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Ambac is a great lesson in Short Pressure and Day Trading....



April 13, 2010 – Comments (6) | RELATED TICKERS: ABKFQ.DL

With better than a 20% short float, I anticipated Ambac would have a day plus of rapid rise as those short decided when/if to cover.  I miss guessed on how long that would take and I'm reflecting why.....

Ambac's core business is Title Insurance. In the boom of the housing market, Ambac rode high. In the bust, Ambac must pay out.

I didn't anticipate the battle to last three days, but mostly because I didn't anticipate the day traders having some fun as well.

I seem any quotes on many boards that Ambac is heading back to the $20's or $30's or higher. Most of the rationale seems to be around two areas (myths).

 1. Ambac had a profit this quarter.   That isn't quite correct. Ambac had a gain this past quarter on the back of ONE TIME events, mostly a tax offset of $470 Million.  Subtract that and they posted a loss of $385 Million.  Guidance was doubt whether they could continue operations, let alone make a profit.  Writing of new policies has essentially ceased.

2.  Ambac peaked at $96 only three years ago.  That parts a fact, the myth is that that has anything to do with reality.  Ambac had a net tangible assets of POSITVE $6.1 BILLION.  Today its a negative $3 BILLION and dropping. ......  NET LOSS of $9 Billion in tangible assets.  Why would a company that had a $9 BILLION drop in tangible assets and now has a NEGATIVE $9.8 Dollars per share, be worth $96 per share when it is writing NO new business and can't value what it has??

My thoughts when I called the top yesterday at $2.08 only to watch it rise again today to $3.39 and spot me a negative 50 CAPS points in a few hours was that the short covering was pretty much done.  What I left out of the equation was the day trading.

Ambac has a float of 286 Million shares of which about 54 Million were listed as "short".  That normally should have burned off on Monday with a 417 Million Share volume.   Here at 2PM EST on Tuesday, we have another 489 Million hands traded.  In two days, the float traded hands OVER 3 TIMES.   Clearly many shares were traded multiple times.

Bagholders abound at the $3.00 Peak. Cries for help fill the message boards.  My advice...don't play with what you don't understand.  I think I'll have my CAPs points back by Friday.  Not optimal, but once Ambac starts down again, I'll be in similar playing field with those who held their downthumb ammo, but a cite better off than the green thumbs that appeared.

Yes, I'll be called a short, abused by daydreamers, but I'll take it.  If I'm wrong and this soars to $30 then I'll return and eat my words and go back to school. I think I have the short trends down fairly well now, the daytraders will take time. I'll practice with the $2.50 puts I bought this morning when Ambac was at $3.10.  So yes....real life disclosure....I'm short.  Show me I'm wrong.....

TSIF    (The Sky isn't falling today....unless you're a speculator, chasing UFO's that went to high altitudes but are low on fuel).


6 Comments – Post Your Own

#1) On April 13, 2010 at 5:54 PM, kdakota630 (29.47) wrote:

Awesome post.  I can't believe it doesn't have more recs!

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#2) On April 13, 2010 at 5:59 PM, TSIF (99.97) wrote:

Thanks Kdakota630, yours was all I needed.

Probably because I posted in the middle of the day when most people were working and it scrolled off pretty fast.

Then again, maybe it has the DTB diseasae,  (danielthebear,

Although he seems to have found the antidote.... :)

Eitherway, I appreciate the comment, I'm trying to stay in learning mode for the next recession......or the second leg of this one!!!  :)

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#3) On April 13, 2010 at 6:49 PM, kdakota630 (29.47) wrote:

As much as I like blogs about economics like from whereaminow or catoismymotor, or ones like chrisgraley's political one today, blogs like this one are why I got into CAPS in the first place.

I was watching ABK yesterday and today trying to figure out what the hell was going on, and then I read an excellent analysis of 'why' on your blog, and I feel like I learned something about investing.

Thanks, and keep up the great work!

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#4) On April 13, 2010 at 10:55 PM, detroitigerz (< 20) wrote:

yeah good post big dog

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#5) On April 14, 2010 at 9:56 AM, jsbacker (73.72) wrote:


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#6) On April 14, 2010 at 10:28 AM, ssubban (< 20) wrote:

Cramer and SeekingAlpha actually think ABK is a buy because of other theortical insolvent bond insurers like MBIA have made huge gains last year.  I think that is faulty thinking especially when this company ABK says a BK or reorganization is very immenient. 

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