Short interest in Citicorp stock jumped again in the latest New York Stock Exchange tabulation, despite widespread sentiment that the New York bank company is in robust health.
During the month ended April 13 - which included the last weeks of a record profit quarter - the number of Citi shares sold short rose 3.8%, to 20.8 million.
The seeming contradiction - selling short is usually a bet that a stock price will fall - apparently illustrates a recent trend among investors toward the use of short positions for hedging other investments.
The Citicorp short position, the biggest in the industry, appears to reflect arbitrage activity related to its huge issue of convertible stock. Similarly, the second-biggest short position in a bank stock, in Fleet Financial Group Inc., Providence, R.I, is thought to also be a hedging strategy, reflecting arbitrage related to its pending acquisition of Shawmut National Corp.
Fleet Financial short interest totaled 12.8 million shares, according to American Banker's monthly survey of NYSE and American Stock Exchange data.
Short interest edged up in the shares of several other major banks, thrifts, and related companies but also dropped significantly at several.
Short activity, for instance, rose by 135% in shares of Chase Manhattan Corp., New York, but fell 59% for Bank of Boston Corp.
The activity in Chase's stock may reflect market conjecture that recent gains in its price are not sustainable. The price increase came in reaction to a larger stake in the banking company taken by Heine Securities, Short Hills, N.J.
Citicorp consistently posts by far the highest short interest level among the nation's banking companies, and its officials lately are taking pains to point out that as much as 75% of the position may be related to arbitrage. "We believe our normal short interest level is five to six million shares," said Milan M. Nanavati, Citicorp vice president of corporate finance.
The short play in Citicorp has expanded steadily for more than a year, he explained, since a $660 million issue of preferred shares issued in 1991 began trading freely in the market.
Shorting a stock involves selling borrowed shares with the idea of profiting if the position can later be "covered" by purchasing shares at a lower price than that realized on the borrowed shares.
Traditional short selling is a bet that a stock will fall in value. The activity thus has frequently been viewed as a yardstick of investor confidence in a particular company or the overall market.
But short positioning by market players is increasingly being done for different reasons, notably as a means of hedging against investment risk and as an arbitrage tool to secure profit in a long position.
Such appears to be the case with Citicorp, whose Series 13 convertible preferred stock, callable next Feb. 15, qualifies in Wall Street lingo as an "in-the-money convertible."
It is essentially common stock of the company offering a better dividend. The shares were issued during the bank's recapitalization.
Perceptive investors have been effectively locking in this better return by buying the preferred stock and at the same time shorting the underlying common stock.
The preferred stock carries a 10.75% dividend and a conversion price of $18.25. At a conversion rate of 2.74 shares of common for each share of Series 13 preferred, an arbitrageur needs to short 2.7 shares of Citicorp common in order to capture the higher dividend.
When the preferred issue is called, the investor can elect to convert those shares to common stock and then use them to cover the short position. The enhanced dividend stands as a guaranteed gain.
"We've been told by experienced people on Wall Street that 50% to 75% or even more of the underlying stock of this issue could be shorted by the time the preferred becomes convertible," Mr. Nanavati said.
Thus, nearly 75% of the current short interest in shares of Citicorp appears related directly to arbitrage in this issue.
Series 13 is convertible into 36,164,383 shares. Mr. Nanavati said he believes 14 million of these shares, or nearly 39%, are now effectively shorted, with the shorting of 10 million or more additional shares possible before the issue becomes convertible next winter.
Once the conversion takes place, the short interest in Citicorp's stock can be expected to plummet as related arbitrage activity ends.
Series 13 is one of two issues of convertible preferred stock sold by Citicorp in early 1991 and callable next Feb. 15. Series 12, a $590 million issue convertible to 36,875,000 common shares, is entirely held by a Saudi Arabian investor, Prince Walid bin Talal.
Behind Citicorp and Fleet Financial, Chemical Banking Corp., New York, was the banking company with the largest number of shares sold short. Short interest in Chemical stood at 7.5 million shares April 13, up 22.4% from a month earlier.
BankAmerica Corp., San Francisco, ranked fourth, with short interest of seven million shares, up 33.8% from mid-March. Norwest Corp., Minneapolis, was fifth, at 5.9 million shares, but that was down 2.2%
Lomas Financial Corp., Dallas, a mortgage banker, again had by far the largest short interest of any banking-related stock. The total short position in its stock would require 155 days of market activity to cover at the current daily trading volume.
Fleet Financial tallied the largest short interest gain, measured in shares, from mid-March to mid-April, with an increase of 4.3 million. Chase was second at two million.
In contrast to Fleet, the short activity in Shawmut National fell by 878,299 shares, or 39.7%.
Short interest in CoreStates Financial Corp., Philadelphia, which announced a major corporate restructuring, was cut nearly in half, falling 46.3%, to 1.3 million shares.
The highest short interest ratio for a banking stock was 37.3 days for Union Planters Corp., Memphis.
Since the short interest ratio is a function of the daily volume in a stock as well as short positioning, banks whose shares are less liquid tend to have higher ratios. Short interest in Union Planters totaled 676,827 shares.