MBIA announced this morning that it lost 13.03 per share. It is currently priced at 10.25, and the stock is rallying. The pundits on Bloomberg said this is because the results were 'better than expected,' with the whispered expectations being 'catastrophic.' They have recently added the spin that MBIA said they now have 'ample liquidity' and will not have to raise any more capital. This triggered 'optimism' in US financials.
"Coincidentally" this is also stock option expiration week for May, and the specs had been piling on the financials which are almost certainly going lower in the longer term, but can anywhere in the short term.
"Perhaps the worst is behind us."
This is a great example of the frustration that the casual or novice investor/trader will feel when playing the markets. When a company loses MORE than their share worth in a single quarter, it could be called counter-intuitive that the stock will rally that morning to say the least.
In the short term fundamentals have little or nothing to do with market performance in the type of market which we are in now, which is a speculator's market awash with desperate hedge funds and big trading banks loaded with hot money.
If you are in this market you are playing a no-limit poker game with a group of high rollers, paid shills, and desperate punters who can see your cards at least in the aggregate if not individually.
If a large group of small speculators took short positions, particularly with options ahead of today's announcement, and the company remained solvent, they are going to get squeezed in the short term, pure and simple.
That's it. In a nutshell. It may not seem fair to you, but that is the game in which you are playing if you are sitting at the table.
How do you fight this? The best and most appropriate measure for most 'traders' is to lengthen your timeframes and shorten your leverage. Play options for the longer term and lightly. NEVER go in heavily before any event. Toss your predictive models out the window.
You will hear from a lot of daytraders who claim to just go with the flow, and make money scalping the direction short term without regard to the fundamentals, the up and down. Most of them have short trading lives, and exaggerate their gains and hide their losses, going bust in less than twelve months. They get consumed by commissions and mistakes. Those are the facts. They may have a lucky streak, but they always give it all back, and more.
How did we handle this? We came in heavy in cash and hedged positions where we are short one thing and long another, so the net result is neutral. Now we are starting to add selective short positions on this rally in financials based on close look at the charts, and not getting married to any of them. We did add some longer dated puts on MBIA for example a few minutes ago when it was up 1.00 and we will do more if it goes higher up to our stop out.
Don't feed the sharks. This is not quite a 'wild west' market but its close. They like to throw a cat among the pigeons and see who panics out of their overleveraged and undercapitalized positions for a quick buck. There are plenty of talking heads and guys talking their books to help you lose money in a panic squeeze or rally.
Protect your capital, lengthen your timeframes, don't overweight any one directional positions, and remember that you cannot predict the future, and nothing has to make sense to you in the short term because you are playing the game on a level perhaps appropriate to you, but not to the real insiders and professionals.
AP
MBIA slides to huge 1Q loss on hefty charges
Monday May 12, 9:34 am ET
By Stephen Bernard, AP Business Writer
MBIA falls to $2.41 billion loss in 1st quarter, writes down $3.58B derivative liabilities
NEW YORK (AP) -- MBIA Inc. swung to a $2.41 billion loss during the first quarter as the bond insurer faced ongoing deterioration in the credit markets and recorded billions in write-downs.
The loss equated to $13.03 per share during the quarter ending March 31, compared with year-ago profits of $198.6 million, or $1.46 per share.
MBIA was forced to reduce the value of its insured derivatives holdings by $3.58 billion, leading to $2.96 billion in total lost revenue, compared with revenue of $729.9 million a year ago. Net premiums written tumbled to $97.3 million from $171.3 million last year.
Unlike traditional insurance on corporate or municipal bonds, the value of derivatives holdings -- called credit default swaps -- must be priced at the end of each quarter at current market value. Because the value of such products has tumbled in recent months, MBIA was forced to cut the value of its holdings, thus recording what in accounting terms is called an unrealized loss. Actual losses would only occur if MBIA sold the derivatives at less than the original cost.
MBIA does not project actual losses on those holdings to ever reach the amount equal to the write-downs it took during the quarter, it said in a statement.
Shares rose more than 4 percent, or 41 cents, to $9.84 at the open of trade.
The derivatives losses were not the only problems plaguing bond insurers in recent months. They have also been hit hard by the deterioration in the mortgage markets that began in late 2007.
Initially, bond insurers only provided insurance to municipalities. But in recent years business was expanded to insure other debt, such as bonds backed by mortgages and consumer loans. As the mortgage market soured and mortgage defaults spiked in 2007, investors and ratings agencies began to worry bonds backed by those troubled loans would default as well. That in turn would lead to a spike in claims payments.
Both investors and credit ratings agencies worried the insurers would not have enough spare cash to both handle a potential increase in claims and maintain reserves warranting top-notch "AAA" financial strength ratings.
The "AAA" rating is essential to ensure bond insurers can book new business. Worries that insurers like MBIA could face ratings cuts cost the company some new business -- one reason why written premiums declined during the first quarter.
Downgrades to bond insurers can make it more expensive for municipalities and other institutions to borrow money for an array of projects ranging from the construction of new schools to sewer systems. Bond insurers essentially back a bond by agreeing to pay principal and interest if the bond issuer misses payments. In return for the insurance, a municipality typically will be able to use the insurer's "AAA" rating to get a lower interest rate and thus save money.
Without that "AAA" rating on a bond pledged by the insurer, investors will charge municipalities more to borrow money. Those higher costs are often passed down to taxpayers in the form of higher taxes.
Throughout the quarter, MBIA raised about $2.6 billion in new capital through the issuance of common stock and other investments. That included investments by private equity firm Warburg Pincus in an effort to maintain MBIA's "AAA" ratings and demonstrate it would have enough cash to cover a spike in claims.
Despite the capital raising efforts, Fitch Ratings cut MBIA's financial strength rating to "AA" from "AAA" in early April. MBIA's reserves range between $3.4 billion and $3.8 billion short of what is needed for Fitch to consider the bond insurer worthy of being rated "AAA," Fitch said then.
Both Moody's Investors Service and Standard & Poor's affirmed MBIA's "AAA" rating in late February, but all three ratings agencies have a long-term negative outlook on the bond insurer.
Prior to those ratings affirmations in February by Moody's and S&P, MBIA had booked very little new business, the company said in a statement.
AP Business Writer Jennifer Malloy in New York contributed to this report.
Citi's Pandit Faces `Impossible Feat,' Whitney Says
Citigroup's ``single greatest challenge'' is the company's ``antiquated and disparate systems and technology,'' Whitney wrote in the note. ``We think that not only will restructuring be almost prohibitively expensive for (Citigroup), but that this expense will come during a time when revenues will be under significant pressure.''
