Zacks issues Strong Sell on Assured Guaranty (AGO)

Administrator — Wed, 30 Nov 2011 16:19:38 +0000

Zacks has issued a report listing AGO as a Strong Sell (5-rank).

Zacks #5 Rank Additions for Wednesday

At the same time, the stock is also being pitched for its dividends in Forbes:

This Stock Has A 1.93% Yield And Sells For Less Than Book

Who to believe?

We believe the stock has more bearish potential, considering the likelihood of more municipalities that will be going bankrupt in the next few years, and Lehman’s $1.4 billion lawsuit against AGO. That alone will shed more than $7 per share in shareholder value.

Lehman sues Assured Guaranty (AGO) for $1.4 billion

Administrator — Tue, 29 Nov 2011 21:30:45 +0000

On Monday, the following story broke on Reuters:

Lehman Europe claims $1.4 bln from bond insurer

If you do the math on this, you come up with the following:

If Lehman wins the lawsuit, we take the $1.4 billion judgment, divide it by the 183.3 million outstanding shares, and come up with a hit to shareholders of a whopping $7.64/share in value that has been wiped out.The day the news hit, Monday, November 28, 2011, AGO’s closing price was $9.43. If we subtract $7.64 from that number, we get a new value of only $1.79.

Wow. That’s stunning, and no one seems to be talking about this.

In trying to understand the disputed Lehman deal, I ran across this article regarding another of Lehman’s disputed deals:

Lehman Sues BNY Over Role in Disputed Derivatives Deal

If past is prologue, here’s the most relevant quote:

“Derivatives represent a significant source of cash for Lehman creditors still waiting to get paid more than three years after the investment bank filed for bankruptcy protection on Sept. 15, 2008.

“At the time of its collapse, Lehman was a party to more than 1.2 million derivatives transactions with 6,500 counterparties according to court documents. The team working on unwinding the deals had recovered, through the end of last year, more than $12 billion in cash for the benefit of creditors.”

What does this mean to option traders?

If the facts starting coming out on this lawsuit in Lehman’s favor, this is a potential catastrophic hit to AGO shareholders. Puts on AGO might be a good choice, both for short term and longer term trades.

Option Reports

Zacks issues Strong Sell on Assured Guaranty (AGO)

Lehman sues Assured Guaranty (AGO) for $1.4 billion