The AIG Selloff is Overdone. It Looks Like a Buy and Hold
Last week, AIG became the lastest example of the skittishness and fear that defines why the market is so volatile. First there was a disclosure in an SEC filing that outside accountants found “material weakness” in AIG’s accounting systems. And then, to cover potential losses in collateralized debt obligations (CDOs), there was also bigger “mark to market” writedowns in Q3 2007, and will be bigger writedowns for Q4, and for Q1 of this year. Analysts moved quickly to revise 2008 earnings lower, and the stock took a 12% haircut off of what is already a pretty depressed price.
The situation reminds me of a trade I had in Capital One stock in July, 2002. It was within a year of 9/11. The market was finally showing signs of life, but still was very skittish. The slightest bit of bad news was met with a ’sell first, ask questions later’ mentality. Kind of like now.
That July, the stock was already down considerably from recent highs in the mid 60s when the company announced a Memorandum of Understanding (MOU) that reclassified a healthy portion of their credit card accounts as subprime, and required that they hold a much larger loss reserve. No money went out the door. No actual damage was done. It just reclassified the risk. Yet the stock sold off from around $50 into the high $20s literally in hours.
Yes, it was not the best news, but it was not the end of the world either. Once you took a breath and thought about it, it was easy to realize that suddenly the Capital One card portfolio was in even better shape and far less risky than it was before the announcement. The odds of a downside surprise were significantly reduced. I took the opportunity to double down, and the shares rewarded me by more than doubling in the next two years.
AIG’s current situation reminds me a lot of this. Yes, again, not the best news, but these write downs are for potential losses, and there is a good chance that the vast majority of the write downs AIG is incurring will reverse back into earnings. AIG will only pay out in the event of an actual default, and AIG collects income in the form of premiums for insuring these CDOs.
The stock is at its lowest levels in years. I would await the rest of the write downs to get a full view of what the potential risk is. After that… I won’t say it will double like Capital One did, but the shares are worth considering.
Disclosure: As of publication I have no positions in the stocks mentioned here. I am not a professional, but I am trying this at home. It is highly recommended that you consult a licensed financial advisor or broker before making any and all investment decisions.
3 Responses to “The AIG Selloff is Overdone. It Looks Like a Buy and Hold”
Discussion Area - Leave a Comment
You must be logged in to post a comment.
So is this what people with disposible income do, talk stocks and bonds? I like the disclaimer by the way. Now, periodically I have a little money in my pocket but I’ve never had the cojones (infected or not) to invest in stocks. Don’t you get a little nervous when things fluctuate so violently and the market gets hairy? I guess if you’re in it for the long haul and things continue, fine and dandy. But what about the inevitable, when the market crashes like it did in 1929 and 1987? You’ve got to have big, hairy cojones and a deeper wallet than I’ve got to deal with that prospect.
So what’s the deal bro? You not going to post anymore because I was really enjoying the site. I mean, it’s not a big hairy deal if you wish to stop but I just wanted you to know that I did enjoy most of the posts. If not, take care and continue on with your success.
So, I’m not even sure if you will see this since there haven’t been any new posts in quite some time but what you recommend for a fellow who owns his own business and pulls in around 150k a year? To be honest, I really don’t know what to do with the little disposible income I actually have. I put money back into the business and I do my best to make principle payments on my home. At present the business is worth about 750k so I’ve got a little equity there. I’ve got a 401K from a previous gig a long time ago and now am putting money in a simple IRA. So what should someone like myself invest in? Just curious since you seem to know quite a lot about the stock market scene.
Thanks