Stock Market Gone Haywire: Is AIG the next Volkswagen?
There are a lot of reasons for the sharp volatility in the stock market.
There are some that make sense. The recession will separate the leaders from the laggards. More than 73% of the companies in the S&P 500 came in with “better than expected” earnings. Economic news has been, generally, good. All of these are reasonable drivers for the rally in some stocks.
There are others which don’t make any sense. Right now, the leading nonsense market move is AIG (NYSE:AIG).
As someone who’s looking for a decent short-term trade though, my question about AIG at this stage, is it the next Volkswagen?
If you recall, Volkswagen went through one of the greatest short squeezes in history last fall. And for a brief moment, was the largest company in the world by market cap.
Volkswagen Overtakes Exxon as Most Valuable Company:
Volkswagen AG became the world's biggest company by market value after Porsche SE announced plans to raise its stake in the German carmaker to 75 percent, triggering demand from short-sellers.
Volkswagen rose as much as 485.01 euros, or 93 percent, to 1,005.01 euros and was up 55 percent as of 11:10 a.m. in Frankfurt trading. Wolfsburg, Germany-based Volkswagen has risen more than fivefold this year and at its intraday peak was valued at 296 billion euros ($370 billion), more than Exxon Mobil Corp.'s $343 billion market value at yesterday's closing price in New York, according to data compiled by Bloomberg.
Volkswagen soared 500% thanks to the combination of a big short-interest (number of shares sold short) against its shares (leading to a massive short squeeze) and limited free trading float (Porsche announced it was increasing its stake to 75% of Volkswagen’s outstanding shares).
It’s very, very similar to AIG. The U.S. government owns 80% of the company (although 0% of total publicly-traded shares). Also, there’s a very big short-interest. The New York Stock Exchange recently reported the short interest in AIG increased from 15.88% to 34.29%. That’s an increase of 18.41%.
Of course, AIG is also in debt to the U.S. government for $180 billion or so.
Basically, at this point in the AIG saga, any good news is great news. And today it looked like they got a bit of good news.
Talked Up by CEO, AIG Climbs 21%:
AIG Chief Executive Robert Benmosche told Bloomberg News on Thursday that he would sell only parts of the company "at the right time, at the right price," adding that he believes the firm will be able to pay back the federal government.
AIG will be a great short – someday. Right now, the odds of it becoming the next Volkswagen are too great to risk a short now. There is an opportunity for credit call spreads, but for a straight long or short bet will probably have to wait.
Remember, as we say in our free investment newsletter, the Prosperity Dispatch, successful investing is about managing risk and reward. Right now, the numbers just don’t make sense when it comes to AIG.
