Stock market futures (in US pre-market opening) have shot up some points a few minutes ago. This is apparently in response to the deal reached on the bad assets and operating capital of Citibank (stock symbol C).

This will be a confirmation of the stock market bottom we called on this blog in the previous two posts (Nov 20 2008 for retirement accounts, and November 21, 2008 for during day trading accounts).

Terms of the deal between US treasury and Citi are apparently as follows:

300 billion "backstop" on Bad Assets

20 billion infusion at 8% per annum

We are not sure on the terms of equity stake by US treasury in Citi bank by US treasry nor on management changes, but the main points:

$20 bn preferred @ 8%, perpetual or redeemed in stock or cash

$7 bn of preferred stock with an 8% dividend rate as the "fee for guarantee"

Govt. gets warrants for 10% of the $27B of preferred stock, ie. $2.7B worth of common stock warrants. Ten year term, and warrants are not subject to eventual future dilution ( "The warrants issued to UST are not subject to reduction based on additional offerings.")

We think this is a good deal for all parties. Read below the discussion on dilution.

This deal is bullish for the stock market. The finance sector would get a strong rally tomorrow Monday. Our market calls in the two previous posts are then perfectly timed!

A question that should raised for stock holders is whether deal is dilutive or not. The answer is not clear as it depends on future performance. Warrants implicitely dilutive. The $20bn is not clear.

government receives 8% dividend/interest . This has to be paid. It can be dilutive depending on increase if earning as result of deal is less that interest/dividend paid.

Government receives 8% dividend/interest . This has to be paid. It can be dilutive depending on increase if earning as result of deal is less that interest/dividend paid. In near term it would be dilutive, but longer term it would not. Since stock is a perpetual option, stock will assess tradeoff tomorrow .

If market focuses on near term, stock price of Citi should go down, but we will see what the market will tell in 6 hours from now.

If C goes down, we expect it to hit a bottom and then head up. The $5 level might however create a problem as large holders are not allowed to hold stocks priced at $5 and less. If there is no reverse split, we expect the $5 level to constitute a resistance.

Therefore, we plan to buy the stock if it goes to area of $2, and sell it on rally, on the assumption that it would make 150% gains (multiplied by 2.5 at best).


Stay tuned, we will time it during market hours.

Before you leave make sure you subject to blog and also read the previous top posts in which we made the call that nailed the BOTTOM of Friday November 21, 2008.

PS: Enrollment is at no charge to you, and can be done by sending an email to marketwarnings (at) gmail (dot) com

To your profits!

1 comments

  1. Jds  

    November 24, 2008 at 8:49 AM

    Who writes this blog, Larry Summers?

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