AIG is moving into positive territory

AIG stock is flying up again( about 22% up as of right now) in anticipation of good earning s for Q2. Analysts estimate is 1.31 per share which is higher than for many companies in S&P 500. It could be the first positive quarter since the monumental collapse last year. I have been waiting for this moment. Lets see what the actual earnings are though. But if its going up right now chances are that good news already leaked somehow.

Journalists Blaming Short Sellers While The Later Use Them

Some journalists never stop to amaze me. Many people falsely believe that journalists write for them. In reality they just write for themselves because they enjoy it or simply to get paid. The name of the article will be choosen simply to attract your attention.

Gavin Manor for example in his today's article the name of which speaks for itself "Is It Safe? You Can't Get Worse Than AIG" makes some interesting points. The first part of his article
consists of repeating all the bad news about AIG from last week. Then he goes on and says the following:

"AIG's stock doesn't usually move on the basis of anything fundamental. It's now at its most dangerous, prior to second-quarter results, with speculation that it might book enormous losses again. Amended financial statements filed for 2008 indicate that the $193 billion value of its credit default swaps may lead to more losses if credit markets continue to deteriorate.
Short sellers saw this weakness and pounced. But a stock squeeze led to the price rising just as dramatically. No individual investor should buy AIG at the moment, unless day trading while wearing Teflon pants. Analysts' consensus share-price estimate is a questionable $108.50. The stock is trading 87% lower, suggesting short sellers may still be on the prowl. "

Mr. Manor, If I was a shortseller I would put you on a payroll. Allow me to ask you, do you think stock prices always move on the basis of fundamentals ?
George Soros of the greatest investors of our time in his book "The Alchemy of Finance" says that the opinion of everybody about particular stock is always biased. The bias of course could be either positive or negative. But what dominates is usually what he calls "prevailing bias". So called journalists of course contribute to the formation of the prevailing bias. Once prevailing bias is formed it can affect the fundamentals themsleves which in turn will affect prevailing bias and so on. We have seen it with Lehman Brothers last year. The article of Mr. Manor is a good example of how prevailing bias is formed.

What is interesting however is that in the long run, in case of AIG it could years, the prices always gravitate back to the fundamentals after going through any number of swings caused by negative or positive prevailing bias. The volatiliy of AIG really shows us how it works. The opinions of journalists and average Joes on Google Finance AIG forum is changing every day.
The fact that stock price always goes back to fundamentals allowed Warren Buffet to amass on of the biggest fortunes on earth. In his biography "Buffett: The Making of an American Capitalist" so beautifully written by Roger Lowenstein there is an interesting story. His teacher Benjamin Graham the author of the classic called "The Intelligent Investor" which Buffet still recommends as the single most important book for any investor to read, at one point was invited to White House for investigation. Investigators understood Graham's philosophy of buying undervalued stocks and holding them until the price will rise. So they asked him, how does he know that the price will eventually go up. He replied that nobody knows why, but it always happens.

Usually I trust analysts less than I trust myself but in case of AIG at least based on the latest Q1 report I tend to agree with analysts estimate of $108.50. How long it will take I don't know, but it will happen. Meanwhile why don't we let market makers to enjoy what they are doing while we will be standing aside and watching with a smile. But dear fellow investors/amateurs don't allow yourself to be taken for a ride by shortsellers and market makers. If you don't want to loose your money either don't touch it or buy it low while you can and hold it at least until the end of the year.

Price Friction

There is an interesting term in the financial world - "price friction". Its defined as a number of shares you need to buy or sell in order to move stock price by 1 penny. I'm sure you've heard about AIG the former 18th biggest company in the world which is taking the money from generous Uncle Sam's hand and throwing it to thousands of finanacial institutions worldwide. Basically US government is throwing money around the world through AIG to prevent the world from collapsing.
AIG stock is one of the most dangerous ones on the market right now and like I wrote before it is an ideal candidate for manipulation and speculation
So back to Friction Factor. For AIG it is only 2392 shares. It means that it takes buying 2392 shares more than selling to move the price up by one penny. What is the price of 2392 shares ? Its only $33,488 !!! So what does it take to move it up by 20% a day? With current price of 14 dollars, it needs to be moved by 380 cents. 380x2392=908,960. So it takes only 908,960 x $14 = $12,725,440! Sounds like nothing for those people that have the money and the knowledge to play it. So they ride the stock up and down like a child on the teeterboard. To start the manipulation you just need to choose proper news to make it look real. And there are always enough loosers the world to be taken up for a ride. Some loosers are pretty smart people, but they just don't know exactly how stock market operates. Fear is very powerful emotion and so is greed. So when the price is droping you can count that many people will sell, when its going up you can count on many people buying. And so it goes. Market makers making money, while the rest of us loosing.

AIG Saga

There are professionals and there are amateurs. There are people that make money and there are people that want to make money. I always believed that we should study from the best. So I read the biography of Warren Buffet by Roger Lowenstein. I think this book can put you ahead of many professionals in the financial industry. But as they say: the devil is in the details. One of the things that I learned from that book is that insurance business is one of the best there is. If run properly ... There is always "if". Up until this day one of the richest man on earth Warren Buffet makes about half of his money from insurance and reinsurance. One of his holdings auto insurance company "Geico" was on the verge of bankruptcy when he helped to save it. American Express was also close to bankruptcy btw when he helped to save it. Buffet also operates his own insurance company. So when I heard about AIG on the verge of bankruptcy I thought here is my chance. Greed is terrible thing, it makes you blind. I knew that Warren Buffet warned everybody about dangers of derivates which he called "weapons of mass destruction". I also knew that he ordered all his insurance companies not to touch any of it. Allan Greenspan btw was arguing with him about derivatives, saying that direvatives help to spread out the risk. He was right they distribute the risk across the entire financial system, so that financial system can systemtically collapse ... And this is what we observed lately. So back in September when I heard the news about AIG I realized what a buncruptcy of such giant could do. And I knew that there is no way it will be allowed by the US government. And I broke the rules I just learned. One of the rules is never speculate (unless you are George Soros). The only thing that works and this is what made Buffet the richest person on the planet is long term value investment. How to select what to invest into is another long story. In any case I knew the bankruptcy won't be allowed so I bought right on the peak of fear, day before the rescue by the US government was announced. The problem was that probably I wasn't the only one thinking this way. And on my way from the office to Scotiabank to deposit the draft into my trading account the stock shoot up from 1.5 to 4.5. It happened in a matter of 1 hour. So I bought at 4.5... Only to see it going down to $2 next day. Then I could have exited at around $5. Greed stopped me again. Then I saw it going down all the way below one dollar. And I did another scary thing. I averaged down and bought about the same ammount of shares I bought first time for 3 times less money. It was a smart move which allowed me to exit again few weeks ago with relatively small loss on my total investment. But I didn't ... As of today the damn thing is trading at $13.61 after 1:20 reverse split. Which is equal to 0.68 cents before the split. The market capitalization is 1.86 billion while shareholder equity is about 55 billion. Still seems like great value but the fear has to go away for the stock to recover. It doesn't seem that it will in the near future. Looks like it will post loss in Q2 and possible Q3. May be we will see some improvement in Q4. Stupid or not, now there is no choice but to hold ... It is an expensive lesson but definetely valuable one. Until I sell it technically I'm not loosing any money.

My Love Affair With AIG

Somebody I know told me that he prefers to stay out of NYSE because it run by money makers and its the best place to loose your money. AIG is probably the most speculated stock in the world right now. After the company announced reverse split some "magic unseen force" created computer glitch on NYSE that caused notice of possible delisting from NYSE to appear. Then some analyst said that the company "may have" zero equity after selling assets at low prices. Allow me amateur to ask you analyst professionals how can you have any idea about the equity AIG may or may not have while the situation is changing everyday and AIG management itself is having serious difficulties with its own accounting? One analyst somehow should outperform the army of AIG accountants the number of which is probably thousands. Then somebody called reverse split 1:20 a kiss of death. Very nice methaphor used at the right time! Within a week the stock went into the most dramatic fall since last September loosing 15-20% per day for over a week. Just yesterday I mentioned to my fellow trader that as soon as the fall ends the rally will begin and here it comes the stock went up 10% as of right now. The future is unpredictable but my intuition is telling me that its totally manipulated. And its ideal candidate for manipulation too because of so much fear associated with it. People get scared. I stay completely cool like old Warren Buffet in spite of $17,000 on paper loss on it. But I'm selling at the next prolonged rally because I've learned enough. Or may be I should just watch the show until the end which in my mind should be sometime at the end of the year. My feeling is that the government will keep pouring as much money as required into it to push its accounting up from red ink. Dear US government I make my bet on you, while you still capable of printing dollars which is not going to last long :)

US Government DEBT

Did you ever wonder how US monetary system works ? It is real magic in action that creates money from air and controls the rest of the world with it.

Allow me to explain how it works in very simple terms. Lets start with some history.

US government knew that costs of WWI would be very high, so after long debate it has been decided to finance it with a combination of government debt and raised taxes. In order to attract buyers interest paid had to be high. So when the time came to pay the interest US government didn't have the money. So it decided to borrow more... And this is how Treasury Bill or T-Bill was born. Various T-Bills were sold by the goverment to whoever was interested in buying them. The purchasers of T-Bills were getting interest paid at certain time period. Now for the sake of example lets assume that the total number of dollars or so called money supply in the entire world is x trillion dollars. If US government to finance its forever extending ambitions would simply print more money that would increase the money supply to say x+y trillion and therefore cause so called inflation which is simply decrease of the value of the money. This would happen because increase in money supply would increase demand for all goods and therefore would allow businesses to increase the price of goods. The price basically could be anything that people are willing or capable to pay it may have little to do with the real value of goods or services. Increases in prices or simply inflation is bad for everybody but thats a subject of another discussion. Therefore instead of printing more money US government decided to continue printing T-Bills which are basically piece of paper. These pieces of paper would be sold in exchage for real dollars already in circulation. So the money basically gets recycled. However there is an interest that needs to be paid on T-Bills. Because it relatively small, it would increase the money supply only slightly. Where US government is getting the money to pay the interest ? Its simply printing more T-bills! Sounds like a perfect system. And it was, but it was very difficult not to abuse it.
In reality United States is a big household living on a credit card. And we all know what credit card debt could be like. To make payments on the credit card the owner of the credit card just keeps borrowing. As any household in debt with very high income it was able to do it for very long time. But the party seems to be over.

Now according to an Aritcle by Sprott Asset Management there is a total of 10 trillion of current US public debt consisting of T-bills. This is very small part of total debt btw because there are other types of debt as well. In 2009, the US government must sell another $2,0041 trillion of new debt in order to finance projected budget deficit of $1.845 trillion and $196 billion of Iraq and Afghanistan expenses. The existing T-Bill buyers which consist of foreign countires, private investors, funds etc can't simply afford to buy so much. So who it will be sold to ???
US government will simply sell it to itself. US Treasury will print the T-Bill and US Federal Reserve will buy them. Where US Federal Reserve will find the money from ? It will simply print it! This will cause what ? Right it will cause inflation. Now like I said inflation is bad for everybody. However inflation is good for the debtor and in this case the debtor is United States. Its good because when the money is being devalued you need to return less than you have borrowed. So if you are thinking about getting a mortgage now is the time. Who are the major holders of US T-bills? Surprisingly the most powerful countries in the world like Japan, China, Germany, Russia etc. Why are they holding so much of it? Because it was supposed to be safe investment :) Therefore inflation is going to destroy virtually everybodys savings. Now is very good time for everybody to sell T-Bills and move money to some other currency you would say. The problem is that selling so much T-Bills at once will push their price down. So United States is basically holding the balls of the entire world with it debt. The world is very unhappy and it will find a way to penalize US for it. As I write this the governments of most countries in the world work on a plan of gradual disposal of T-bills they own. if US dollar one day will loose its status as the world default currency it will simply go into free fall and so will United States along with it. But because United States consumes as much as 40% of the world economic output this is also a bad scenario for everybody. So what does the future hold ? We will see.