The DJIA has risen for eight straight days and the verdict is still out as to how today’s close will go. With major indexes trading over 50% above their March lows and with all the troubled and speculative financial stocks trading like the new ghetto replacement for crack, you know you are in the midst of a big bull market or a major bear market rally. And this new call on American International Group, Inc. (NYSE: AIG) either proves that we are all going nuts in the euphoria or that this market cannot be scared and cannot be reasoned with. AIG has doubled since August 19 and is up roughly 400% from lows. And now here is the call we are starting to hear more and more as at least a possibility…. AIG at $100.
For starters, we are not just skeptical. Call us, or call me, Thomas. But after running the math, this is at least not out of the realm of possibilities. This becomes a scary notion if you start interpolating the gains off of lows seen at some of the other troubled financial giants that took TARP money and had to get bailed out by Uncle Sam.
Citigroup, Inc. (NYSE: C) is actually up more than 400% from its lows; and it is still down more than 75% from its 52-week highs and down over 90% from its $50+ highs in 2007. Bank of America Corporation (NYSE: BAC) is still down about 55% from its 52-week highs today and is down 66% from its highs in 2006. Hartford Financial Services Group Inc. (NYSE: HIG) also took TARP money and it is an insurer. Hartford shares are actually up sixfold from their lows; yet the shares are still down about 66% from the 52-week high and down over 75% from the 2007 highs. While AIG is in hock with Uncle Sam, and while it is perhaps the most hated company by most of Main Street of all surviving financial giants, imagine if you started just using the stock performance of other troubled financial giants to make price targets at AIG.
Despite the pullback off of highs this morning, we also cannot go back to the euphoria of the old tech bubble to make some further obvious realizations. If we adjust for splits, Yahoo! was grossly overvalued at a split-adjusted price of $50.00 in October and November of 1999. But that did not keep it from going up to north of $100 in December 1999 (again split-adjusted). By March 2001 that stock was under $10.00. If you do not adjust for splits in the euphoria, Yahoo! went from just over $110 to right at $500 before Humpty Dumpty was knocked off of the wall. AIG is not Yahoo! and we are not under the impression that there is a direct comparison. But this is to compare euphoria…. There is a huge difference between the two. For starters, AIG has already risen about 400% from the levels of just July 9, 2009. The July 9 lows coincides with six trading days after the 1:20 reverse stock split. If you adjust for the split, AIG was up at almost $30.00 a few days before that reverse split became effective on July 1, 2009.
Even if this latest move this week turns out to be a bogus share appreciation, the market bulls are still in charge for now. A 40 point pullback in the DJIA after roughly a 50% index run from the March lows and after eight straight days of an up-market does not really give the bears any real sense of a major victory. Yours truly has been in the camp that many of these troubled financial giants are up too much or at least far too fast considering the valuation and the risks. But a bull market does that and trying to be too smart or trying to out-guess the flow of money means a lost opportunity. Ask Meredith Whitney or ask Nouriel Roubini about that…
So how the hell can someone come up with a price target of $100 for AIG in the world of 2009??? Isn’t this company still an at-risk organization? Isn’t it still a ‘going concern’ for a real company if it was not under the wing of Uncle Sam? Hasn’t the company been emasculated in unit sales and in operations? Didn’t this little piggy get booted out of the DJIA? Didn’t this do the reverse stock split to artificially boost its share price? And isn’t AIG still going to be under political pressure? The answer is YES on all fronts. But that might not matter after everything we have seen this year.
Again, there is a raging bull market mentality that is winning in the current climate. It doesn’t matter even if this turns out to have been a major bear market rally in the years ahead. All that matters for traders is if they made money when the market moves. And this $100 crazy figure is what those under the bull market spell are trying to figure out what it would look like.
If we adjust for the reverse split and use a $47.84 close of yesterday, the actual 52-week high for AIG is now $493.60 when you account for that 1:20 reverse stock split. The market cap today is ‘only’ $6.4 billion. AIG generated revenues of $33.9 billion in its latest quarter and made money if you account for everything in and out. While it lists total assets as $830.4 billion and total liabilities as $772.4 billion as of June 30, 2009, we have yet to find a single investor nor a single trader that can legitimately endorse a real figure here as to what it is worth. But on the books as they are written, the equity is listed as $57.9 billion and the net in tangible assets after offsetting the whole items (again, by what the books say) it is listed as $51.5 billion. Do we assume those figures are real or final? No… Just because it’s written doesn’t make it so. There are many alternative calculations out there that take the government stake into consideration that are far lower what this notes.
And if you back further, AIG’s stock was north of $1,000.000 less than 2 years ago accounting for that reverse split. The real price on an unadjusted basis was over $70.00 on a nominal basis at the time.
Then there is the case of government ownership. Uncle Same effectively owns 80% of the company. The most recent short interest data also showed some 24.1 million shares sold short, roughly 20% of its float. And Jim Cramer said that those who were blindly shorting AIG were amateurs who needed their shoe-laces tied. Again, there are no targets from analysts that are worth mentioning. Could you imagine a brokerage firm on Wall Street coming out with a price target on AIG today? And what would shock you more as any interpolated or theoretical price target… if you saw a target of $25.00 or a target of $200.00?
The reason the government never officially just closed AIG nor just took it over will be very obvious through time. Uncle Sam has enough balance sheet issues without having added what could have been a black hole onto its books. And to have just wiped it out entirely and suddenly would have likely caused waves of failures in counterparties. You would also have suddenly had million of policies with real value that would have been wiped out, and how many states can actually fund the takeover of all those ‘regulated’ liabilities? Maybe some, but none would have wanted to. So it was cheaper for the government to hold its nose and throw a mountain of cash at the problem. This is somewhere around $170 billion worth of bailout in AIG alone, although again the real tally of what was thrown its way may not be known for years.
So back to the bulls… For all practical purposes, AIG has no real analysts covering the stock in a classic sense. So there is no sense of a price target and there is no sense of earnings and revenue projections. That also means that anyone making price projections or any assumptions is doing so entirely without guidance, entirely without reference, and entirely without knowing what the real worth of AIG happens to be.
The other bits that the bulls have going for them is the new CEO Robert Benmosche is the real deal as far as the insurance industry is concerned. He was a champion at MetLife (NYSE: MET) before he retired. Benmosche has also pledged not to just keep selling off unit after unit just to raise cash. This is where the anti-emasculation comes into play. It is our opinion that Benmosche can probably achieve what Ed Liddy was unable to do… defend the bonuses and keep every Senator or Congressman from trying to run AIG. After all, Benmosche probably has every gumption of slamming the politicos that are certain to be bashing him down the road and demanding that he show up for Congressional television spanking sessions. He can yell back legitimately and show how he was brought in after they already ran out one replacement. And Benmosche probably does not care what the salary of any politician happens to be, even if that pertains to the salary of the President. From everything we have seen, Benmosche is going to actually be endorsed with a Pay Czar approval next week. He is even pledging to pay back the government, as the company should.
And in the sense of Benjamin Button…. The is an aspect similar to “The Curious Case of Hank Greenberg” that is coming into play. Any notion that Greenberg is going to form a bid to come take AIG back seems very far fetched. But Greenberg may have a friend in Benmosche compared to Liddy. And whether you like Hank Greenberg or whether you want to blame him for being part of the problem that got the company here, a coin toss bet would probably be more favorable of an outcome if Greenberg is actually out praising the efforts rather than saying he is being ignored or brushed off.
AIG has pulled back substantially from the highs this morning of $55.00 or higher. It did open at $52.98. It also went negative and was actually up about 3% around $49.50 on last look before publishing this. The case for $100.00 on AIG is a hard case to make for those who still consider it an at-risk institution. In bull markets, and even major rallies within bear markets, crazy things happen. This is one of those instances where reality and perception are both items that vary greatly depending on what your mentality is.
Oddly enough, Dow Jones ran a note today saying that the DJIA would now be closer to 10,000 had Citigroup and AIG not been stripped out of the index. It seems that nobody wants to take any stab out there at what is even possible for how high AIG could go before this is all said and done. AIG could see $100.00 at some point. It could also see $10.00. And if Uncle Sam suddenly demands all of its money back, well there is likely nothing left over at all in that scenario.
JON C. OGG
August 28, 2009