Outlook Remains Grim for MBIA, Ambac

by: Michael Patterson posted on: June 30, 2008 | about stocks: ABK / MBI    
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MBIA Inc. (MBI) and Ambac Financial Group, Inc. (ABK) have been at the center of the credit and housing crisis as insurers of sub-prime, sub-A loans and prime housing loans. Analysts continue to drop the earnings estimates and the stocks themselves fall to new lows weekly.

MBIA Inc.

MBIA fell to a new 52-week low on Friday as the market continued to struggle and the bond insurer saw its earnings estimates decreased during the most recent week. Dropping another 5% on Friday the stock reached $4.03 a share, the lowest over the last year of trading.

The company missed its last earnings estimate terribly, posting a loss of $3.01 a share while analysts were expecting a loss of only $0.19. But analysts have now reduced the company’s expected earnings across the board down to a loss of $1.09 in the current quarter and a loss of $6.22 a share for the current year.

20% of the shares are currently short and with no revenue or earnings in the foreseeable future, MBIA could easily see more drops and a few short squeezes on its way lower.

Ambac Financial

Ambac Financial, lower in value than MBIA, doesn’t have the outrageous dividend payment still outstanding but is in a similar situation on all other accounts.

Missing its last earnings quarter by 359%, analyst have slashed their expectations from a loss of $0.78 to a loss of $1.33 a share for the current quarter and from a loss of $2.75 a share to a loss of $9.16 a share for the current year.

The Trade

You could short either one of the two bond insurers or purchase a Put when there are not additional shares available to be shorted. I would purchase a January 2009 Put at the 2.50 Strike price for ABK and I would purchase a January 2009 Put at the 5.00 Strike price for MBI. This will allow time for the stock to fall and to avoid a short squeeze close to an options expiration date.

Disclosure: None

Editor's note: The original version of this article incorrectly stated that MBIA has not eliminated its quarterly dividend. In fact, the company did so earlier this year.

This article has 8 comments! Add yours below...

Michael Patterson

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This article has 8 comments:

  •  
    fxtrader07
    Jun 30 09:28 AM
    'no revenues or earnings' ?? do you even have the slightest understanding of these companioes? i doubt it.
    in short, you recommend shorting stocks that
    have already fallen by 90-95%,
    have a large percentage of their float shorted,
    have a good chance to realize a book value of 5-10 times their current market cap over the coming years if they can avoid bk and further dilution

    and on top of it, you base it on their terrible last quarter and the expected bad current one. So you think, yesterdays news will determine the stock's moves of tomorrow?
  •  
    Ishortyou
    Jun 30 10:11 AM
    In respect to AMBAC and MBIA, they need to keep and save all the cash possible including stop paying dividends, deleverage from all their risky liabilities specially those CDS, CDO's, RMBS-ABS of uncertain value, in order to remediate their book values, once their book values are sound they need to reinstate their triple A rating again to write new low risk public bond insurance business. They can also open or extend a line of credit to make sure to continue operations and dissipate doubts.

    They are already doing these, so it will take some time to deleverage their books from uncertainties and rewrite new business again. This coming back will be the best advertisement to recruit new clients.
  •  
    Ishortyou
    Jun 30 10:19 AM
    In respect to AMBAC and MBIA, they need to keep and save all the cash possible including stop paying dividends, deleverage from all their risky liabilities specially those CDS, CDO's, RMBS-ABS of uncertain value, in order to remediate their book values, once their book values are sound they need to reinstate their triple A rating again to write new low risk public bond insurance business. They can also open or extend a line of credit to make sure to continue operations and dissipate doubts.

    They are already doing these, so it will take some time to deleverage their books from uncertainties and rewrite new business again. This coming back will be the best advertisement to recruit new clients
  •  
    oldlures1
    Jun 30 11:30 AM
    Thanks fxtrader07! I was mentally teeing one up when I read your response - you beat me to it.
  •  
    sunrises
    Jul 01 12:15 AM
    Will ABK have a bounce this week?
  •  
    Bear Stocks
    Report
    Jul 01 09:46 AM
    My Website
    We've been short-selling stocks like HUN, LEH, GM, OSK, CTX, AIG, LEN, PACW, LFG, XL with great results. Who says bear markets are bad?
  •  
    HarMegiddo
    Jul 01 02:26 PM
    Bear Stock Reports.
    I think thats just called the DXD. The DOW is as ugly as the few you named, some are in it.
    I love the DJ30 taking out HON to put in BAC, that was the move of the year, HaHa!!
  •  
    Common Sense
    Jul 02 01:54 AM
    Fear and greed drives markets.
    There is absolutely no way AMBAC or MBIA will to go to zero there fore they will eventually go back up. They will however have to restructure and get back to their original business of insuring low risk and low margin public bonds. Their greed got the best of them and they became overweight in risk, but now there is enough fear to not let it happen again. I am not suggesting that they will not continue to dip lower in the near term. What I am suggesting is that the next 36 months these stocks could possibly be in the high teens, low twenties.
    There may be government intervention of some sort to assist them in regaining their AAA rating. After all we saved Harley Davidson and that had very little reach into the stability of the market. Figure out how many companies will be affected if MBIA and AMABC fail completely. Figure out the overall ramifications of a complete failure on the overall market and you will begin to understand that it will not be allowed
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