Sunday, April 11, 2010

Stock Market Review - 04/11/2010

"It's not a lie if you believe it." - George Costanza

This was a classic line from the television show, Seinfeld, delivered by the character, George Costanza. Neurotic, pathetic, warped, and completely detached from reality, George constantly tried to reshape and manipulate his world to match his perception. "It's not a lie if you believe it", was a classic example of his attempt to warp reality to his wishes. I couldn't help but to think of it when Ambac Financial came out with their earnings report on Friday. Like the show, Seinfeld, Ambac's earnings are always a comedy act delivered with the deadpan banality of a good straight man. Yet, Ambac is representative of today's stock market. It is the 'new era'. All that matters is the lie. It's all a lie. The lie never ends. The stock market opens with a lie and closes with a lie. The lie is the opening of the greatest con job in history. No one can tell the truth else they risk their head exploding on utterance. But if the lie is a good one, it can do wonders for the stock price. Ambac shot up 71% on Friday. Nope, that is not a misprint. 71% in one day. Granted, the stock price went from $.65 to $1.10 but still - 71%! What could cause such a tremendous rise. Well, it takes a tremendous lie.

Ambac's business was insuring bonds from 1997 to 2007. Not just any bonds. They insured the credit default swaps that underpinned the derivative world that launched the subprime real estate mania that dissolved the financial system of the banker cartel. Don't get too excited about Friday's action. Take a look at the chart below. Ambac used to be a $90 stock before the real estate con became front page news to even the idiots in the mainstream media.

ABK - 18 years monthly
Chart courtesy

As you can see, the stock price collapsed but now it must be in 'recovery' mode like the rest of the financial world. Yeah, sure it is. But let's get to the comedy. The company announced that for the fourth quarter of 2009, they made $558 million in income. Wall Street stopped reading right there and the stock price jumped 71% before bubblevision could prance a talking head out to cheer on the latest bubble de jour. But not me. I kept reading. It seems that the company went on to say that the $558 million was due to a tax law change (imagine the new bankster government of the US changing tax laws to benefit the companies that spent the last decade scamming the world in derivatives trading?) and 'unrealized' gains in derivatives valuations. The change in tax laws benefited Ambac to the tune of $472 million and change in 'fair value' of derivatives was $132 million. They realized losses of $648 million in derivatives but took gains of unrealized nature of $781 million on derivatives. They also admitted that net losses were $384 million due to 'credit deterioration' in portfolios. In other words, they didn't really make any money. They made accounting adjustments to get to the positive number they reported. Well, they earnings weren't really earnings. They were 'statutory' earnings. That means the earnings depended upon whether or not you believe it. A lie is not a lie if you believe it.

The chart below shows the reaction on the Friday of the 'earnings' announcement. Yep - a giant gain with giant volume. Yippee! This is our modern market. It's all built on a lie because no one can deal with the truth. Here it is. Everyone is broke. No one has the money they claim to have. Ambac might still be on the hook for hundreds of billions or even trillions of swaps and derivatives. Good luck to everyone if they have to rely on this insurance. Oh, did I mention that the company's balance sheet shows a book value of negative $7.95? Now how does a company with a negative book value of $7.95 per share claim to make $584 million in a quarter? It' not a lie if you believe it, indeed! After all, the news made the stock price jump for the day. Oh, did I mention that the swaps on the the company themselves are indicating default is imminent? Party on, bubble blowers!!

ABK - 18 days
Chart courtesy

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