Mid-Morning Update

The Absurdity of AIG

By Bryan Bottarelli
Thursday, August 06, 2009 11:42 AM EDT
Thu, 6 Aug 2009 15:42:00 GMT

Dear Bottarelli Research Member,

Good morning. Thus far, we’ve seen another day in which early selling pressure was quickly bought up. Nevertheless, the SPX chart continues to look primed and ready for a pullback. As you can see below, we have a two-day stall right at the 1,000 level.

SPX

As I’ve mentioned before, we must be skeptical of these “false-high” formations. But eventually, we will see the sell-off that’s been postponed for far too long. As a result, let’s remained positioned to profit off this selling pressure (whenever it decides to come) by maintaining our SDS August 45 Calls (SSH HS). As you know, we entered these ultra-short calls on August 3rd for $2.50 and they’ve hit a high this morning of $2.45. We’re certainly still in the game here, so maintain this downside protective play.

We’re also holding the AEM August 60 Calls (AEM HL), which we entered on August 4th for $3.10. With gold prices holding firm just under $970 per ounce, I still feel that $1,000 will be the next target. Such a move could push AEM past the previous high at $62.50, potentially offering a nice boost to our August 60 Calls. Hold for more upside.

AEM

Then we have our CTRP August 50 Puts (QCT TJ), which we entered yesterday for $2.80. As you can see below, the stock is attempting to stop the bleeding from yesterday’s sell-off, but I still feel that a move down to $45.00 is the next logical move. If the stock breaks below support at the 50-day moving average, then the next support level won’t come until the 200-day moving average at $30.00. If I was a CTRP stockholder, I would be very concerned about this formation. Let’s hold our puts.

CTRP

And finally, we have our STP August 20 Calls (STP HD), which we entered on August 4th for $1.95. This morning, fellow solar manufacturer Canadian Solar (CSIQ – NASDAQ) reported Q2 earnings of $0.49 per share, absolutely crushing the estimate of $0.09 per share. As you can see, shares of CSIQ are blasting higher today, and I would think that this bullishness would spill over to STP.

CSIQ

But as I write, the STP August 20 Calls (STP HD) have traded in a range between $1.35 and $0.85 this morning. If you adhered to the pre-determined stop limit price on this trade, that’s the safe play. But if you’re still holding this position, I’ll continue to follow it. After all, STP could find support at the 50-day moving average. They also have an earnings announcement on August 20th, which could offer an upside trigger. Let’s give it one more day to see if we get a bounce.

STP

And finally, let’s consider the absurd and ridiculous trading in American International Group (AIG – NYSE). As you know, this absolute dog of a stock recently performed a reverse 20-for-1 stock split, which was nothing more than a last-ditch effort at stock price survival. Back on July 17th, the AIG August 15 Puts (AIG TO) that we entered on July 14th for $3.70 opened the day at $4.25, good for a 14.8% gainer. That’s when I officially gave the sell signal for this position. But if you’re still holding (or sold only a portion of your position), yesterday’s massive rally moved against you. See below:

AIG

Apparently, the powerful upside blast is coming on speculation that some sort of debt-for-equity swap may be in the works between AIG and the U.S. government. Now here is what I find interesting: When things like this happen (remember Fannie and Freddie?), the typical result is that such a swap should wipe out all the equity of AIG. In other words, if this rumor is true, then we’re talking about a move that’ll make AIG’s common shares worthless. Is that a reason to buy the stock?

Don’t forget, AIG owes the U.S. government about $170 billion. Before the stock is worth one red cent, AIG must figure out a way to repay this debt. Can this happen? Who knows? But I must say, the stench from this entire upside move is enough to reach the far corners of heaven. If you’re still holding some of the AIG puts, look to sell out on any forthcoming weakness. These trading patterns are just too illogical.

In terms of any new plays, I’m inclined to sit back and watch how today’s action plays out. Should anything come up, you’ll be the first to know. Until then…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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