AIG gets its Pants Back On

There are some companies that the average investor simply will not touch; American International Group is one of them.  AIG is, after all, a poster-child for the excesses of the 2008 banking fiasco.  While America burned, AIG executives dressed in togas and had grand parties – literally!

At The Frost Report, however, we recognize that companies the public hates are often good bargains.  When the numbers make sense, we let bygones be bygones.

This Wednesday, AIG paid back the US Treasury an additional $1.5 billion in TARP money, eliminating the government’s preferred share stake.  Tim Massad, the Treasury department’s assistant secretary for financial stability, had this to say about the event: “In the dark days of the financial crisis, when commitments to AIG totaled $182 billion, few would have believed that we'd already be able to reduce that amount by more than 75 percent, or that we may be able to recover every single dollar invested in the company.”  And yet they have – ahead of schedule.

Consider these statistics: AIG has a book value of $55 per share, yet today’s closing price was only $28.27.  In what always strikes me as one of the wonders of Wall Street, you can literally buy $55 worth of goods for $28.27.  Of course, "book value" is useless if AIG is forced to have a fire sale on its goods and sell them for less than cost.  So, is the company profitable?

AIG had annual sales of over 64 billion dollars in 2011, with profit of $15 billion on 1.9 billion shares outstanding.  Return on equity also handily beat the market at 26%.

Like other companies in the pariah class, there is no big rush to buy AIG.  The government will be selling its stake for some time, and the stock will not likely jump until that selling pressure is over.  Having said that, the government has done a good job of letting other companies it owns (like Citi) rise steadily in value, selling them in a mellow and responsible manner.

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"I would suggest the first thing that would make me feel a little bit better toward them [AIG executives] is if they'd follow the Japanese example and come before the American people and take that deep bow and say, I'm sorry, and then either do one of two things: resign or go commit suicide."

Senator Charles Grassley, 2009

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Disclosure

Do not buy stocks, or take this or any other financial advice without doing your own analysis; including, but not limited to: reviewing business models, financial statements, management style and philosophy, recent developments, market macroeconomic analysis, and chart analysis. If you do not know how to do these things, you shouldn't be buying stocks in the first place. Seek the advice of professionals, as appropriate.

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A Tale of Trading Woe

Last Friday, I was chatting on the phone with a friend of mine who is a talented and logical investor: one of the elite.  He and I often trade views on economic trends or discuss companies and stock tips, and this was just such a day.

He mentioned having recently bought a company called “Viterra,” which has a virtual monopoly on grain storage and shipping in central Canada.  He said that its price had dropped in recent quarters, and went through a short burst of statistics to back up his “great buy” claim, including earnings history, price to book value, and the nature of the industry.  I told him I’d check it out, and we each hung up the phone.

It only took a couple of minutes for me to realize that Viterra was indeed a great company at a great price, so I put in a limit order well above the current bid (at $11.50), to make sure I’d get in.  Then I hit the "enter" key and sat back.  But strangely, it didn’t fill.

I looked at my screen in disbelief as I read that trading had been halted pending an announcement.  The newswire then announced that “certain parties” had expressed interest in buying the company.  When the stock resumed trading a few minutes later, Viterra stock had jumped 29.8% to over $14 a share.  My order (at a now-measly $11.50) didn't fill.  Dammit!

Needless to say, my friend called back a couple of minutes later to casually jab me about my lost opportunity (“I didn’t know this would happen.  Honestly!”)

Shortly after that, I called him back to let him know that the transaction just made the cover story for the Globe and Mail’s online business section.

I completely missed out.

 

Lesson of the day: solid, undervalued companies do not stay that way forever.  Don't wait to buy.

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“We didn’t lose the game; we just ran out of time.”

Vince Lombardi

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Canadian Government welcomes Crackheads to Banking

The Canadian government this week announced upcoming changes to federal banking rules, designed to reduce "consumer irritants," and make banking more transparent and fair.  Unfortunately, the new rules are also a dream for the nation's con-artists.

One set of changes, for instance, relates to holds on deposited cheques.  Currently, people with bad credit may have a 5-7 day hold put on all non-cash deposits.  According to the new rules, banks must provide access to the first $100 deposited by cheque into the bank, no matter what the credit score of the individual opening the account.  And, for any cheque less than $1500, the maximum hold is 4 days, down from the previous 7 days.  For the working man with spoiled credit, these changes are convenient.  But, it's for con-artists that the new rules really shine.

Once the new rules are in place I can, as a con-artist, now open an account at a bank, deposit a $100 cheque (payable to myself) from my account at another institution (with no money in it), and then take out the $100 as cash!  Awesome!  Even better, I can write a cheque to myself for $1499 from my $0 balance Credit Union account in Toronto or Montreal, deposit it into a new account at a bank in Vancouver, and only 4 days later walk away with $1499 in cash, courtesy of the new 4-day hold maximum (cross-Canada cheques often take more than 4 days to be returned NSF).

Canada's crack addicts will be busy opening accounts at every bank in town, guaranteed a $100 minimum payday for each new account.

Among other changes, the new banking rules also ban unsolicited credit card "convenience cheques," which most banks have discontinued anyway since they tend to get stolen from the mail and used by 3rd parties.  The ban was introduced because Canadians - like their American counterparts during the last housing boom -  have shown a remarkable inability to delay gratification (Canada's personal debt levels are at record highs), and would presumably use the cheques if they received them.

Canada's banks will no doubt fight the new legislation, since it leaves them exposed to millions of dollars' worth of preventable fraud.

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"It's easy to dodge our responsibilities, but we cannot dodge the consequences of dodging our responsibilities."

Josiah C. Stamp, economist

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See also:
Goodbye to three irritating bank practices

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