Why Has AIG's Stock Risen So Rapidly?

If you are looking for an article with details regarding the latest drama on AIG (AIG) and the bonus scheme, stop reading. With AIG in the news so much in the last few days, almost exclusively in a negative light, very quietly the stock is up 237% in just the last five trading sessions. The one question that isn’t being asked about AIG right now: why is the stock up so rapidly?

The obvious answer is that demand for the stock has risen, but that does not get to the heart of the question. Generally, when demand rises on a stock it is because of some bit of good news such as earnings results or a macroeconomic trend, but with AIG the news has been exclusively bad. The company has just had a historic $100 billion quarterly loss and it is effectively nationalized. Add to that the fact that its former and long time CEO who built the business is suing, and, oh yeah, the bonus scandal that has grabbed headlines for the last week. So, where is this demand coming from? For the answer we turn to Jim Cramer on Wednesday’s Mad Money,

“AIG is the key to a long-term turnaround. And the reason why the banks continue to rally dramatically. >> buy, buy, buy. >> Buy now AIG.

…But here’s the problem. The chicanery at AIG, you see, we’re in a real jam and tonight, I’m making strange bedfellows with Tim Geithner, Obama’s embattled and beleaguered Treasure Secretary…The temptation to go populist because of AIG’s disgraceful actions it must be enormous on the President and the Treasury Secretary. We can’t afford to return to the old populist Obama. Remember, this is not the time …They have become more like President Clinton. They stopped demonizing them now, AIG has put that in and we need Treasury Secretary Geithner to acknowledge that the bad guys at AIG are not the same as the rest of the banks. Or we’re going to see that Dow 6,500 again. We’re going to roll back our and then some.”

So, essentially what Cramer is saying is that AIG is a buy because it has become the centerpiece of the government’s turnaround efforts. Essentially, in his eyes and as far as I can tell, also the market’s view, if you believe the U.S. economy will eventually recover, then AIG will be right there with it. When you see the names of companies that AIG has insured, it does lend some credence to the fact that AIG may be the absolute definition of “too big to fail” or perhaps more accurately, too well-connected to fail.

So, AIG’s sharp rise in the last few days is in spite of itself and the media circus it is embroiled in. Seems like flimsy reasoning to me for a move of this magnitude, but that’s the best I’ve got for the time being. Cramer is quick to point out, that if the blame for AIG’s misdeeds gets spread out onto all financials, it will certainly spell trouble for the stock market in the near term.

For all stocks mentioned by Cramer on Mad Money, refer to the chart above or refer to the original post.

Comments

[RSAAKS:]

Listening to Mr. Liddy before congressional committee last night, the message was that he plans to unwind all CDS's (all valued at 2.4 trillion on their books). Of theis $2.4 T, about half has been unwound (and I assume that is where $100B loss reported came from. Assuming the rest gets unwound in a year or so with a similar loss, total loss will be $200B. Add to that $78B they have already borrowed from the feds. To pay for all this, they plan to sell the healthy businesses and end the company. Unless those busineeses generate a lot more than $278B, where is the value for common shares? and what is your basis for listing AIG as undervalued by 35% or so (shown on your chart?

Mar 19 04:46 PM

[Between The...:]

At this point, owning AIG stock is a wager as to the political will of the US government. Clearly, they have lost all "real" equity and the government is propping them up, and few seemed convinced that the losses and troubles are over. Theoretically, the bailouts are loans and equity stakes that will be paid back, but AIG could not meet its current obligations so what confidence would a rational investor have that the 100+Billion could additionally be paid back to the governement in a timely fashion. So, what fraction of the bailout will end up being a giveaway, and what fraction will actually get paid back? If we care that AIG survives against all else, then enough money pumped in will dig it out of the hole and eventually create a true privately owned going concern. But bonus outrage, general bailout fatigue, FED/treasury balance sheet concerns, etc may sap the political will to put infinite money in, potentially causing common to be wiped. It is a risky bet indeed as an investor. If one wanted to purely speculate on political events (as this pretty much is) intrade.com already provides a more direct method.

Mar 19 05:27 PM

[Between The...:]

The Ockham valuation chart tries to show the relation of value and recent price action. On the Y axis, it shows AIGs stock has fallen 35% in the last quarter, not that AIG is 35% undervalued. To determine how fairly valued AIG is, the x-axis (no units?) tells us where it falls among all of the stocks in the sample.

Ockham valuation is a formula based hybrid fundamental/technical analysis that won't take into account many of the complex considerations needed for a deep analysis - it is more like a simple back of the envelope calculation.

Mar 19 05:35 PM

[Timmothy Posey:]

Umm, all of this article is wrong.

The WSJ/CNBC put out a notice a few days ago saying that the gov't is going to request physical delivery of its 79.9999% in stock certificates in order to prevent further short selling by making it extremely difficult to borrow the stock from a broker. Thus, the rise has been nothing than a really bad short squeeze.

Mar 19 06:39 PM

[drbob66:]

"essentially what Cramer is saying is that AIG is a buy because..."

Baloney. I actually saw that episode of "Mad Money" and I did NOT get the impression that he was recommending AIG stock at all. I would like to see a link to the actual video footage, as I think that you are misquoting him. And if this is indeed the case, you've lost all credibility.

Mar 19 07:00 PM

[Mbuna:]

The bailout money for AIG is for the Wall St insiders and their buddies at the Fed (and Treasury?) to prop up the corpse while they get their money out. They are going to have to let this thing die at some point because the taxpayers have had enough. If I were in the market I would be researching like hell to short this stock. Full disclosure- no market positions on AIG, never had and never will.

P.S. I bet you could make a dam good screenplay out of Goldman Sachs' hand in all of this.

Mar 19 07:02 PM

[Fairway Jack:]

If AIG was a zombie and it was chasing me and you....I would trip you and keep running....oh...wait a minute...AIG is a zombie. Have a nice trip. See you next Fall.

Mar 19 10:23 PM

[NickH:]

When it gets to "I would like to see a link to the actual footage" then we are back to a fairly common problem with Cramer...he can be very inscrutible and inarticulate at times. That said, if you will read the presentation that Liddy made to Congress this past week, you will learn some things: :Yes, AIG does business in alot of countries and with alot of companies. No, they are not irreplaceable: other companies can pick up their business in most cases, if they were not there, but there are a few exceptions. CDS notional value (financial talk for maximum potential loss) has been brought down to about 1.6 trillion, from 2.4 trillion. Bad news, the settled with some customers for 100 cents on the dollar. Dumb! Good news, the damn is about to break on this and settlement on the remaining CDS will no doubt be negotiated down for less than 100 cents on the dollar. As a point of reference, Lehman's CDS contracts were settled for around 25 cents on the dollar owed. In summary, why is AIG up? Classic short squeeze. Has nothing to do with fundementals.

Mar 19 11:05 PM