Tuesday, April 13, 2010

Quote of the day

I swear, a day after I gave Cramer credit for some insightful analysis...he spews this inexcusable nonsense.

Writing to clients earlier today, Jim Cramer suggested they buy mortgage-insurer Ambac(ABK), even though it is  - in his own words - "worthless", on the premise that even worthless stocks can go higher:

Give Me Some of That 'Worthless' Ambac

04/13/2010 11:49 AM

I hate Ambac Financial (ABK - commentary - Trade Now). I believe the current stub of equity is worthless. The claims are too big and the cash too small. But so what.

That's painful to write. Especially, when you consider the Columnist Conversation tune of Tim Collins, and the excellent work by Andrew Wessel at JP Morgan backing up that analysis.
But it doesn't matter. You could argue that none of these insurers are technically solvent: Radian (RDN - commentary - Trade Now), PMI (PMI - commentary - Trade Now), MGIC Investment (MTG - commentary - Trade Now), MBIA (MBI - commentary - Trade Now). It hasn't meant a thing. 
MGIC has rallied 400% during its extended period of "worthlessness." I want some of that worthlessness. Radian's up 600% during its "worthless" period. I would have liked a piece of that worthlessness. How about grabbing a hunk of the 800% rally in the "worthless" PMI? Wouldn't that have been delicious? 
Do you hold your nose and buy ABK because of those rallies? I believe, oddly, yes. Now, there is simply no percentage in admitting you would ever recommend a worthless security. But this is a game of performance, not a game of valuation. There are plenty of genuinely worthless stocks that have gone up huge. There are tons of cases where gigantically worthless stocks -- almost every dotcom circa 1999-2000 -- gave you great returns. 
The purists out there have spurned these points. I could care less about purity. I could care less that someone might be able to say Cramer likes worthlessness. But the !@#$% animal spirits have it going, and a worthless stock can be worth something if it moves up that much and starts offering equity or bonds against it.

Again, I hate these situations. But they are real. They are happening. They have happened. And this is one of them that I feel is destined to happen again.

JP Morgan highlighted a few reasons the stock is worthless in a note out earlier today.  The best outcome here would be for the stock to promptly fall to zero.  Sure, it would cost "CrAmerica" money in the short term, but it would be a important learning experience for investors who think investing in "worthless" companies is a smart endeavor.

Copyright 2010 AlphaNinja

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