CITIGROUP FLOAT MANIPULATION

Fri, 20 Mar 2009 11:19:17 -0600

Citigroup Float May See Dramatic Upside Velocity

Never underestimate the unintended consequences of a change to the number of shares outstanding and the resulting float. Citigroup finds themselves right in the middle of this phenomenon. In a financial environment that is anticipating new mark to market accounting regulations on April 2nd the Citigroup float is a major issue to understand. Less float means more directional velocity. If the direction for financials is heading up, the 36% stake by the U.S. government in Citigroup will put additional upside pressure on the stock. Not good for shorts, very good for the long side speculators.

It is expected that in April Citi will exchange $27.5 billion in preferred shares to common stock and the U.S. government will tender up to $25 billion of its preferred holdings into common stock. This scenario would give the government a 36% stake in the company and it would increase the number of shares outstanding from the current 5.5 billion to anywhere between 13 billion and 21 billion depending on how many investors participate. http://www.forbes.com/2009/03/19/citi-reverse-split-markets-equity-citigroup.html?partner=yahootix This dilution is positive for Citi because their tangible common equity will rise to approx. $81 billion, up from $30 billion at the beginning of 2009.

With all of this dilution Citi is at risk of becoming a stock that is virtually impossible to move because of the ridiculous amount of shares outstanding. However, this week the company announced they will be seeking shareholder and government approval to do a reverse split with a range anywhere from 1-for-2 to 1-for-30. This move makes a lot of sense for Citi. It’s looking like they may end up with a total number of shares outstanding below the current 5.5 billion, it could end up lower than 1 billion and the government would have a 36% stake.

Until now, most have viewed the government stake as a negative for the stock but that perception might change quickly. A float of less than 1 billion with 36% of it stable. The government won’t be selling, and most other investors who have ridden this stock down to its depths won’t be selling either. It is conceivable that 80% of the shares outstanding won’t be sold in the near term which leaves only a 20% float for investors to buy and sell. Many firms try to manipulate their stock price by restricting the percentage of tradable float. According to a research report release by Robin Greenwod of Harvard Business School, “prices rise when the float is contracted and fall when the float is released.” For a current example just look at the price action of Sears. CEO Eddie Lampert has been buying back shares for years and has dramatically reduced the available float. As a result, Sears has been able to keep its stock up near $40 a share even though most on Wall Street feel it should be in the single digits. Citigroup appears poised to be the next stock to experience the gift of a tight float. If financials do rise, expect Citi and also AIG (government has a 79.9% stake) to be the percentage gaining leaders because of the unintended consequences of government ownership on their price velocity.

Apple netbook coming

Thu, 12 Mar 2009 11:44:45 -0600

APPLE NETBOOK TO FILL THE NEWSPAPER VOID

As a dedicated reader of newspapers since I was 5 years old it’s really sad to see the downfall of this great American tradition. Print subscriptions are way down, ad revenue is drying up, and Americans are becoming more and more accustomed to the up-to-date news found on the Internet. The New York Times stock is down below $4 a share. Gannet, the owner of USA Today is down to $2 a share. McClatchy, the owner of papers like the Miami Herald, The Sacramento Bee, and the Charlotte Observer is down to $.45 a share. Mike Simonton, an industry analyst, says “In 2009 and 2010, all the two newspaper markets will become one-newspaper markets and you will start to see the one-newspaper markets become no-newspaper markets.’ (NY Times).

In the end, we all knew that mainstream reliance on newspapers couldn’t last forever but it’s still hard to watch. As if newspapers didn’t have enough to worry about, now they are about to get hit by the Apple train. Reports that Apple is ordering 10-inch touchscreens have been confirmed by Dow Jones, The Wall Street Journal, and Reuters. Many are speculating that these will be used for Apple’s new netbook but I think this device will be much different than what we’re used to seeing in the netbook space. As Apple has done with the Mac, the iPod, and the iPhone, I expect them to revolutionize this sector of the market.

There currently exists a major void of access with the Internet. I’ll call this void the newspaper void. Newspapers are the perfect size to read and they’re portable. The iPhone screen is not the perfect size to sit down and read a newspaper, I’m good for ten minutes of reading on the iPhone screen; anything more is too much for my eyes to handle. It’s great as a quick reference, but it is primarily a phone. My laptop has a good sized screen but the clunky keyboard and lack of universal WiFi access make it hard to use as a newspaper replacement. This new netbook/tablet/E-book reader/whatever you want to call it will fill a niche. Users will be able to take it on the Subway, take it in the car, take it on the back porch, take it to breakfast, take it to the pool, take it wherever you would normally go to read a magazine or newspaper.

Apple has seen enough evidence that the netbook space is big enough for them to enter. IT research company Gartner, expects PC sales to drop by 12% in 2009, but they don’t think that drop will come from netbooks. In fact, they are forecasting netbook sales to grow from 11.7 million units sold in 2008 to 21 million in 2009. In this recession, consumers are shopping price and Apple will benefit from having a sub $600 alternative. I would imagine that this device will come with a built in 3G Internet connection so that universal internet access is not a problem. It won’t have a keyboard like the other netbooks do, and it won’t be made to do much more than read the news from the Internet, watch television shows and movies, and play games from the app store. Once again, Apple is the true innovator or the technology revolution going on in this day and age.

BUBBLES

Fri, 6 Mar 2009 11:03:27 -0700

THE BUBBLE OF UNCERTAINTY ABOUT TO BURST; PART 1

We are in the decade of the bubble. This new bubble, which I call the ‘uncertainty bubble’ is different because its price action is negative, but the bubble-like characteristics are all the same. Once mainstream momentum attaches itself to a cause it will run beyond what is fundamentally expected. This bubble has been especially dangerous because there is nothing that investors despise more than uncertainty. The bubble of uncertainty has caused a rather dramatic stock market selloff but this bubble is about to meet the same fate as its predecessors-it is about to burst.

THE OBAMA EFFECT

Back when the Presidential campaign began nobody knew for certain who Obama was or how he would govern. He was inexperienced and hadn’t voted his opinion very often. He was the ultimate candidate of uncertainty. This worked to his advantage in a brutal campaign where all sides were trying to distance themselves from the Bush administration. In a weird way, this anti-Bush obsession inadvertently turned anti-American. The perception became one of American despair, American fear, and American greed. As a result, the majority of Americans became obsessed with finding an anti-Bush replacement and they knew they had their man in Obama. Ironically, many people paid no attention to the details of what he said, instead they focused on his tremendous ability to articulate, to inspire, and to lead. Even moderate voters jumped on board, not because of any particular policy ideas but because they yearned for change. Let’s not kid ourselves, we all know there was a tremendous ‘cool factor’ in supporting Obama. It was a historic moment. But the true reality of how he would govern remained a mystery.

THE LARRY SUMMERS EFFECT

In trying to uncover the mystery of Obama governance, many supposed that this recession would protect us from his liberal agenda but it hasn’t. If anything, it has emboldened it. Much of this can be attributed to his top economic advisor, Larry Summers. Summers is a seasoned veteran. He learned a lot during his days in the Clinton administration. As a member of the Clinton cabinet he witnessed how Clinton was handcuffed by the economy he inherited form Bush Sr. Summers knows that if you are a slave to the recession you will never accomplish your goals. To Summers and Obama the liberal agenda means everything. It’s more important than re-election. Those who were hoping for a repeat of Bill Clinton; a President who talked liberal but governed as a conservative have been let down. Obama is not Bill Clinton. He is the opposite. He talks in a way that moderates can agree with but then he governs as a liberal. Wall Street has been stunned by this realization as they don’t know what to do with a President who is more concerned with the lower and middle classes than he is about them. This situation has led to a lot of negativity coming from Republicans and the conservative media but one good thing is happening. The uncertainty of Obama governance is slowly dissolving away. Even if you don’t like how things are shaping up it’s important to remember that any plan is better than no plan.

THE OBAMA STOCK MARKET

After a miserable 2008 many assumed that the market could never have a repeat performance. So far, it’s been worse. January was the worst January in history. The market has now dropped in 21 of the 32 days Obama has been in office. Uncertainty spread from the campaign trail into the banking sector. So many unknowns made it virtually impossible for investors to make intelligent decisions and so the selling has continued. As Warren Buffet says, in the short run the market acts as a voting machine but in the long run it acts as a weighing machine. We all see the negative vote but we are now at the point where another significant move down in the stock market represents the pricing in of events far worse than a recession. Our economic backs are against the wall. The bubble of uncertainty will burst as detailed solutions replace the unknown. It’s important to remember that Obama ran a flawless campaign and he has been very actively engaged in solving the chief problems of this crisis: banks, unemployment, and housing. It doesn’t happen in one day but the gradual process has begun and will soon start showing results. The market will transform from a voting machine to becoming a forward-looking, fundamentally driven entity that is able to compare itself year over year with the 2008 recession. Historically speaking, the current economic fundamentals do not warrant a 60%+ market selloff. Economic history is telling us that we are in bubble territory and that the potential for a burst is very real.

CONCLUSION #1

Ford sits at $1.85. GE is at $6.85. Bank of America is at $3.30. CBS is at $3.40. A host of other former stalwart stocks are priced in the single digits. If Washington’s long term plan works to restore any form of certainty in this economy then these stock prices represent a great buying opportunity. If Washington can’t do this it means we are on the verge of the second Great Depression. The 2009 selloff that has taken us from Dow 9,000 to Dow 6,600 is based more on uncertainty and negativity over who Obama really is than it is based on economic fundamentals.

CONCLUSION #2

Investors need to understand that times have changed. This decade of bubbles has changed the investment climate of today and it has altered the way investments should be handled in the future. The days of buy and hold are over because of the real risk of 40% drops in the stock market. We have now had two of them in the last eight years and the potential for a third is on everyone’s mind. I have written up a stock investors handbook that is available if you click here (http://web.me.com/jzapple/Economic_Weather_Station/Investment_Products.html). This handbook will help you to adapt your investing strategies to the new, extremely volatile environment that these bubbles bring.

JASON SCHWARZ
DISCLOSURE: NONE