The Stock Surfer

AIG: Another Example Why Anything Related To Financials Must Be Sold

Rating: 3.00 not yet rated(1 votes)    Vote:

You are logged in as | Logout

Volatility brings trading opportunities--some good, some bad. So is it a good idea to buy AIG on this dip? First, let's look at the facts.

According to Reuters:

American International Group Inc (NYSE:AIG - News) said on Thursday potential cash losses on its portfolio of credit default swaps tied to risky mortgage debt could be as high as $8.5 billion, much more than previously disclosed. Under two revised ways of assessing risk, losses were estimated at $5 billion to $8.5 billion, finance executive Steven Bensinger said. The estimates are much higher than the $2.4 billion worst-case scenario disclosed by AIG, the world's largest insurance company, in the first quarter.

I do not pretend to know anything about credit default swaps, but I know what I don't know, which is more than AIG can say. In the first quarter, they estimated $2.4 billion in losses as a worst-case scenario. Now, evidently, the worst case scenario has doubled or tripled. Just stop and think about that for a moment--they underestimated their worst-case scenario by as much as 6 billion. Until further notice, AIG has no credibility whatsoever.

I've heard a lot about a bottom in financials, and I respectfully disagree. Several pundits and CEOs have stated that financial conditions could improve, but that improvement is contingent on a recovery in the housing market. Frankly, I don't see how years of excess in real estate can be worked off this quickly. How many Adjustable Rate Mortgages (ARMs) are going to reset higher in the next few years? Beyond that, all indications show that people are still barely making payments, and unemployment is rising.

So you have two choices. You can trust that AIG has a handle on its business (despite all information to the contrary), and that housing is about to turn around (despite all information to the contrary). Or, you can stay far, far awA-I-G.

[posted simultaneously, which charts, at thestocksurfer.blogspot.com.]