NEW YORK - INSURANCE giant AIG extended its surprising rally on Thursday, rising 26.9 per cent amid frenzied speculation along with improved prospects on its ability to repay its massive government bailout.
AIG shares closed at US$47.84 (S$68.89), up US$10.15 in a day and some 400 per cent from recent lows on July 9, before the ailing firm announced its first profit in nearly two years.
The rally has spread to other troubled financial firms including Fannie Mae and Freddie Mac, the two mortgage finance giants taken over by the government nearly a year ago. Some analysts said the rally was a 'short squeeze' in which market players who had bet on a decline are forced to purchase shares to cut their losses, resulting in upward pressure on stocks.
Analysts at Briefing.com said the gains were a 'garbage rally' in the most at-risk financials, 'which began late yesterday afternoon with the massive short squeeze in AIG.' The surge 'wasn't the result of a specific news-related catalyst; instead, it started as a small rally in the afternoon, and as it started to gather steam and accelerate it forced shorts to panic and scramble to cover,' the note to clients said.
'Since AIG is the most volatile name in the 'at-risk financials' group, this created one of those momentum themes where coming in this morning, traders saw AIG continuing to squeeze in pre-market trading, and so they started to bid up the other low-quality financial stocks.' Andy Brooks, head of equity trading at T Rowe Price, said AIG 'looks like a stock that may be salvageable, so that has drawn investor attention. The same thing has happened to Fannie and Freddie.' But he noted that AIG stock 'is still down a down a ton from its highs' over US$1,000 a few years ago.
AIG was the largest single recipient of US bailouts, with the government pumping more than US$170 billion into the firm to keep it afloat and taking a controlling stake in the group in the process. It reported in July second-quarter earnings of US$1.8 billion.
The company said its return to profits came as some 'businesses stabilized and the company's results reflected positive valuation changes. AIG also achieved several important milestones in its restructuring programme.' AIG was on the verge of collapse last year after backing trillions of dollars in risky financial products amid a home mortgage meltdown that triggered financial turmoil.
Jon Ogg at 24/7WallSt.com said some of the AIG interest came on reports that new chief executive Robert Benmosche had talked with founder and former CEO Hank Greenberg about efforts to help rescue the firm. Joe Weisenthal at the financial website Clusterstock said the AIG rally was 'insane' since the government would have to be repaid before shareholders could benefit.
'Nobody knows what's going on, really. It's all rumor and speculation,' he said. Among other financials, Fannie Mae rose 3.78 per cent to US$1.92 dollars and Freddie Mac jumped 10.34 per cent to US$2.24. Citigroup, the bank with the biggest US bailout, jumped 9.07 per cent to US$5.05. -- AFP
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