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Thursday, August 6, 2009

AIG Soars... Still Down 96% Year over Year

WSJ details:

Have the markets gone mad?

AIG closed up 63% to $22. Yes, AIG.

The troubled insurance giant — which reports earnings Friday — announced earlier this week that it company would soon get a new CEO. But that was on Monday, and wouldn’t really explain today’s surge.

Speaking to MarketWatch, Miller Tabak analyst Peter Bookvar says that he sees a technical issue at work stemming from the company’s recent reverse stock split. “It’s another example of where the float has dramatically shrunk, and now there’s a massive short squeeze going on,” Bookvar said. “There is certainly no news to account for it (AIG’s stock move), he added.

First a little perspective. Even after yesterday's 60% jump, AIG's share price is down an astounding 96% year over year (and down 35% from levels seen just 2 months ago).

While something does seem fishy, this type of volaility for AIG shouldn't be all that unexpected. After all, AIG is no ordinary stock. It is just a binary option on the continued bailing out of an entity currently too big too fail. At the end of the day, AIG should be worth $0.00 (i.e. nothing) or a high multiple of its current valuation.

The reason being it is a non-zero probability that the government will hand over billions more to equity investors via subsidized financing of their operations for years to come. How do you model that?

Source: Yahoo