Citigroup Stock Sheds Its Tether After Conversion

(Includes closing stock prices.)

NEW YORK ( TheStreet) -- Anyone searching for an explanation to the dips and peaks of Citigroup's ( C) share price recently needs to look beyond the fundamentals.

Citi shares wilted Monday morning, the first day of trading after the bank completed a mammoth conversion of preferred stock into common. Its stock was down more than 5% at times in early trading, closing down 4 cents, or 1.5%, to $2.69.

The sluggish pricing reflected a few practical factors, despite bullish sentiment expressed by those analyzing Citigroup's fundamental ability to earn money.

First is the basic issue of supply and demand, with a tidal wave of new stock pushing down the price. The exchange offer is expected to bring Citi's total shares outstanding to 23 billion, vs. 5.5 billion at June 30.

Another factor at play is the arbitrageurs who were only holding preferred to reap the benefits of a pricing differential, but really had no interest in owning Citigroup.

In The Money
In The Money Chart
Source: Bloomberg

Once the stock conversion was announced on Feb. 27, investors flocked to get a piece of Citi's preferred stock that was eligible for the exchange. Its Series AA preferred security, eligible to be converted into 7.307 shares of common, soared $2.57, or 47%, on the day of the announcement, to close at $8.05.

The preferred series has traded in a wide, but profitable, range ever since the announcement, representing a premium of 55 cents to $12.50 over the closing price of common stock.

Some investors have also attempted to boost the profitability of the trade by shorting Citi common shares as well, though the availability of shares for lending has been too limited or too costly at times to make the trade work. Nonetheless, short interest in Citigroup surged from 0.4% on Feb. 27 to 1.5% just two weeks later. It has climbed pretty steadily since then, reaching a peak of 6.6% in July.

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