Come on, Brother, Give Me a Hard Eight!!

Want to play craps? How about a little roulette? Black jack? Or should we merely play the slots?

On the topic of casinos and gambling, I hope traders, investors, and the general public fully appreciate the extent to which our wards of the state – AIG (NYSE:AIG), Freddie Mac (NYSE:FRE), Fannie Mae (NYSE:FNM), and Citigroup (NYSE:C) have dominated equity trading volumes over the last few weeks. On many days, these stocks have represented upwards of 25% of the overall volume.

I addressed this point in my August 2009 Market Review and wrote,

A large percentage of market volume has centered on those stocks in which Uncle Sam is heavily involved (Citi, AIG, BofA, Freddie, Fannie). I view these particular stocks as very speculative in nature. That said, there are large short bases in these stocks. The shorts were punished during the month. The stocks did trade off significantly on the last day of the month.

Are we supposed to make assessments of our future economic health and overall market performance based upon stocks in which Uncle Sam holds anywhere from a 40-80% equity stake? I think not. I view trading these stocks as pure gambling, not investing. I challenge any analyst who would say otherwise.

What sector of the market is leading the overall market lower today? Financials!! Which companies in particular? Our friendly Market Data page from The Wall Street Journal highlights the following:

So there you have it, 6 of the top 8 most active stocks being traded yesterday are wards of the state, or a close cousin, that being CIT Group (NYSE:CIT). Ford (NYSE:F) is a fully independent entity. Many view General Electric (NYSE:GE) as an extension of the government politically, while the company itself has clearly benefited from government-backed financing.

Don’t take my word for the speculative nature of AIG, Citi, Freddie, and Fannie. The Wall Street Journal highlights the same in writing, Financial Lead Broad Selloff. Specifically the WSJ asserts,

Among the weakest was American International Group, which sank 17%. Sanford C. Bernstein & Co. downgraded AIG to underperform from market perform, estimating that if the government’s support and other goodwill were discounted, AIG would have a negative book value of $6.4 billion.

Mortgage lenders Fannie Mae and Freddie Mac also traded lower, falling more than 15% after FBR Capital Markets analyst Paul Miller wrote to clients that “[t]here is no fundamental value remaining” in the companies.

I ask you how much money you want to invest on a long term basis in companies which have negative book value or no fundamental value.

The first rule of gambling is, ‘only play with money you can afford to lose.’ The same is to be said for money put into these companies which just so happen to be dominating the overall market volume.

Come on, brother, give me a hard eight!!

About Larry Doyle 522 Articles

Larry Doyle embarked on his Wall Street career in 1983 as a mortgage-backed securities trader for The First Boston Corporation. He was involved in the growth and development of the secondary mortgage market from its near infancy.

After close to 7 years at First Boston, Larry joined Bear Stearns in early 1990 as a mortgage trader. In 1993, Larry was named a Senior Managing Director at the firm. He left Bear to join Union Bank of Switzerland in late 1996 as Head of Mortgage Trading.

In 1998, after 15 years of trading and precipitated by Swiss Bank’s takeover of UBS, Larry moved from trading to sales as a senior salesperson at Bank of America. His move into sales led him to the role as National Sales Manager for Securitized Products at JP Morgan Chase in 2000. He was integrally involved in developing the department, hiring 40 salespeople, and generating $300 million in sales revenue. He left JP Morgan in 2006.

Throughout his career, Larry eagerly engaged clients and colleagues. He has mentored dozens of junior colleagues, recruited at a number of colleges and universities, and interviewed hundreds. He has also had extensive public speaking experience. Additionally, Larry served as Chair of the Mortgage Trading Committee for the Public Securities Association (PSA) in the mid-90s.

Larry graduated Cum Laude, Phi Beta Kappa in 1983 from the College of the Holy Cross.

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2 Comments on Come on, Brother, Give Me a Hard Eight!!

  1. Sure, right now they may look like “junk” with quite possibly a negative book value. But have you considered that many investors appreciate some of those companies’ ability to return to growth and positive book value in a few years from now? Stock investments are based on your judgement of how companies will perform in the future. Obviously many people anticipate a comeback of those severely battered companies.

    Oh, and John Paulson (arguably an insider) is smarter than you think! He’s laying the seeds to his pension pot which will inevitably turn dust to gold within the next 3-6 yrs..

    Oh and Larry, you should stop regurigitating what Wall Street Journal says! I think their articles are available for all to see.

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