Monoline Stock Price Rally Overdone

The recent rally in the stock prices of monoline insurers Ambac (NYSE: ABK) and MBIA (NYSE: MBI) is overdone, in CreditSights' view. “While there is no denying there have been several positive developments, we think Ambac and MBIA are still far from back to where they were before the credit meltdown,” CreditSights says in a new Monoline Monitor report.

“In our opinion, the direction of the recent rally in major monoline securities may be justified but the magnitude of the shift seems premature.”

Perhaps the most positive development over the past month was when Ambac and MBIA had the AA financial strength ratings on their primary insurance subsidiaries removed from CreditWatch Negative by Standard & Poors. The rating agency’s outlook on both companies is negative. S&P said that the removal of the negative outlook for both companies will depend on clarification of ultimate potential losses as well as future business prospects, the outcome of strategic business decisions, and potential regulatory developments.

While the action does help reduce pessimism, the wording in the S&P release indicates that it believes both companies have likely impaired their franchise values, which will be problematic in jumpstarting their new subsidiary strategies.

Hypothetically, if the regulators approve the recapitalization of Ambac’s and MBIA’s dormant subsidiaries and then if the agencies rate these subsidiaries at the triple-A insurance financial strength level, we just don’t know if there is any demand for their wraps in the first place.

Comments

[Ishortyou:]

Many of those bonds wraped in RMBS and CDOs are from NINJA loans or credits-No Income, No Job or Assests- originated by banks and broker firms. Many of those bonds were tripla A rated by Moody's. Bond insurers believing they were high quality bonds decided to insure them, but surprise, surprise they contained JUNK, this cost a lot of write downs. Eventually Moody's dowgrades the bond insurers based more on speculation rather than facts and causes a massive sell off of municipal bonds, a flood in the auction rate securities market, massive write downs in banks and broker firms, collapse of several regional banks, Fannie and Freddie, etc., bond insurers are now doing their homework and remediating their books from toxic waste. On the other side the housing market is correcting itself, it will take sometime, but like any other economic bubble is correcting itself, so remediation is on the way.

2008 Aug 22 10:50 AM

[CrossProfit:]

Author should have noted that CreditSights competes with S&P and Moody's.

2008 Aug 22 11:51 AM

[The Jackal:]

MBI + ABK are cooked. Both will be under $1 by the end of this year.

2008 Aug 22 12:58 PM

[TJB:]

If your going to bash this stock, at least have the fortitude to put your name behind it. It is cowardly to not have to be held to your predictions or opinions. Like when a financial reporter says"some experts are saying", or "some analysts think".

2008 Aug 22 01:02 PM

[Ishortyou:]

I agree who is hiding behind this comments doesnt even have a name.

2008 Aug 22 04:57 PM

[VEGAS0825:]

Over done? the stock is trading at less than 1/3 rd of book! "In our opinion the rally is premature", what kind of statement is that? The world is starting to realize what really happened to these guys and see the value in these companies. Did they get greedy with the mtg paper absolutely, however they were told the paper was AAA. Dont know if you are out to protect the shorts or what but do a little research of your own and stop hiding behind others with the he believes and the analyst thinks bs. Thanks Greg

2008 Aug 22 05:26 PM

[nonidiomatic:]

If ABK and MBI end the year under $1.00 / share, then all new mortgages will require 20%-30% down payment. Interest rates will no longer be tied to the 10 year T-Notes or 30 year T-Bonds, but will depend upon your local Savings and Loans. Rates will probably vary between 14% to 19% with terms not beyond 20 years. Home values will drop 50% or more from today's valuations. Unemployment will triple in the construction trades and the effects of that scenario are too complex to contemplate. Bernake and the FED have a vested interest too make sure that scenario NEVER happens.

2008 Aug 23 01:57 AM

[nonidiomatic:]

Vrtde

2008 Aug 23 01:58 AM

[Pauley:]

Face the facts....ABK dropped for one reason and one reason only....they have HUGE LOSSES.....when the stock was trading at huge valuations, they had PROFITS....Ambac has such huge losses, why would you put any money into their stock...their is no vested interest in Ambac, none at all, if they failed, no one would notice, the company is worthless, look at their cash flow balance sheet......THEY HAVE LOST ALL PROFITS OVER THE LAST 7 YEARS!!!!!.....IN LESS THAN 8 MONTHS.....they make nothing, they could stand to lose an unbelievable amount of money.....SERIOUSLY...... one good reason to invest in a company that is losing money....HOW WILL THEY MAKE IT BACK.....where is the money going to come from.....WHERE.....the... have no idea......THEY TRY TO BORROW MONEY TO STAY AFLOAT.....WHERE IS THE MONEY GOING TO BE MADE IN THE FUTURE......GIVE ME A BREAK PEOPLE......GET SOME COMMON SENSE......HOW LONG HAVE YOU BEEN IN THE MARKET, MY GOODNESS

2008 Aug 23 04:54 AM

[VEGAS0825:]

And who are you? Come on no name, hide behind the keyboard all you want short boy. At least have the cahones to tell us who you are and what your position is!!!

2008 Aug 23 07:47 PM

[wobatus:]

The rally has more to do with the intrinsic value of the companies' balance sheets, not the hope of future business.

Nice call that the rally is over done, since now it must be burnt to a crisp. The selloff was overdone.

2008 Aug 27 12:19 PM