In This Edition...

• Trading Idea - Timing is Everything 
• Trade Updates 

Timing is Everything: A Tale of Two Citis

If you've been kicking yourself because you missed out on the 100%+ rally we've seen from financial stocks since early March, don't worry - I think I've got a way for you to turn back the clock and get in a certain financial stock at March's prices. 

There's no two ways about it - Citigroup Inc. (C) has been a mess throughout the recovery effort. Not only has the stock failed to rally, but each passing day seemed to bring about yet another headache for its investors. 

That could change within a matter of days though, and I believe now could be the perfect time to become an investor of Citigroup... sort of. 

I'm not going to get into all the mechanics of it, since it's really not the important part. However, if you've been wondering why Citigroup shares have flat lined while the rest of the market has flourished, it's simple - most of the market knows there are more than 17 billion shares waiting in the wings to flood the float (i.e. drive the price lower, by short-selling pressure if not just plain old selling or dilution). 

See, last year - in desperate times - Citigroup raised capital by issuing a wild amount of preferred convertibles... enough convertibles to raise the number of issued and outstanding shares from 5.5 billion to 17.4 billion. 

At the time it made sense, but in retrospect, setting the conversion price a few cents under the stock's price just invited all sorts of arbitrage ('owning' the converted shares at a certain price, and selling/shorting the existing shares at a price a few cents higher).

The problem? If all this preferred stock is converted and used for arbitrage, the supply would be waaayyyy greater than the demand. Thus, down goes Citigroup shares - hard. I probably wouldn't touch them either. 

To get around that problem of driving Citigroup shares into the ground, the New York Stock Exchange recently listed a 'Citigroup When Issued' equity. 

The idea is that all those traders who were looking to capture some arbitrage profits could short the 'when issued' security rather than regular 'C' shares - of which there aren't enough - and then cover those trades by delivering shares when the preferreds are converted (which is not an instantaneous process). 

Now, if you're equipped to do your own arbitrage then be my guest, but that's not exactly my recommendation. My suggestion is to become a long-term owner of Citigroup now that we can see the arbitrage/conversion isn't going to crush the stock. 

See, Citigroup isn't a terrible company - it just failed to rally with the rest of the financials because the potential arbitrage pressures were just overwhelming. Now that arbitrage players and hedge funds have a liquid exit path, we don't need to fear the stock. In fact, Citigroup will actually be very well capitalized once all this preferred/conversion business is done. 

I think the market is going to put two and two together though, and soon. This 'when issued' convertible unwinding process is getting underway right now, and it's my understanding that the window will close by the end of this week. Once all the dots are connected, Citigroup shares could finally catch up with the other financial stocks....by rallying. 

So, in my opinion now's the time - as in this week - to step into a trade. 

And almost needless to say, since the 'when issued' Citigroup will eventually become regular Citigroup shares, you may as well save yourself a few cents and buy the 'when issued' version. Check with your broker regarding the ticker for the 'Citigroup When Issued' shares though - it seems to be different on each trading platform. 
 

Trade Updates

Picking up where we left off last time, today we're going to update some of the trades we didn't get to talk about in our previous newsletter.

Oramed Pharmaceutical (ORMP)

It's not a problem yet - just an observation... our ORMP long trade seems to be hitting a ceiling around 60 cents. That's where it peaked last week as well as in May. 

The retreat from that high has been mild, and we're even seeing another effort today to attack that potential wall. I'll just feel a lot more confident once I see the 60 cent mark toppled.

I think at this point we can push our stop up to the support level around 45 cents.

Management Energy Inc. (MMEX)

I had a good feeling about Management Energy Inc. (MGEG) back when we bought it as MGMT Energy (MGEG), but I had no idea we should expect anything this big. Our gain (based on the split-adjusted entry price of 78 cents) is now 62%.

The one concern I have here is fading volume. The stock's going higher, but the buyers are becoming rarer. On the other hand, it's still too soon to get out.

That's my convoluted way of saying please keep a tight stop in effect for this trade.

Agilent Technologies Inc. (A) 

You have to get in the time machine and go back to January to find this trade's origins. We got in at $19.12, and after a big rally over the last few days we're up 21%. 

In the short run the chart looks overbought, and Agilent isn't the kind of stock that continues to rally when it's in that shape. In fact, I'm thinking we should actually play some defense here now that we have profits to protect. 

It seems like the $20 level has been support as well as resistance lately, so let's just draw our new line in the sand (a stop) there.

Other quick notes that don't quite deserve a chart...

• Our Sierra Bancorp (BSRR) short trade is still profitable, but the stock has started to creep higher this week. Just be sure you have a stop in place to protect those profits - I don't like what the bulls are trying to do here. 
• Don't sweat today's pullback from US Gold Corporation (UXG). It was overextended, and needed to cool off. 
• I can't complain about the Grupo Simec S.A.B. de C.V. (SIM) trade, as it's profitable for us, and continues to migrate in a bullish direction. I'm just a little disappointed in how slow it's been moving. It sure beats the alternative though, right? I'll keep following it as an open trade all the same.