trades

Closed: ITB at $21.01 for 40%.

Opened: long AIG at $62.98.

ITB has been in the same basic $20-$22 range for a month or two now. The homebuilders are so oversold that every time there's bad news, like today's humongous price drop, the sharks come out and run the prices up. Fortunately, I got out ahead of the news, not after it.

AIG has the most subprime exposure of any insurance company. The AAA tranches are getting beaten with the ugly stick this month. Therefore, I think it's about time to short AAA MBS/CDO holders. Also, I expect that the greatest threat to insurance companies will not be losses from AAA MBS's, but losses from downgraded securities. The insurance companies are rated themselves, and the state regulators and insurance company raters (like AM Best) have no vested interest in painting lipstick on the subprime pig. AIG may have to sell downgraded MBS's just when they are worth the least. With the downgrades starting in the summer, I think AIG will show some exposure. Will it be a scratch or a bloodbath? Who knows, but I figure that I'm selling risk that is not paying for itself. I believe that a cut from the Fed's already priced in. In fact, the market will probably be driven down by the traders after the cut is announced. We shall find out November 7th, when AIG announces earnings.