Citigroup Reverse Split Proposal Announcement 03/19/2009

Today there was a Citigroup reverse split proposal announcement that I heard about while I was eating breakfast and watching the financial news on television (can you say "Financial News Junkie?").

Updated May 2011 Note: This article was written in 2009 as noted in my heading above. A little over 2 years after this article was written, Citigroup did actually begin trading post-reverse-stock-split. I've added 2 additional articles relating to the May 2011 news here: Citigroup Announces 1-for-10 Reverse Stock Split and Citigroup Begins Trading Post 1-for-10 Reverse Stock Split May 9, 2011.

While I have seen actions like this taken by companies in the past, a lot of people have not. Even those who have, seem to get caught up in the announcement rather than stepping back and analyzing why this action is being taken in the first place.

I understand this type of reaction though. People that know me have always said that I analyze things too much.

I know I would have been a great Financial Analyst, as long as the firm I worked for allowed me to report what I actually found out.

In reality, I probably would have had to quit and start my own firm because I would have been told to report what someone else wanted me to.

As long as you have not been in a cave for the last year or two, you and I know that Citigroup (C) has been bleeding cash and the stock price has been declining for many months now. For those of you that don't know, the 52 week high is $27.35 and the 52 week low is .97 as of today.

Since hitting the low of .97 on March 5, 2009 less than 2 weeks ago, the stock has risen more than 200% and closed yesterday at $3.08. In pre-market trading this morning, the market and C were continuing their recent rally and moving higher.

On the Citigroup Reverse Split news announcement this morning around 7:30 a.m., the stock price initially moved lower, but only to around $3.00 which was near support at yesterday's closing price. After the initial move lower, C steadily climbed to a high of $3.89 this morning around 9:45 a.m. That's a 26% move higher from yesterday's closing price.

When I heard the news announcement, I knew that if the stock moved higher, it would probably be an exaggerated move without even looking at the chart (most moves on news announcements are usually exaggerated). I then thought that on the basis of the reverse split announcement alone, there should be no move higher as the shareholder value will not be changed and nothing has changed fundamentally with the company, at least at my first impression. I also know that stocks do not always move on logic and results of proper analysis, if any at all.

When reading the news announcement, one of the sentences that caught my eye was this "Assuming the maximum amount of the conversions are made, existing common shareholders would see their holdings diluted by nearly 75%, with the government becoming the largest holder at 36%". Now why would the stock move higher if investors and traders read this?

The answer lies with the fact that stocks move irrationally at times and that if you want to survive in today's investing and trading environment, you must realize this.

As I write this, the share price of C which hit a high of $3.89 this morning, is now moving lower as I expected. The share price has gave back all of today's move higher and is now in negative territory, and it is only 12:00. Here is a chart from today so far:

Citigroup Reverse Split

I don't know about you, but this Citigroup Reverse Split news announcement doesn't change my view of Citigroup's ability to run a business. As a matter of fact, today I profitably traded FAZ counting on this type of reaction.

Longer term, if the markets pull out of the long downtrend they've been in, then Citigroup will likely rise with the tide, but for how long?

For more information on understanding a reverse stock split and to see what can happen in the the months following this type of move, see my other page I recently added here: Reverse Stock Split.

Return From "Citigroup Reverse Split" To "Market Commentary"

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