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Assured Guaranty Ltd. Message Board

  • hounddawgie hounddawgie Mar 29, 2010 11:55 PM Flag

    Rising shorts in AGO

    The one thing that I find most disturbing about AGO, is the amount of shorting that is taking place. I am looking at over 12 million shares short in a total of 187 million total shares outstanding. The number is rising, up from 10 million in early February.

    I respect the work that short sellers do. They make me very nervous when I am long and their numbers are growing. I am long on AGO and remain confident that AGO's future earnings estimates make sense and are playing-out. AGO appears significantly undervalued and thus a good value. As the market reaches new highs, I would think that the short sellers would start fading rather than rising in numbers, especially as AGO's stock stabilizes above $20/share.

    Can anyone shed any light on this?

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    • data u are looking at is backward looking as reporting lags. Front runners into the huge Dexia sale being reflected. You can see how they were burned when deal was don UP 1.60 from when announced. Huge demand and short covering. Being short this stock could be suicide.

      • 1 Reply to the10kdetective
      • Short sellers are not usually known to be suicidal-maniacs, they don't like losing money any more than anyone else. As a group, short sellers do a better job of their homework than do the 'longs'. There must be some basis for their shorting activity, I just don't know what it is???

        By my measures, I feel like AGO is undervalued by $10-12 in this market we are in. Unfortunately, I am not getting the feeling that AGO is going to capture any of

    • In the short term, don't you think the relatively high short interest will tend to push the share price up? In the short term, I would think that there needs to be a significant catalyst (e.g., a sizeable municipal default or downgrade of Assured) to cause the share price to drop significantly.

    • There is a risk of rising RMBS losses. However, my guess is that the stronger short thesis at this point is municipal credit risk.

      Many people point to historical default rates for municipalities as a reason to feel safe, but this is horrible logic. This type of logic would have suggested that subprime bonds would be a great investment in 2006 and CMBS would be great in 2007.

      Part of the reason for the historical default rates near zero is that, historically, most municipalities’ taxing power has greatly exceeded their near-term debts. This was true even for municipalities that defaulted. Now their finances are in shambles burdened by heavy debts and benefit promises that are extremely rich and extend many years into the future (the scale is smaller, but the burden can be compared to social security and medicare for the federal government, except that the benefits are richer). Many municipalities are not solvent based on manageable tax increases. In many cases, restructuring debts may be the only solution.

      Think for a moment about how hard raising taxes could be over the next few years. Federal debts are huge, so taxes will need to increase. With consumers already being squeezed by the Federal government, it may prove next to impossible for municipality tax its way out of a big hole.

      In its municipal business, Assured is charging about 10-15 basis points per year to insure credits where the market spread is many multiples of that. Many would argue that the market spread is not enough because there is no realistic way for so many municipalities to repay their debts.

      If we return to strong growth, all of this could turn out to be a non-issue. If not, municipalities could be in for some very challenging times, and the pain will be magnified for Assured.

      • 2 Replies to uttoca
      • According to bankrupcy law muni's have to pay educational debt (ie teacher's salaries, etc) first, and then their outstanding debt.

        I think we would receive a very high %/$ if some city were to go under.

      • I don't think you can equally compare what happened to real estate in 2008 and 2009 with munis. The real estate bubble was made enormous by fraudulent lending activity, which put huge numbers of loans in the hands of people who never had any chance to pay them off. Muni and state governments are suffering through a horrible revenue crisis, but at the end of the day they can make budget cuts, and they can raise taxes. They have the power to manage their situation to a positive conclusion. That isn't to say there will not be failures, but I don't think you will see any collapse of the same magnitude as what happened with real estate

    • I don't see a disturbing trend here. First, the absolute amount of shorts is still under 10% of the outstanding shares. I normally don't get worried until it grows consistently, and then over 25%.

      Second, I don't see a pattern here. We have been jumping between 7M and 10M for most of last year, and only the last two reporting periods did we jump to 12M shares short. I don't think that constitutes a pattern nor is it a statistically meaningful jump.

      If you want to see a pattern that would be very disturbing, look at FUQI. From the initial short covering event at the beginning of May 2009 (reported May 15 2009 at under 500K shares short), shares short grew consistently until the short position was around 40% of the shares outstanding! That's huge.

      I think hedge funds knew the accounting was dirty and made big bets accordingly, and I should have seen it and did not. I lost about 10% of net worth on that mistake because I had a $6 cost basis on a stock that went to over $30. Ah well.

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