Friday, August 21, 2009

AIG: Gives new meaning to volatility

I watch the markets carefully and with a lustful eye. I just finished graduate school, so I’m not overflowing with funds which mean I don’t have the extra cash to trade. Buy and hold will have to make do, and I’m doing exceedingly well with that (up 70 percent since the inception of my Scottrade account). I know that high return is heavily influenced by the date that I chose to start (mid-October 2008), but it wasn’t the absolute bottom and my return is better than the market return since then.

Anyway, the stock that has caught my eye lately has been AIG, the failed insurance giant. Looking further, I found that it has a beta of 3.59! (source: Yahoo!Finance). Thinking on it further, this is probably heavily influenced by the steep decline from ~500 to ~100 in just a few short weeks last fall. Also, it has 24.9m shares short out of a float of 134m (~19%), which leaves a big squeeze play on the table and helps to generate those huge swings. Still, in the past two weeks it has moved 20% a day multiple times. In fact, I advised a friend (who does have the money to burn) to purchase a small amount around 23 this week. He called me last night and said “whoa! That baby can move! I’m already up over 30%! Thanks, man!”

My thoughts on AIG: I think it is going to become ever more profitable as the credit crunch abates (realistically not until FY 2010), which will relieve AIG's creditor requirements that they post significantly more collateral on the CDSs. Who cares about that even? They hold $119b in cash (I know, I know, government money but it can be used for investment purposes). I think that 2Q earnings were no fluke, that they can be repeated and that the stock is so-so at $32/share. If I were holding it now I would target $40 and take my profits. Mostly because I am already skiddish about this fall's entire market outlook, but more on that later.

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