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Give Me a Hard Eight on AIG, Freddie, Fannie, and Citi

Posted by Larry Doyle on September 1, 2009 3:35 PM |

Want to play craps? How about a little roulette? Black jack? Or should we merely play the slots?

On the topic of casinos and gambling, I hope traders, investors, and the general public fully appreciate the extent to which our wards of the state (AIG, Freddie, Fannie, and Citi) have dominated equity trading volumes over the last few weeks. On many days, these stocks have represented upwards of 25% of the overall volume.

I addressed this point in my August 2009 Market Review and wrote:

A large percentage of market volume has centered on those stocks in which Uncle Sam is heavily involved (Citi, AIG, BofA, Freddie, Fannie). I view these particular stocks as very speculative in nature. That said, there are large short bases in these stocks. The shorts were punished during the month. The stocks did trade off significantly on the last day of the month.

Are we supposed to make assessments of our future economic health and overall market performance based upon stocks in which Uncle Sam holds anywhere from a 40-80% equity stake? I think not. I view trading these stocks as pure gambling, not investing. I challenge any analyst who would say otherwise.

What sector of the market is leading the overall market lower today? Financials!! Which companies in particular? Our friendly Market Data page from The Wall Street Journal highlights the following:

So there you have it, 6 of the top 8 most active stocks being traded today are wards of the state, or a close cousin, that being CIT. Ford is a fully independent entity. Many view General Electric as an extension of the government politically, while the company itself has clearly benefited from government-backed financing.

Don’t take my word for the speculative nature of AIG, Citi, Freddie, and Fannie. The Wall Street Journal highlights the same in writing, Financials Lead Broad Selloff.  Specifically the WSJ asserts:

>>Among the weakest was American International Group, which sank 17%. Sanford C. Bernstein & Co. downgraded AIG to underperform from market perform, estimating that if the government’s support and other goodwill were discounted, AIG would have a negative book value of $6.4 billion.

>>Mortgage lenders Fannie Mae and Freddie Mac also traded lower, falling more than 15% after FBR Capital Markets analyst Paul Miller wrote to clients that “[t]here is no fundamental value remaining” in the companies.

I ask you how much money you want to invest on a long term basis in companies which have negative book value or no fundamental value?

The first rule of gambling is ‘only play with money you can afford to lose.’ The same is to be said for money put into these companies which just so happen to be dominating the overall market volume.

Come on, brother, give me a hard eight!!


  • coe

    I’m thinking that there is a distinction between C/BAC and FRE/FNM – the top four on the list. Just isolate on Citi for a second. Here’s a company that has one of the most recognized brands in the world, is well positioned in dozens and dozens of foreign countries, and mints money everyday the sun comes up just by showing up for work. No question they have mismanaged their risks and financial supermarket vision, but so much of the exposure is tied to two businesses – the foibles and volatility of the Investment Bank with respect to big bets on mortgages, structured credit, conduits and the usual suspects; and at the Consumer and Corporate Bank in terms of cyclical problems in credit card and CRE exposures. If management, either through divine inspiration or regulatory prompting, can get their act together (a big if), I would make the case that this is the best of the lot to roll the dice on. If there is no dramatic next leg of recessionary economic news, my belief is that Citi will earn enough money to power its way out of the government ownership hole and be back in the game. It may take awhile, but the framework of a real business platform cannot be denied. Gotta hop – have to see if the tooth fairy visited my daughter last night! Food for thought?

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