What do you guys think about a quick trade in AIG?
Best Answer
221 points
BryanPerry answered 11 months ago …
The last couple months of earnings reports revealed some companies that were in much better shape than the market had priced them. Most notably, the insurance companies have faired far better than the banks and brokerages.
It's true that the collapse of American International Group (AIG) crushed the sector, taking most names down with it, as fear of a domino effect took hold and I haven't recommended AIG at this point. But looking at some of the Q3 results, it is clear that there is some dislocation that deserves our attention.
While I can't give you the details of the trade, I did recently establish a bullish call option position on Hartford Financial Services Group (HIG), which offered one of the biggest upside surprises of the third quarter.
On Dec. 5, life-insurance stocks climbed sharply, when Hartford Financial became the second big insurer that week to allay investors' concerns that it might have to raise additional capital. The company said it had ample resources to maintain its financial-strength ratings even if the stock market worsens.
Shares of life insurers have been widely sold off in recent months because of concerns about steep investment-portfolio losses and charges against earnings tied to their businesses of selling variable annuities with guaranteed minimum returns. Met Life (MET) was the other big-name insurer to provide a reassuring outlook.
But, given these shortened holiday weeks, short-term traders can't get complacent with any trade -- when you see a profit it any name, your best course of action is to take it.
Answers
132 points
imgamekc answered 11 months ago …
AIG is still on shaky ground, why put capitol at risk if you don't have to ? Simply a case of if it looks too cheap it is a cheap stock. Long term turn around possible.. short term trade.. you would need something positive to bump the stock upward. I see none coming with the banks looking to post more losses for the first quarter of 2009. AIG wrote the insurance on a lot of those notes that are failing.
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3963 points
MNSL answered 11 months ago …
I think we must avoid insurance sector completely now. We have to think twice if we are going to handover our insurance, retirement and portfolio management to some insurance companies now. This sector is more vulnerable now.
In addition to insurance, we must avoid leasing, merchant and investment bank sectors as well. Of course there are few strong companies in these sectors and they will outperform the market. These sectors not only will underperform in a sector oriented bull markets but also in a future bull market. Next bull market will begin with completely different sector.
When there are newly identified promising sectors, it is not wise to invest in sectors such insurance sector now. Some insurance companies have exposure to highly risk instruments such credit default swaps. There are possibilities of becoming some insurance companies bankrupt now. Some of these insurance mangers have frozen public deposits and funds as well. Some investors are going to lose in massive amount.
Pl see following link as well:
http://www.rapidtrends.com/blog/credit-default-swaps-what-are-they-the-def inition-of/
Although AIG’s credit default swaps were really insurance contracts, they weren’t regulated. That meant AIG didn’t have to put up any capital as collateral on its swaps, as long as it maintained a triple-A credit rating. There was no real capital cost to selling these swaps; there was no limit. And thanks to what’s called “mark-to-market” accounting, AIG could book the profit from a five-year credit default swap as soon as the contract was sold, based on the expected default rate.
Whatever the computer said AIG was likely to make on the deal, the accountants would write down as actual profit. The broker who sold the swap would be paid a bonus at the end of the first year – long before the actual profit on the contract was made.
With this structure in place, the European bank was able to assure its regulators it was holding only triple-A credits, instead of a bunch of subprime “toxic waste.” The bank could leverage itself to the full extent allowable under Basel II. AIG could book hundreds of millions in “profit” each year, without having to pony up billions in collateral.
It was a fraud. AIG never any capital to back up the insurance it sold. And the profits it booked never materialized. The default rate on mortgage securities underwritten in 2005, 2006, and 2007 turned out to be multiples higher than expected. And they continue to increase. In some cases, the securities the banks claimed were triple A have ended up being worth less than $0.15 on the dollar.
Even so, it all worked for years. Banks leveraged deposits to the hilt. Wall Street packaged and sold dumb mortgages as securities. And AIG sold credit default swaps without bothering to collateralize the risk. An enormous amount of capital was created out of thin air and tossed into global real estate markets
