Sunday, August 30, 2009 0 comments ++[ CLICK TO COMMENT ]++

AIG short-sellers get burnt badly

Almost all short-sellers have been getting killed lately—especially the last two weeks. AIG, in particular, has not been very kind to those betting on its demise. The stock, thought to be worth very little, is up around 500% in the last month. You can see the spectacular rise and the heavy volume, due to short-covering, in the chart above. This goes to show the tough life of traders (in this case, the short-sellers.) Once short-covering gets going, it can skyrocket. As of today, anyone that shorted the stock this year is down almost 80%, unless they managed to cover. Of course, this is not to say that the stock won't collapse in the future. In fact, the Bloomberg article quoted below says that the AIG bonds are pricing the stock as if it is worth almost nothing.

I'll let Bloomberg has a detailed story on the situation:

American International Group Inc., the insurer bailed out by the U.S., gained for a ninth day, reaching a 10-month high as speculators bought back shares they borrowed and sold short, traders said.

AIG climbed $2.39, or 5 percent, to $50.23 at 4:15 p.m. in New York Stock Exchange composite trading after earlier rising as much as 17 percent. In a short sale, investors sell borrowed securities and agree to buy and return them to the shareholder later, profiting from any drop in the stock.

“It’s a short squeeze of an unprecedented fashion,” said Robert Bolton, managing director for trading at Mendon Capital Advisors Corp. “If it goes up enough in their face, then they have to make a decision to cut their losses. This is all fueling that updraft.”

AIG has 21 percent of its float, or shares available for public trading, sold short. That’s the sixth-highest proportion in the Standard & Poor’s 500 Index, according to data compiled by Bloomberg. Today’s gain marked the longest consecutive increase since May 2007, Bloomberg data show.


AIG’s so-called reverse stock split in June magnified the effect of short selling, said Jud Pyle, a market analyst at Chicago- based options trading firm PEAK6 Investments LP. Through the split, AIG gave investors one new share for every 20 they turned in to help keep the stock above $1 and avoid delisting.

“That meant there were fewer individual shares out there,” Pyle said. “If you can’t borrow the stock, you can’t short it. Because if there are fewer shares available to sell short, that can cause a short squeeze if people aren’t able to borrow it to short.”


As AIG’s shares have more than doubled in the last nine sessions, the company’s bonds still trade at levels that indicate the company’s shares may be worthless, according to Peter Boockvar, an equity strategist at Miller Tabak & Co.

“The value of the company is still the same,” he said. “AIG bonds tell you that the equity is possibly worth nothing and that they may not be able to pay back the government.”

AIG’s $3.24 billion of 8.25 percent bonds due in 2018 are quoted at 79 cents on the dollar to yield 12.2 percent, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The insurer’s $4 billion of 8.175 percent bonds due in 2058 are quoted at 49.5 cents on the dollar to yield 16.7 percent, Trace data show.


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