Dazed and Confused

The trading situations of C preferreds and C common have generated many questions among readers, colleagues and financial advisers. Unfortunately, some in the financial press wouldn't know the causes of a technical trade situation from their hind quarters. Let's clear the air.


First Barron's reported over the weekend that the discount between the trading levels of C common and C straight preferreds (CprP and CprM) was due to a short squeeze and that the preferred prices would rally to close the gap as the preferred shares trade at parity to the exchange. Hold on there. Someone doesn't understand trading.

Although it is true that there is a short squeeze happening with regards to C common, it is deal uncertainty which is causing the dramatic discount versus parity of the trading levels of C common and C preferreds. This is not uncommon. When securities are called or a tender offer is announced trading prices are usually at a discount versus the prices announced in the terms of the deal. This is because that until a deal is done terms can change or the deal can be cancelled. To take on this uncertainty (deal risk), investors (speculators) seek to pay a discount to the final or proposed final price. For this reason it is unlikely for C preferred shares to trade at exchange parity with C common until the deal is done (assuming that the terms of the deal do not change). A Bank of America analyst is speculating that the terms do change. I have no idea if he will be proven correct, but for most income-oriented investors it makes no difference, owning CprP and CprM is not appropriate. Those who choose to time a technically-driven market deserve any pain they experience.


The Wall Street Journal, which has its moments (good and bad) correctly states why C common shares are rallying. The Journal states: Citigroup Inc. stock's upward momentum may continue longer than some market professionals are expecting -- and it isn't because investors have suddenly regained faith in the banking company's prospects.
Instead, Citigroup's plans to issue billions of new shares won't move forward until at least Friday, potentially prolonging a "short squeeze" that has been inflating the company's shares.



Again, as long as the deal happens in some form the dividends on CprP and CprM will be permanently eliminated. Now is not the time to wring every last cent out of the preferred shares. Now is the time to move on to new investments while there is a healthy bid for C preferreds. This will not last forever. It is very possible, if not probable, that common share prices will fall to parity with preferred shares once the short squeeze is over. Also, once the deal is done and the preferred dividends are gone for good and the shares delisted, bids will be quoted in pennies.



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