I feel like I have a sense of what I should be doing in this market.  Back in April, I put a note on my calendar to move to cash in September.  Perhaps not a bad idea.  I moved to about 30%-35% cash during the downturn today.  Perhaps that was foolish.  Perhaps it wasn’t enough.  Only time will tell.

I also took the opportunity to place a few trades on vehicles that will move with the downturn.   I looked to the Diamonds (essentially a trade on the DJIA) and to AIG.  View my trading log to see the few moves that I made.

I placed 1 option trade on AIG that turned a profit of 5.57% in about an hour.  The problem is that I left another 8-10% on the table. The stock reacted the way I expected and I only have a small gain to show for it.

I can’t believe how wrong I have been on AIG over the past few weeks.  I have been calling for them to “go away”.  As I often say, we are never wrong, we are  just early or late.  I am not alone in the feeling that AIG is simply a trading vehicle at this point.  (Investors Trading 3 Stocks that May be Doomed).  This is nearly an ideal vehicle.  There is more than 80% of the company tied up in hands that will not act (remember the taxpayers own more than 80%). This could be manipulation.  I don’t see AIG as a long term play.  As a short term trading vehicle it is great. One analyst has this to say about AIG.

“their price is almost certain to go to zero”.

The other trades made between yesterday and today were in options on the Diamonds (DIA).  I bought puts (a bet that the shares will move lower).  In all cases I left much more on the table than I took off.  I have become tight after a few plays of mine headed the complete opposite of my expectations.  I did pull a few percent on each play, but holding a bit longer would have yielded gains of more than 8x my profit (approx 80% gains).  I am not talking about holding for the rest of the day, I am talking about simply sticking with the momentum (10 more minutes).  On 2 occasions, I was headed out of the office and was forced to place a conservative limit, but on the others, a more disciplined approach could have yielded much more.

HINDSIGHT!

Today was a very poor day for the market. I don’t feel comfortable that I raised some cash today and the small profits in my trades simply kept my spirits up.

FAIR WARNING!: This market could get ugly. Down, down, down. Vacation time is over and there is big money ready to move this market. I don’t think that we will be able to digest bad news the way we have been able to for the past few weeks.  In fact, the market shrugged off some good news today. Not a great sign for the bulls. Stay tuned.

Bob

I am not sure how this is shocking at this point.  There was a culture at AIG.  The culture was agressive and loved risk.

In a past business, Scott and I had some dealings with a unit of AIG that handled Viaticals and Life Insurance Settlements.  Scott left our discussions stating “I will never do business with ….”.   It wasn’t a statement regarding business, it was a moral issue in how they conducted their business.

via Even After Rescue, New Weakness Seen at A.I.G. – DealBook Blog – NYTimes.com.

AIG

Was the AIG Bailout a Goldman Bailout by Proxy?

This was something that I have discussed in the past.   Taking a single entity and making sure that it was doling out the billions the way that treasury saw fit was made easy.

By using this single entity to pay out to GS and many foreign entities the government kept things from toppling financially and politically.

I am still convinced that AIG is not long for the public market. Their job will be done, the trades will be unwound and then the gov’t will have an entity in place to bring the entire company in house.  There isn’t anything in place right now, but I expect there will be.

AIG continues to sell of the jewels in its crown and will soon be left with little to pay down the enormous debt load.

via Was the AIG Bailout a Goldman Bailout by Proxy? — Seeking Alpha.

After pounding on AIG for a few weeks, I finally realized that I should be making money on this call.  I hammered AIG from the reverse split point on.  (remember, I owned it from $2.02 to $1.45).  When they did the reverse, I felt there would be very little but down.  The parts of this company do not equal the whole.  The 1 for 20 offering didn’t do much other than mask the dismal condition.  Wait… do you know what else it did?  It allowed for certain entities to participate in the just announced shelf offering.  Innnnneresting!

When would you announce news that isn’t likely to help your shares or your company?  Friday after the market close!!  Wait, that is when they did announce their shelf offering.

AIG Shelf Offering

AIG is in trouble.  I finally placed a small short on AIG today by buying put contracts.  I have avoided doing so for quite some time due to the fact that AIG options are priced with a SICK premium.  The movement needed to get into the money is big.

The 40%-50% recovery in the shares, over the past week or so, initially felt like a dead cat bounce.  After a few days it felt like something more than that.  I tweeted about it a bit.  Didn’t make sense to me.  I was perplexed.  Well, the shelf offering that came out after the close today (Friday Jul 17th) might explain a bit of it. There is support for this dog from some high places.  People “in the know” can make money from these movements and events.  They can make money on all sides, from the buy side, sell side, and underwriting side.  I haven’t looked yet, but I am going to guess that Goldman is the lead.  Hang on… I’ll go look… no one listed yet.

The recent support could have been generated to garner a good price for the offering.  I know, I know, I sound like Mel Gibson in the Conspiracy Theory movie.  Or, I sound like Phil at PhilStockWorld.com.  Either way, I might be right.  Phil, what do you think?

Back on topic, I am pleased that I took the action today to buy some puts.  As always, when I am right, I wish that I committed more funds to the trade.  I bought August 14 puts based on the fact that I felt AIG moved back way too fast.  The move didn’t seem natural and there was no news that called for a 40% bounce.  A typical dead cat bounce would have died off much sooner and wouldn’t have bounced as high.  The action prior to today’s offering reeks of the action prior to an offering.  The higher the price, the more money raised.  Less of an impact on the shares (perhaps).  But in the end this is a dog that is in rough shape.

This offering will cause dilution and if it weren’t for the recent run, it would have been nearly impossible to place.  The terms on this one will be interesting.  Those who commit to the offering will likely be assured a profit thanks to recent action.

The shares are going to come back down.  They should reach 9 before they reach 14.  I am happy that I stand to benefit from this since I have been pounding the table calling it a dog. I am not alone.  Jared Levy, who is on Fast Money on CNBC, said it well when he said “They’ve got a lot of debt and I have no idea how they are going to service it”.   Well said, Jared.

Here is what it comes down to.

• They are selling assets of any value to pay down the debt.
• Continuing operations cannot support the debt.

Were the books still cooling off when the bidders reviewed a purchase of this unit?

AIG has been on a pretty sick run up here.  I am looking at put options on this, but the premium is pricing in at least a 25% drop.

Lead Bidders for AIG Unit Drop Out

via Lead Bidders for AIG Unit Drop Out – WSJ.com.

This Reuters headline is no shock to readers of BobandScott.com.  AIG is in freefall.  Citigroup is jumping on the bandwagon moving this thing down.  The 1 for 20 reverse split didn’t do anything but mask the downfall.

AIG is now simply a vehicle to deliver what is owed.  This will go away as soon as the US government has an organization in place to bring in financial entities other than banks.

Don’t even think about buying shares.  I don’t care where they once were.  The assets that the company was built on are being sold off.  The assests that provided big returns with extreme risk are what will remain.  You can have it.  By you, I mean you and me via the US Gov’t.

AIG is going away!

Recent AIG articles from BobandScott.com

• AIG is Almost Gone (7/7/2009)
• AIG Continues its Trend Down (7/2/2009)
• AIG is Going Away (6/30/2009)
• AIG’s Deep Hole (5/17/2009)

AIG Going Away

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July 9 (Reuters) – Citigroup said there is a high probability that American International Group Inc’s (AIG.N) equity value is zero, given the risk of more credit default swap (CDS) losses and the management’s eagerness to dispose of key businesses at low valuations.

via UPDATE 1-Potentially no value in AIG equity – Citigroup | Markets | Markets News | Reuters .

I have been holding a short of MAPP for quite some time now.  Read the comment following our logo…

Never wrong, just early or late.

Map Pharmaceuticals

MAPP might just turn into a profitable trade after a period where it looked like I would surely lose more than 15%. The dollar amounts are small, but a win is a win.

I didn’t hold MAPP in hopes that something like this would happen.  I shorted to play a pull back on a bounce.. they happen.  There is generally a bounce from a free fall (unless you are AIG, of course) as well. It is usually referred to as a “dead cat bounce”.  Even a dead cat will bound when it is dropped from a high enough level.

I have taken off my limit order to cover this short.  I am probably going to be out today, but will try to get a good price (pre-bounce, of course).

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Map Pharma Down After Suspension Of Asthma Drug

By JENNIFER HOYT CUMMINGS

Of DOW JONES NEWSWIRES

NEW YORK — Shares of Map Pharmaceuticals Inc. (MAPP) fell premarket after the drug company said Thursday that it is suspending the development of its asthma drug for children.

The suspension comes after Anglo-Swedish drug maker AstraZeneca PLC (AZN) terminated its license agreement with Map on the drug, Unit Dose Budesonide. Map said it received the termination notice Wednesday.

The two companies said in February that the drug had performed no better than a placebo in Phase III clinical trials.

Shares of Map fell 5.6% to $10.44 in premarket trading while American depositary shares of AstraZeneca weren’t recently moving.

Map shares plummeted earlier this year after the company reported the results of the Phase III studies on the drug. However, the stock bounced back in late May following positive late-stage data for its migraine drug, Levadex.

Map said Thursday it remains focused on developing Levadex, which achieved all four endpoints in a Phase III clinical trial.

via Dow Jones NewsPlus – Map Pharma Down After Suspension Of Asthma Drug.

AIG has completely given up.  As I have mentioned, I owned it from $2.02 down to $1.45 in a long term account.  I changed my mind about the “long term” viability of AIG and expect it to be swallowed up by a government entity as soon as they are done splashing the $180 billion dollars that we (taxpayers) gave to them.  Money well spent?  Probably not.  Consider AIG the sacrificial lamb.  If the gov’t gave $180 billion to all the names that ended up receiving it through AIG, there would have been a bigger fight against the various stimulous packages that have been pushed through.

By using the shell of AIG, they can dole out billions to foreign entities, Wall Street favored firms (GS), and others.  It is  more orderly to set up one company to be the hated scapegoat than to tar the entire industry.  Aparently GS is putting their money to good use with huge volume automated trading.  GS is in the driver seat.  If you don’t believe that, please read about how Goldman Sachs is at the center of the financial universe.   Chasing the mighty dollar!  Markets and country be damned!

AIG is now trading at $14.11. That is a split adjusted $0.70!  I feel lucky to have only lost 25%!

AIG

Yesterday, I wrote about the AIG 1 for 20 reverse split. I am going to continue piling on AIG because I don’t want others to jump in and lose the 25% that I did in AIG shares. This is a dog. There are not assets to cover the debt to the government/taxpayer and some of the assets that they are selling off are assets that generate the meaningful earnings, revenue, and cash flow to the parent.

In my AIG 1 for 20 article yesterday, I said that I expected AIG to close around $18 for the day. They closed at $18.08 (there were above $20 when I wrote). I feel good about that one and would warn against some of the head fakes that will come in AIG.  There will be buying, but it is likely to come from ‘traders’ rather than investors.  If you want to take a financial flyer, I would recommend many other companies ahead of AIG.

AIG

AIG did a reverse split today.  Shareholders are getting crushed on this future/current government entitity.  This has been a mess.  It appears that the realization may have set in for many inestors that the sum of the parts does not equal the whole (and by whole, I mean our $180b).

This giant is being wound down.  Anything that can be sold off is being sold off.  Who knows what will be left or what it will be worth.

My bet is that AIG moves down to about $18 today.  Keep in mind, that would have been a price of 90 cents yesterday.