Monday, August 31, 2009

Taipan Daily: Trading in Marked Ingots

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Monday, August 31, 2009
Taipan Daily: Trading in Marked Ingots
by Adam Lass, Senior Editor, WaveStrength Options Weekly

“It’s a throwdown… a feud at Taipan Daily… Lass is long and Litle is short…”

Not really.

First of all, Justice is the taller of the two of us. Second, the only reason you can see any daylight at all between our positions regarding the current rally is because Justice has more spine than yours truly.

We both see pretty much the same root causes, both for the economy’s current woeful state and the market’s gassy little rally. And we both suspect that in the end, unwary investors will most definitely lose some coin.

The sole difference between us is that I am tempted by the opportunity to ride along with Washington’s rigged bet, while Justice wants to get as far away as possible from what will eventually be ground zero.

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You Can’t Fool the Dealer

I must admit that, in the long run, his stance is probably the wiser – and certainly morally superior to my own. It’s kind of like hanging out just an hour or two longer in Sodom, because your poker game is going so well.

According to certain rabbinic writings, one of Sodom’s primary sins was economic in nature. Rich men would publicly claim mitvot – good karma, if you will – by lavishing gold on beggars. However, the ingots were inscribed with certain signs alerting merchants to refuse these men any service or food. When the poor souls starved to death, their corpses would be ransacked and the gold was secretly returned to the supposed “donor.”

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There is some question amongst historians and archeologists as to whether Sodom ever really existed. Jews, Christians and Muslims are satisfied with the tales’ strong moral advisories.

What’s $182 Billion Between Friends?

What brings all this to mind today is the recent behavior of shares of the insurance giant, American International Group (AIG:NYSE). I’m sure you’ve heard the backstory by now: AIG underwrote the risk of Wall Street’s mortgage bond speculations. And when it all hit the fan, Washington stepped in with some 182.5 billion of your dollars to back up those policies.

Sound risky? Perhaps even fiscally irresponsible? You bet it was!

It has since been revealed (via a FOIA lawsuit) that an initial draft of the Treasury Department’s AIG proposal contained a description of the whole AIG deal as follows: “the prospects of recovery of capital and a return on the equity investment to the taxpayer are highly speculative.”

“That Was Then”…

But somehow, by the time the whole dog and pony show was presented to Congress (i.e. “us, the public, the rubes who will pay for this mess for decades to come”), this fearful assessment had been excised.

When asked why taxpayers have been kept in the dark as to the ongoing risk of losing $182.5 billion, a Treasury Department flack caviled that the “highly speculative” phraseology dated back to the previous administration.

You know, the “bad old days,” when the whole bailout team was run by miscreants like Hank Paulson, Ben Bernanke and Timothy Geithner. The current team (that would be Tim Geithner and the recently re-nominated Ben Bernanke) is more sanguine as to AIG’s chances.

This Is Now

And if such masters of the universe are satisfied that investing in a virtually defunct insurance company is a good idea, why should the herd turn its collective nose. So far this August, these hollow assurances have caused AIG shares to rise from $12.97 to $55.90, an astounding gain of 331%.

In one day last week, investors traded 149 million shares in a stock that may, at any moment, be revalued to zero.

Seriously, I have a report on my desk right now that states that when the entire bailout of AIG is done, and every commitment they have made to such firms as Citigroup, JP Morgan Chase, and Goldman Sachs has been paid off, AIG shares will inevitably be reduced to their fair value: Nothing, zip, zed, nada.

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Now why would such a “zombie stock” be allowed to roam free like this? Apparently, there are no rules in place to deal with government-reanimated corpses.

The NYSE assures us that they are violating no specific regulation. The SEC and Financial Industry Regulatory Authority both claim that they can do nothing to warn off investors (despite the fact that they did circulate alerts regarding the similar reduction of “Old” GM shares.)

Seems to me that these investors are happily trading in Sodom’s marked ingots, due to be recalled at any moment. And yet, most all short positions in AIG (including the puts I recommended to WOW readers) have simply been crushed.

The moral thing to do is to leave Sodom and not look back. Might even be the wisest idea. On the other hand, this game is going so well, and I’m holding aces…

Yours truly,


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