Citibank saga is a perfect example it. And now we’ll see how efficient today’s markets are at finding liquidity for those really big players.

The Chancellor of the Exchequer will be watching too, because the British government bought a huge stake in Lloyds Bank and the Royal Bank of Scotland. They will be hoping that the Citibank share sale goes smoothly because they have a big investment position to sell too.

What about the Bank of Canada? Does our government have any shares of giant Canadian banks to sell? No. Our banking system came through the 2008/9 crisis in relatively good shape.

And what about you: what should Canadian investors do as big governments distribute their bank bailout bounty to the world’s investors? Follow their lead: sell your bank stocks now, before the longer term effect of the American and British government’s mega-sales takes effect.

Ken Norquay, CMT,
Financial Philosopher
Market Street Investment House

Links for buying Beyond the Bull:

www.gobeyondthebull.com Bullmanship code: K44N

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