JPMorgan Analysts Halt Ambac's Bizarre Resurrection

Apr.14.10 | About: Ambac Financial (AMBC)

I had forgotten all about bond insurer Ambac Financial Group (ABK) – one of the many hobbled poster children of the recent financial panic. I sure did not realize the company is still limping along and even trading on the NYSE.

So, imagine my surprise when I learned that ABK doubled on Monday to add to Friday’s 72% pop on ABK’s latest earnings report. Somehow, I allowed ABK to fade once again from my memory until today I saw it was down 28%…after having been up as much as 50% at Tuesday’s highs. This chart should get an award for chart of the year (to-date)!

ABK gets my nomination for chart of the year (click to enlarge chart)

*Chart created using TeleChart (see here)

JPMorgan analysts appeared to initiate today’s huge fade. In a research report, they asserted that ABK is worthless. And no wonder – the latest earnings report includes THIRTY-THREE risk factors in its forward-looking statements. The first point is perhaps the most telling of all:

Ambac has insufficient capital to finance its debt service and operating expense requirements beyond the second quarter of 2011 and may need to seek bankruptcy protection.

I tried to study the earnings report to understand how traders and investors suddenly came to the exact opposite conclusion of JPMorgan despite the very real threat of bankruptcy. However, the report reads like so much fog and haze to me with adjustments layered with offsets flavored with mark-to-market impacts and a dash of tax benefits for good measure:

…The fourth quarter 2009 results reflect a tax benefit recorded during the period, reduced loss and loss expenses recorded relative to fourth quarter 2008, and unrealized mark-to-market gains in the credit derivatives portfolio. In 2008, Ambac’s fourth quarter results reflected a significant negative net change in fair value of credit derivatives, higher loss and loss adjustment expenses and a large increase in the deferred tax asset valuation allowance.

Quarter Summary

Net change in fair value of credit derivatives was positive $133.2 million, driven primarily by price improvement in certain reference obligations, partially offset by a narrowing of Ambac’s short-term credit spreads (ASC Topic 820 adjustment) during the quarter.

Net loss and loss expenses incurred amounted to $385.4 million for the current quarter, primarily related to deterioration in the first-lien residential mortgage-backed securities (NASDAQ:RMBS) portfolio, partially offset by reserve reductions in non-consumer asset-backed securities transactions.

In the financial services segment, the results for the derivative products business improved by $105.8 million compared to the fourth quarter 2008.

A tax benefit of $472.0 million was recorded primarily as a result of legislation that passed during the quarter that allows Ambac to carry back 2008 and 2009 operating losses as far back as 2003. Ambac Assurance Corporation (AAC), Ambac’s principal operating subsidiary, received the tax refund amounting to $443.9 million in February 2010.

And that is just the “easy to read” introduction!

If there are signs of hope in there, I sure do not know where to look. In the meantime, the large fade in ABK should end the fairytale that was brief but sweet for those who got in. Of course, in this market, ABK could still get bought up to double-digits just because it lags the general market and is “cheap” on an absolute basis.

Be careful out there!

Disclosure: No positions