American International Group- AIG
Here is my bold bullish play on AIG
American International Group, Inc., through its subsidiaries, provides insurance and financial services in the United States and internationally. It operates in four segments: General Insurance, Life Insurance and Retirement Services, Financial Services, and Asset Management. The General Insurance segment underwrites various business insurance products, including large commercial or industrial property insurance, excess liability, inland marine, environmental, workers compensation, and excess and umbrella coverages. This segment also offers various specialized forms of insurance, such as aviation, accident and health, equipment breakdown, directors and officers liability, difference-in-conditions, kidnap-ransom, export credit and political risk, and professional errors and omissions coverages. In addition, it provides property and casualty reinsurance products to insurers; automobile insurance products; residential mortgage guaranty insurance products; and second-lien and private student loan guaranty insurance products. The Life Insurance and Retirement Services segment offers individual and group life, payout annuities, endowment, and accident and health policies, as well as retirement savings products consisting of fixed and variable annuities. The Financial Services segment provides aircraft and equipment leasing, capital market transactions, consumer finance, and insurance premium financing. The Asset Management segment operations comprise investment-related services and investment products, including institutional and retail asset management, broker-dealer services, and spread-based investment products. The company was founded in 1967 and is based in New York, New York.
Today this stock has tanked on credit worries. In the last two days it has gone from $20 – $3. Bankrupcy is almost priced in.
Outlook This company is solvent (it can cover its debt obligations), it is simply ill-liquid. It has fantastic assets and it simply needs time – nothing else. If the Fed lets this company fail (and I am not pro-bailout for all of the others), panic will set-in.
They employ 116,000 people worldwide and it has over $1T in assets. With all that the Fed has done to avoid a financial crisis in the last year, a bridge loan seems like a slam dunk.
Tactic Buy AIG shares. They are trading for the price of an option. I believe the stock could rally to $10 or be worth $0. I see a 50:50 chance for either event and I am willing to risk $3 to make $7.
Buy and prosper! Happy Trading.
Andy
Market updates
This past week the markets leaped in both directions and this time the volatility worked against us…
The only good thing you can say about getting stopped out is that our losses were limited and now we’re on the sidelines safely back in cash. If we are going to bet with the opportunity of winning the tide is occasionally going to go against us—the key is to learn and improve.
One of the things I’ve noticed is that trying to time a reversal—like this past week on the XLF and the USO–is much more demanding than just jumping on board an existing trend and riding it. However when your timing on the reversal works the rewards can be greater.
With two losses this past week it’s important that we get positioned for winners this coming week—which is why our two new plays have extremely high odds of making us money no matter which way the market goes. You’ll see what I mean when you take a look and I’m really excited to show them to you—but before we do let’s take a good peek at…
WHICH WAY THIS MARKET IS HEADED
As you can see we’ve got two different stories going on right now. The SP-500 is weighed down by the financial sector and the recent drop in oil prices has brought energy down as well. Energy and the financials are by far the two biggest groups in the SP-500.
The Nasdaq on the other hand rallied +30 points on Friday bouncing off of its new uptrend support line. This is a bullish chart even after the mid-week drops in AAPL, RIMM, GOOG—and those stocks have already started to recover.
The bounce we saw at the beginning of last week can be attributed to relief that earnings have been better than expected–over 45% of the S&P has reported so far and 75% of those reporting beat estimates.
That is pretty good news on the surface but keep in mind earnings have still declined 17.8% for the quarter. And if you eliminate the energy sector earnings have fallen a very bearish 25.8% for the quarter.
And in spite of the rally in the XLF early last week the financial sector was expected to report an earnings decline of -60% but instead the bottom line dropped a mind-numbing 90%. Guidance has also been worse than normal with an almost unanimous view across all sectors that Q3 and Q4 will see lower profits. It is not surprising that the rebound failed on Thursday.
Lowered forward guidance brings into question the whole “the bottom is behind us” mentality that is currently keeping a bottom under share prices. Probably the biggest key is the labor market which so far has held up pretty well. We’ll get another look this Friday when the Labor Department reports on employment in July. In June, nonfarm payrolls fell 62,000, while the unemployment rate held at 5.5%.
Credit Suisse analysts expect a July decline in payroll jobs of 75,000. They forecast continued deterioration, and cited indicators such as a trend in initial jobless claims remaining at elevated levels and June’s decline in the ISM Non-Manufacturing Employment Index.
Plus the financials have not hit bottom regardless of any temporary jump in the XLF. S&P placed Fannie and Freddie on negative credit watch which is a pretty good indication they will lower their rating soon. With mortgages failing in record numbers Fannie has already raised $7 billion in capital and Freddie $5.5 billion. The government has pledged to help them and the Fed said it would open a special lending option to provide further support. Congress is expected to pass the housing bill including guarantees of up to $100 billion for the pair. Over the last year the government–along with Fannie and Freddie–have already put $1.43 billion of support into the mortgage market. As a result of the subprime crisis banks have already written off $880 billion and expectations are for that to climb to $1.5 trillion by the end of 2009—so by those estimates we’re little more than half-way through this mess.
One big indication that banks are still having problems is the Fed reported that bank borrowings at the discount window rose to an average of $16.38 billion per day in the latest week–the highest level ever. This is a strong indication banks simply cannot raise money in the private sector which means the credit markets are still locked up.
The Fed seized two more banks after the close on Friday and immediately sold them to Mutual of Omaha Bank. The two failing banks were the First National Bank of Nevada with assets of $3.4 billion and $3 billion in deposits. The second was First Heritage with assets of $254 million and $233 million in deposits. The FDIC said the estimated cost of the transactions to its insurance reserve account would be $862 million. Expect more bank failures to come.
In spite of a pretty serious situation there are signs of hope. The Durable Goods report for June rose by +0.8% when analysts were expecting a decline of -0.7%. This was the second month of positive growth. Unfilled orders also rose and the orders to shipments ratio is near its all time high. The inventory to shipments ratio is at its highest level since 2001. This was a very positive surprise.
Plus Consumer Sentiment for July spiked to 61.2 from June’s 56.4 reading–the first move higher since January. Analysts credited the tax rebate checks and a firming of home prices in many states. A reading of 61 is not great but it beat the tar out of expectations in the low 50s. Current conditions rose +6 points to 73.1 and expectations rose +4 points to 53.5. Inflation expectations remained high at 5.1% but appear to have eased somewhat from the first July reading at 5.3%.
The third positive report on Friday was the New Home Sales for June. New sales totaled 530,000 units–much better than the 501,000 analysts expected and better than the previously reported 512,000 in May. However, the Census Bureau revised the May numbers up to 530,000 as well as the April numbers to 540,000 from 520,000. This surprising improvement in sales was super news for a horribly beaten down sector. New home prices rose slightly to $237,871 from $231,087 in May for a +2.94% gain. Months of inventory decreased slightly to 10.0 from 10.4. Sales in the second quarter declined only 17% over Q1 compared to drops of nearly 40% in the prior three quarters.
The bottom line is we have data coming out heavily in both directions. If energy prices continue to slide for a few more weeks we could see more optimism in the consumer sector. However this economy is still in tough shape–the index of leading economic indicators, which attempts to forecast turning points in the economy–declined 0.1% in June with six out of the ten indicators falling. Until we see some growth this economy has not bottomed.
However the keys to market direction this week will still be earnings with nearly 750 companies reporting. This will be the heaviest week of the Q2 cycle although most of the largest companies have already reported. Earnings quality will continue to decline as we move farther into the cycle with the smaller companies reporting. This will also be a heavy week for energy earnings and those should be very strong.
So we’ve got the SP-500 looking bearish—although it may be helped by energy this week—and the Nasdaq looking bullish. The banks are still in trouble and crude has been falling—with so many counter-trends…
Trade with close stop next week everyone.
Andy Huang
Trade update
This has been a tough week for the market. We traded at a new two-year low and financial stocks lead the decline. There weren’t many earnings or economic releases to cloud the price action and it was easy to spot panic selling.
Friday, concerns over Freddie Mac and Fannie Mae are weighing on the market. These “government-backed” agencies will likely be bailed out and stockholders will be left holding the bag. In other news from the financial sector, rumors that PIMCO has halted trading with Lehman spread quickly and the stock plunged to $14. Fear surrounds the financial sector and investors are worried that the crisis might spread to traditional loans. Next week’s earnings will be dominated by financial stocks. Last quarter, worst-case scenarios were “priced in” and financial stocks rallied after posting dismal results. In the first chart you can see the April decline and rally.
Foreclosure rates spiked by 50% in June (year-over-year) and one out of every 500 homes is now in default. A big round of mortgage resets is taking place right now and higher interest rates could place even more pressure on homeowners.
The Fed has been preparing the market for tightening. A quarter-point rate increase has been priced into September bond prices and another quarter point has been priced in for October. Next week, the FOMC minutes will be released. If they indicate that inflation is the primary focus, the market will have a negative reaction.
Energy prices are placing a huge burden on our economy and they just won’t go down. This week, oil inventories showed a much larger than expected draw. The pullback in oil prices was brief over the last week and today we are right back up to $145 a barrel.
Next week, we will get the CPI and PPI. I am expecting to see an increase in the CPI. To this point, the PPI has been climbing faster than the CPI and companies have been absorbing higher costs. This will hurt profit margins this earnings season. Many companies have started to pass those costs on; however, they have cut back on production because higher prices are reducing the demand for their products.
The unemployment rate continues to climb and jobs are the cornerstone for this economy. Last week’s Unemployment Report was dismal. We lost 62,000 jobs in June and the numbers for April and May were revised upwards by 50,000. Fortunately, initial jobless claims came in better than expected this week. It is only a one-week number and I would not give it too much weight.
GE announced its earnings before the open and they met expectations. Unfortunately, cautious statements about the future are keeping a lid on the stock. This multinational conglomerate is representative of how earnings season should play out. Soft guidance worries me and profit margins for some companies could suffer since they have not passed on higher costs.
I am long-term bearish, however, I believe we will see a capitulation low soon. If you look at the second chart, you will see that the air pockets we experienced last month are gone. In the last week, we have seen volatile, two-sided trading action and prices are starting to compress. The bulls and the bears are fighting it out and we might be getting close to support. In order for us to find that capitulation low, the market must freefall. An intraday reversal with follow through rallies for two days would mark a significant support level. We might see that low and reversal unfold today.
I doubt that traders will want to hold stocks going into the weekend ahead of earnings next week in the financial sector. Fear is influencing trading and we could see a big drop today. The reversal would set us up for a bounce next week on the actual earnings releases. If you are going to trade this move, you need to have your stocks lined up. Look for situations where support has been established, the stock has maintained a long term uptrend and the stock has bounced during rallies. Biotech looks solid here.
Remember, this is a low probability trade. I am not looking for a sustained rally. Conditions (inflation, interest rates, unemployment, and earnings) are much worse now than they were in April and this bounce will be brief. As soon as the shorts cover, it will be time to get bearish again.
The better play at this juncture is to lighten up on short positions, wait for the bounce and then re-enter.
A whopping $3000 profit this week during a shaky market.
Trade updates
Here is my June option trading result.
I started June with just $629.29 in my account as a test project just to show everyone what option investing can achieve.
With the power of option, I get to capture downside/upside gains with very minimum risk. With the market free falling, I decided to long my put position and take short term profits right when I was able to capture the downside moves of the market.
I have ended the month of June with $4,659.62 additional profit. Almost 800% profit from what I have started. Not a bad month with what you are able to leverage on the downside.
I will keep a tight score card for the month of July since the market has hit official “Bear” market based on the technical indicators covered by major media in the news last week. Keep your eyes open for any rally, as you should short into any strength on retail, banking, financial, real estate, and high tech industry. Long your position on weakness on oil, gas, defense, energy, and farm goods.
Happy hunting everyone!
Andy Huang
Financial Market Commentary
For days we’ve had the “calm before the storm” as traders waited for the Fed’s decision. On Wednesday a decent durable goods number and an unexpected build in oil inventories helped spark a short covering rally. The “dogs were barking” and stocks that had been hit hard were leading the charge–but it couldn’t last. Last week we mentioned that the Fed was likely to keep rates unchanged and that it would lead to a short term rally–and we went on to advise taking advantage of that rally to play the short side. That advice paid off big-time by Friday’s close.
The big problem is the Fed pointing toward higher rates in the not-too-distant future–in fact a .25% rate hike has already been factored into September bond prices. Raising interest rates at this point is a delicate operation and they’ll likely want to see the impact of all those mortgage resets before tightening. 30-year mortgage rates have gone up 33 basis points in the last two weeks and a rate hike right now would force even more homeowners into foreclosure as they try to negotiate fixed-rate mortgages. The Fed just got done throwing the kitchen sink at the financial crisis and they are reluctant to change course because one false move right now and the whole house of cards comes tumbling down.
But the truth is they have no choice in the long run–inflation is everywhere and it is just a matter of time until it creeps into the core. On a producer level, the PPI has been “hot” for months. Traders took comfort when the CPI did not move up correspondingly. High food and oil prices have a ripple affect and manufactures are raising prices even if it means selling less product. Both FedEx and UPS said that fuel surcharges are responsible for higher shipping prices and demand is softening. Consequently, they both lowered earnings forecasts for the rest of the year. Dow Chemical announced that they are raising prices by 25% and they are cutting production. Customers are cutting back on their consumption as prices increase.
Meanwhile there is probably no sector that has taken a bigger hit than the airlines–Continental grounded 62 jets and it is laying off 3000 employees. United Air grounded 100 jets and it is laying off 1000 pilots now and 1400 more could be laid off soon. Imagine what this will do to ticket prices and think of the impact on the tourism industry.
In another inflationary development China just re-negotiated iron ore prices with Rio Tinto. Ore prices have doubled since the last negotiation while iron and metallurgical coal prices have skyrocketed leading to astronomical steel prices. Outside of the oil industry there are few if any sectors able to justify new construction. Oil prices dipped temporarily, but they have snapped right back and now look poised for new highs. Global demand outstrips global production while uncertainty in Iran/Nigeria and a hurricane-producing La Nina weather pattern will keep oil prices high.
Central banks around the world are raising interest rates and their economies are feeling the pressure. Global markets are rolling over and its hard to imagine where the strength will come from to avoid a deepening recession. Traders are gradually beginning to lose faith in the theory that global expansion will provide a soft landing for our economy.
The financial sector is getting pounded. MBIA and Ambac are toast now that Moody’s has lowered its rating. These mortgage insurers provided protection to other financial institutions and now that safety net is gone. This morning, Fortis (insurance company) said that they will need to secure additional financing. Last week, Fifth Third Bank said it needs to raise $2 billion. Today, Goldman Sachs said that it believes Citi will take another $9 billion a down and Merrill will take another $4 billion write-down. As the financial sector goes so goes the markets–we are in confirmed bear market until the financials turn around and that could be quite awhile.
The only thing holding this economy above water has been a decent employment picture–but that is changing fast. Jobless claims came in higher than expected and the four-week average sits at 378,000. Continuing unemployment claims rose to 3.14 million–a four-year high. If the unemployment rate continues to climb, our high debt levels will quickly push the country into a much deeper recession. Next week, we will get the Unemployment Report. Last month’s number was very weak and a repeat could push this market down to the double bottom support level established in March. Due to the holiday, the number will be released on Thursday. Traders will brace themselves for a worst-case scenario and the market is likely to drift lower ahead of the number.
Major technical damage has been done. The market broke below support at SPY 138 and it continued to drop, taking out a horizontal support at SPY 132. That was a key support level for two reasons: SPY 132 was the capitulation low from March 2007/August 2007 and in April, we saw two large up gaps from that level as buyers stepped in with confidence. This time around, we only saw a brief bounce from that level and now the “bid” is gone. On a five year chart, a head and shoulders pattern has formed and the neckline has been breached–when major technical patterns form on a five year chart, they need to be respected.
The good news is no matter how dire the economic situation you can make some serious money as the market falls–Trade well and lock up your put positions.
Andy Huang
Dow sink more than 358 points
The stock market today tanked 358+ points or 3% to a new 52-week low. Moving in the other direction, crude prices hit a new intraday record high, crossing the $140 per barrel threshold right after the market have closed in the after market.
Large-cap tech names were among the session’s worst performers as the Nasdaq 100 fell more than 4%. Research In Motion (RIMM 123.46, -18.88) down more than 13% to its lowest level in two months. The company disappointed investors by reporting earnings per share results that were a penny shy of the quarterly consensus estimate. Meanwhile, Oracle (ORCL 21.42, -1.13) disappointed its investors with an underwhelming forecast.
All ten of the major economic sectors finished markedly lower. Five sectors closed with losses in excess of 3%.
Financials (-4.4%) were the session’s worst performing economic sector. According to reports, Goldman Sachs stated Citigroup (C 17.67, -1.18) may incur additional write-downs and may also raise more capital, while Merrill Lynch (MER 33.05, -2.41) may need to raise additional capital as well. Shares of C were added to Goldman’s Conviction Sell List, according to Dow Jones; the stock hit a new 52-week low today.
Also hitting a 52-week low were shares of Dow components General Motors (GM 11.43, -1.38) and General Electric (GE 26.53, -1.46). Goldman Sachs cut estimates for General Motors, while The Wall Street Journal reported GE is having difficulty selling its credit card business.
We have broke all the march low and the market is heading for a breakdown. Be sure to prep yourself with July, Aug, September put position to hedge against weaking economy.
There will be more downside profits to be made in the financials, BAC, C, WB are my top picks for put postions. MMM is also breaking down its support, this stock is heading lower on increasing volume. Make sure you enter your position on any short rally day.
To your success!
Andy Huang
My trading update
Last week I have mentioned about weakness in the banking sector, as I have long a few put position on Wachovia stock hitting a 16 year low.
Here is my result for just few days of trading. $1,167.45 risked to $2922.50 realized. 250% gain in just a short few days. Make sure you continue to scout out the weakness in the financial sector and hedge yourself with more profits in the month of July.
