AIG last week priced new equity, allowing the government to unwind some of its position. The U.S. Treasury sold 200 million shares, or 15% of its AIG stake on Tuesday, but still has 77% ownership of the insurer and another 1.5 billion shares to sell before it is fully out of its investment.
That means this is just the first of many liquidity events. And you don't want to own a stock when you know that a company's largest equity holder is on a mission to get out of its position. Long-term weakness will prevail in this case.
So it's time to "Sell" AIG -- until the U.S. government finishes diluting current shareholders by dumping its equity.
- High levels of new property insurance claims are coming.
- A glut in old inefficient aircraft is going to affect leasing rates for fleet owners like AIG.
- The U.S. government's equity sales will provide short sellers liquidity to put on new shorts.
- And the global economy continues to struggle, leaving franchises struggling.
Meanwhile, high energy prices - specifically the cost of distillates like jet fuels - have forced airlines to temporarily or permanently ground their most inefficient aircraft ahead of schedule. This has resulted in a glut in jet aircraft on the world's markets.
AIG, through its International Lease Corporation, is one of the largest owners of older and newer commercial aircraft in the world. Now, at these fuel cost levels, it is seeing a growing percentage of its fleet become undesirable.
In the coming quarters, AIG will be paying out more cash than it takes in. This means it will be looking to price additional secondaries as quickly as it believes the market has digested the last ones. This will weigh on the stock price going forward as the company seeks to increase its real cash levels.
Furthermore, the current economic crisis in Europe isn't over, and that leaves AIG's international business model exposed to contagion issues should the European Union (EU) or European Central Bank (ECB) have a crisis in confidence.
Indeed, the future of AIG is still in doubt, as it spins off assets and absorbs hits to the value of its remaining assets.
If you own AIG it's time to get out before the losses get worse.
AIG shares closed Friday virtually flat, up 12 cents, or 0.42%, at $28.87. That's just off it's 52-week low of $27.50 and well below its 52-week high of $62.87.
If you are long on AIG, look to sell your shares at market and get out of your position.
I would advise patient investors to look toward buying a put on AIG via the 2012 January 29 strike for every 100 shares of equivalent short exposure they're interested in. These (AIG120121P00029000) will give an investor down side exposure without the margin obligation through January 2012 and are currently trading around $4.00 per contract.
If you are adventurous, AIG makes a nice long-term short. I would suggest pairing that trade with an equal long exposure to a company like Berkshire Hathaway Inc. (NYSE: BRK.A, BRK.B).
This would give you a way to go long on quality insurance management, while going short a structurally weak insurance company.
(**) Special Note of Disclosure: Jack Barnes has no interest in American International Group.
Barnes launched his own shop, RIA, in 2003, just as the second Gulf War was breaking out. In early 2006, after logging a one-year return of nearly 83%, Forbes named Barnes the top stock picker in its "Armchair Investors Who Beat the Pros" competition. His two audited hedge funds generated double-digit returns in 2008.
Barnes retired to the beach in the summer of 2009, and continues to write from there. He's now the author of the popular blog, "Confessions of a Macro Contrarian," and his "Buy, Sell or Hold" column appears in Money Morning on Mondays. In his BSH column last week, Barnes analyzed Archer Daniels Midland co (Nasdaq: ADM).
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