C Convertibles at 11% for $7.5 Billion

There seems to be a lot of ground to cover this evening especially with the recently released news from Citigroup (C). So, let's start with that and work forward and backward from there.

As you will no doubt hear on Tuesday, C has received a cash infusion to help it with its short term capital issues which it has said it doesn't need help with and will have resolved by midyear 2008. C has been falling all year from 57 early in the year to Monday's lows just under 30. Now, tonight according to the WSJ, an investment arm of the Abu Dhabi government is investing $7.5 billion in C. As we write this, the US futures jumped on the news but let's take a closer look at the deal.

ADIA (Abu Dhabi Investment Authority) is going to get convertible securities from C that will yield 11%. One sweet deal. This is what the WSJ had to say:

"In exchange for its investment, ADIA will receive convertible stock in Citigroup yielding 11% annually. The shares are required to be converted into common stock at a conversion price of between $31.83 and $37.24 a share over a period of time between March 2010 and September 2011."

The Asian markets don't seem overly impressed with the news and our futures are not quite as high as they were an hour or so ago.

If the financial stocks take this as good news on Tuesday, which seems difficult to believe on the surface, then we may have seen the lows for this move. As always, it is month end this week and as we move into the first part of the month we sometimes see a rally. The stock market is extremely oversold and could rally on this news just because of that. We still don't know that is what will happen.

Based on Monday's action, the stock market certainly seemed to want to rally in the morning but after the news from HSBC, there was some hesitation in that point of view. HSBC announced that it was having trouble with some US mortgage investments in its SIV and has decided to buy some of the SIV's assets rather than risk a fire sale on them.

The stock market didn't like that news and pushed the higher futures down so that the open was flat to down. But, as is so often the case, the buyers came in. They were in control for about a half hour before sellers took over and then there was a little fighting back and forth for control until a couple hours before the close. That's when the market fell out of bed with the Dow dropping over 200 points after running up 180 points on Friday. All of that may be up for debate as we go into Tuesday.

We have been watching the pattern developing in the stock market and see that the August Dow lows have been holding in this last few volatile days. Yes, we did see a new "closing" low but the real intraday low is still untouched as far as the Dow is concerned. Given that the market wants to put in a low here, and it certainly could, there is ample room for it to move up to alleviate the oversold condition. We noticed that the FSI seems to have bounced off its lows as well. More after we see Tuesday's trading.

In the mean time, we have a couple of comments on the SIV's. We received an email from one of our readers last week who asked about whether one could tell if you have a SIV in your money market fund or any exposure to subprime debt. The first comment is that SIV's are the fund that operates by borrowing short and investing long. So, they would go to your money market fund and get money from there to fund buying something with a longer term, recently that would have included subprime mortgages of one kind or another.

Money market funds generally loan out cash to corporations that are in need of some short term float. Many times the corporations just roll over the debt since it is normally 30 day "paper" or commercial paper. Normally this is ok debt to hold because these corporations are good at paying off short term debt. If a SIV is the borrower, that's where the problems started to occur. We need to put off the rest of this discussion. We will make it the main topic for the week and add more info over the next few posts.

There is much to discuss and for your homework assignment, we received another email from the same reader who sent us this link discussing CDO's. There is a CDO primer article built into this article but we are providing that link here, too. Good reading material and thanks to our readers who help make this blog so good.

FSI: 100.16 (holding up pretty well)