Over the past month, shares of Ambac Financial (NYSE: ABK) have been on a roller-coaster ride that would make any thrill-seeker nauseous. But yesterday's death plunge of 50% leaves us back where we started in October, waiting for an eventual bankruptcy.
The fall was in response to word that Ambac did not make a $2.8 million interest payment to debt holders and is trying to organize a prepackaged bankruptcy.
So what happened to that sliver of hope we saw a couple of weeks ago? Turns out mortgage put-backs weren't going to be as big as some thought and Bank of America (NYSE: BAC) unleashed the foreclosure machine just 10 days after pausing foreclosures.
In reality, there was very little hope for Ambac even as the stock seemed to jump day after day in October. But shares kept rising as investors who were short the stock got spooked by the put-back news and bid up shares to close out their positions. I love a good short squeeze to scare hedge funds a little bit.
So I should short the stock, right?
Even though bankruptcy seems inevitable for Ambac, shorting the stock may not be a great move right now. Why? Remember when GM shares traded above $1.50 even after bankruptcy? The market does crazy things in normal circumstances, and a stock on its last breath can act completely irrationally. Just look at today's move up 17%.
Ambac has 30 days to make the interest payment missed on Monday or enter into default with creditors. By then, the company will either be in some kind of prepackaged bankruptcy or Chapter 11.
You could try to get Ambac shares in paper form and use them for paper airplanes or finger-painting, but that's about all they'll be good for even in a prepackaged bankruptcy.
Time to move on
This leaves Assured Guaranty (NYSE: AGO) as the only company selling new products in the industry. Usually this is an enviable position, but given an uncertain future in bond insurance, investors have treated Assured more like a pariah than a newly formed monopoly. Despite concerns, Assured increased guidance when it released earnings so investors willing to wait out industry changes could be rewarded.
Ambac's old competitor MBIA Inc (NYSE: MBI) is also hanging around, and considering insiders are buying stock, I wouldn't bet against it either. But MBIA is a much bigger roll of the dice than Assured Guaranty at this point because of a lower credit rating.
Ambac, it's been a fun ride, but my stomach just can't handle it anymore. I'm getting older and roller-coaster stocks just aren't as fun as they used to be, especially when they end in disaster.
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