Shares of Citigroup are taking another run below $5, a critical point that could trigger mutual funds and pension plans to dump the company.
Most institutional investors—pension funds, endowments and the like—are prohibited from owning stock worth less than $5.
Citi stock is a staple of many such funds and could be battered even further should they decide to jettison the stock if it remains below that crucial level.
Citi's stock (NYSE: c) tumbled below $5 Wednesday as investors worried that that the bank's attempts to shed assets—such as the Smith Barney brokerage unit—won't raise enough capital to offset continued losses.
While many fund and index managers could choose to wait until the end of the quarter to decide what to do with Citi, some might act earlier should there be a pervasive belief that the stock won't regain its value.
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"My impression is if they really felt they had a fiduciary duty it's probably something they would do immediately," said analyst and venture capitalist Peter S. Cohan. "They might be looking at the trajectory of the stock in anticipation of it going down."
Citi is expected to post a loss approaching $10 billion for the fourth quarter, and many investors are wondering how it will weather the storm.
While the company's net capital position could help mitigate some of the negativity, there will be a strong temptation for institutional investors to dump the company should it continue to struggle.
But the company's market cap remains close to $30 billion and it is a recipient of federal bailout funds, putting it in a stronger position to continue than some of the other large banks that have folded in the past year.
"You probably would see fund managers, if they really like Citi, to hold out for the quarter to see if it pops back above $5," said Steven M. Roge, portfolio manager at the Roge Partners Fund.
Also, the question of whether to dump Citi in many cases wouldn't be made by the fund managers themselves but rather by the authorities who control what stocks are placed in individual indexes.
"We will continue to track the indxes, so whatever the indexes include is what the funds will be tracking," said Lance Berg, a spokesman at Barclays.
Still, questions remain and investors have shown a decided lack of confidence.
A looming ugly earnings report combined with sentiment generated by the Smith Barney deal to keep Citi's stock price in the danger zone.
"We thought Citi was OK with the TARP bailout. But now that we are learning that they are selling their proverbial crown jewel i.e. Smith Barney, what does that tell us?" said Peter J. Tanous, president and director of Lynx Investment Advisory. "That sends a very different message of a dire and urgent need for capital beyond the billions that the government has already pumped in. Clearly the message is that Citi is not out of the woods."