Despite Wall Street’s scorn, speculators don’t give much ground

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Some speculators finally bailed out of shares of American International Group, Fannie Mae, Freddie Mac and Citigroup on Monday after the wild rallies the stocks have had this month.

But considering the scorn that people on Wall Street and in the financial media have heaped on traders who’ve been playing in these names, the surprise may be that the sell-off wasn’t all that drastic.

All four of the stocks opened the session sharply lower but quickly snapped back from their worst levels.

AIG, for example, fell as low as $42.80 at the opening bell, down nearly 15% from Friday’s close of $50.23. But the shares soon rebounded to $47.67 before pulling back again. AIG closed at $45.33, down $4.90, or 9.8%, for the session.

Fannie Mae fell from $2.04 on Friday to $1.79 at the start of trading Monday, but then clawed back to close at $1.93, off 11 cents, or 5.4%.

Freddie Mac lost 4.6% for the session, to close at $2.29, and Citigroup fell 4.4%, to $5.00. They were down as much as 14% and 7.5%, respectively, at their lows.

It probably helped the stocks that the broad market also avoided a serious slide, despite widespread expectations of an imminent pullback. The Standard & Poor’s 500 index lost 0.8% for the day after being down as much as 1.4% early on.

The latest assault on the four speculative favorites began in Barron’s magazine over the weekend. Writer Andrew Bary calculated that AIG has negative tangible common shareholder equity after adjusting for the federal government’s current equity stake (post-bailout) and other assets promised to the Federal Reserve. Barron’s suggests that speculating in the company’s bonds is smarter than playing the stock at current prices.

Barron’s also took aim at Citigroup, which it recommended when the stock was around $2.75 a month ago. Now the stock is above Citi’s estimated tangible book value of $4.35 a share, the magazine says. ‘Citi isn’t a bargain anymore,’ it says.

On Monday, veteran Fannie and Freddie analyst Paul Miller at FBR Capital Markets in Arlington, Va., put out a brief report asserting that ‘there is no fundamental value remaining’ in the shares, given the government’s 80% stakes in the companies and the rising losses the firms are facing on their mortgage portfolios.

What’s more, Miller doesn’t believe that the government would condone reverse stock splits just to get the shares out of penny-stock territory.

The 1-for-20 reverse split that AIG undertook in July probably has helped to juice the stock since then by making the shares scarcer. But in the case of Fannie and Freddie, which are under direct control of the Obama administration, ‘In our opinion, the regulators will not want to create a false sense of value in Fannie or Freddie shares and will likely shy away from reverse stock splits,’ Miller wrote.

But the problem with trying to use fundamental analysis (i.e., logic) to steer speculators away from these stocks is that, by definition, many of the day traders who’ve been driving the shares don’t care about fundamentals. They’re just interested in momentum -- .a.k.a. the Greater Fool Theory: ‘I’m a fool to pay $2 a share for this, but there’s a bigger fool out there who’ll pay $3, if we can just keep this going.’

-- Tom Petruno