by Larry Levin
For weeks now the market has been on pins and needles, waiting for Ambac to announce a package that will (somehow) keep it"s AAA-rating. When rumors (of nothing new) went through Wall Street, it created violent reversals higher. Now that the news is out, I doubt the market will be saying, "Guess what?! I got a fever, and the only prescription... is more Ambac (cowbell)...I"ve gotta" to have more Ambac (cowbell)!"
Like waiting to pass a 1-pound kidney stone, the final event (seemingly) never wanted to come out. That day, however, came today as Ambac's news finally hit the tape...with a thud. When it disclosed its super-duper-bailout-special plan, the March S&P futures promptly dropped 24.50-points from the high. Until today we bought the rumor - today we sold the fact.
Ambac shares dropped 19% to $8.70 after the announcement. Investors worried about being diluted by the offering and about the lack of participation in the deal by banks that are big counterparties to the bond insurer.
"On the common stock offering, the real question is where the deal gets priced," said Stewart Johnson, a portfolio manager specializing in the insurance industry. "The lower the stock price the more shares issued to raise the $1 billion -- more shares means more dilution. Pricing the deal is a balancing act: price too low and dilution kills current investors, and if the price is too high the deal doesn't get done."
Ambac also said that it will stop guaranteeing several different types of structured products, including collateralized debt obligations (CDO’s), all mortgage-backed securities...even auto loan and credit card securitizations. Ambac also noted that it has written "virtually" no new business so far in 2008.
And from this reduction in its line of business, the rest of 2008 will be lean as well, yet it is still on the hook for underwriting the prior junk that got it here. And when you consider that both Ambac and MBIA will now have to deal with the elephant that just waded into the pool, Berkshire Hathaway, there won't be any room left to swim. I'm not sure why the majority of municipalities would bring any new business to either of these companies over Warren Buffett's, who has nothing dragging it down and keeping it from paying future claims?
Oh, and then there's California. California announced it will no longer buy reinsurance for its projects, which means even less business for Ambac and MBIA when this spreads.
Well, at least the "consortium" we heard so much about put their money where there mouths are - right? In the words of Borat, "Not so much!" The offering was expected to be backed in some way by this group of banks that are big counterparties to Ambac, including Citigroup, UBS, and Barclays. However, the super-duper-bailout-special didn't mention any backing from these firms. Naaaaah, they are apparently getting their clients in on the "ground floor"...literally. When the "consortium" won't buy a single share, what does that tell you? And the beat goes on...how pathetic.
One portfolio manager was quoted as saying, "We won't be investing. As an investor in a company that needs capital, you want to be in position where your incremental investment addresses the problem, and is not simply money into an ever-deeper hole." Well said.
The reaction of the credit ratings firms was also surprising. Moody's and Standard & Poor's said that Ambac is still worthy of an AAA-rating (lol,lol,lol,lol), but is still on a negative outlook for a downgrade! But don’t worry, the fix is in - that isn't going to happen any time soon.
"I am under-whelmed," said Richard Larkin, director of research at Herbert J. Sims & Co. "The raters continue to hedge their bet with a negative outlook, primarily because they are concerned that there could be further deterioration in the subprime mortgage market which they have not captured in their latest in a long series of 'worst-case' scenarios. I don't feel that today's announcements by Ambac and the bond raters give me any more comfort that the bond insurance credit crisis is now behind us."
Question: What does the government call an investment where current investors are used to pay off old investors? Of course, that's a Ponzi scheme and although this isn't the same, it smells similar.
Real Time Trading Signals*for
Trade Date: 3/5/08
E-Mini S&P Trades*
(before fees and commissions):
1) TP sell @ 8:40am at 1331.75 = -2.00 (1 lot)
2) FT sell @ 9:05am at 1340.50 = +2.25 (1 lot)
3) FT buy @ 9:35am at 1335.75 = b/e (1 lot)
4) FT buy @ 11:05am at 1340.00 = -1.75 & -1.75
5) FT buy @ 11:35am at 1332.50 = +3.00 (1 lot)
6) OTF sell @ 1:15pm at 1328.50 = +2.00 & b/e
7) OTF buy @ 2:15pm at 1325.75 = -1.50 & -1.50...-1.25 points
E-Mini Russell Trades*
(before fees and commissions):
1) Buy @ 9:27am at 684.2 = -1.3 (1 lot)
2) Sell @ 9:42am at 683.3 = +.5 & -.7
3) Buy @ 9:57am at 684.4 = -.6 (1 lot)
4) Sell @ 1:15pm at 681.2 = -.3 (1 lot)...-$240
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