Tuesday, November 27, 2007

This is Why They Call It Turnaround Tuesday


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Markets are bouncing up today (ie. on Turnaround Tuesday) because of this tidbit of news:

Breaking News from The Globe and Mail
Abu Dhabi fund pays $7.5-billion for 4.9% stake in Citigroup


Tuesday, November 27, 2007

NEW YORK — — Citigroup said late Monday that the Abu Dhabi Investment Authority will invest $7.5-billion (U.S.) in the largest American bank, offering needed capital to offset big losses from mortgages and other investments.

The cash from the sovereign investment fund of the Gulf Arab state, which has been a beneficiary of this year's surge in oil prices, will be convertible into no more than 4.9 per cent ofCitigroup Inc.'s equity. Citigroup characterized the investment as passive and said the fund will not be able to name any board members to the bank.

The Investment Authority would become one of Citi's largest shareholders.

The Abu Dhabi investment, which was expected to close within the next several days, will be considered Tier 1 capital for regulatory purposes, helping Citi reach its goal of returning to its target capital ratios in the first half of 2008, the bank said.


"We see in Citi a highly respected company with a premier brand and with tremendous opportunities for growth," said the Investment Authority's managing director, Sheikh Ahmed Bin Zayed Al Nahayan. "This investment reflects our confidence in Citi's potential to build shareholder value."

Charles Prince stepped down as Citigroup's chairman and chief executive on Nov. 4, the same day Citi announced that it will likely write down the value of its portfolio by $8-billion to $11-billion in the fourth quarter.

In the third quarter, the bank's exposure to assets tied to subprime mortgages led to a loss of about $6.5-billion.

The Investment Authority will receive equity units that pay an 11 per cent annual yield until they are converted into Citigroup common shares at a price of up to $37.24 a share between March 15, 2010, and Sept. 15, 2011.

The overnight session in ES went up well over 3hours before this news hit all the feeds. Note also that the price that Abu Dhabi paid for 4.9% of CitiGroup values CitiGroup at just over $30.72, which is a couple pennies above its closing price on Monday.
So far, it looks like the bulls are resilient in defending the 1415 level . Can this be the catalyst to turn the market around ? We'll have to wait and see what happens on the
inevitable re-test of the 1410-1415 level which should occur in the next week or two. The re-test will tell us whether we have bottomed or not.
If my theory about how Fund Managers do tend to act like lemmings turns out to be correct, then there should be a few fund managers coming out of the woodwork (or sellers now converted to buyers) who will start some buy programs over the next few days on the rationale that "well, this other fund is buying now." Let's see what happens.


Denarii said...

tuesday is not over yet

Phileo said...

Hi Denarii,

good point, there could have been a last hour reversal. I was speaking more to the general time of week pattern where on Tuesdays, the market often behave the opposite of Mondays.
Since I'm hearing and reading more and more news about a possible recession, even I am not too optimistic about today's bounce. But, as always, the market will tell us the answer.