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Bond Insurance: Buy this battered $8 stock before Warren Buffett does

Posted March 7, 2008

A TFN Special Report: 

"The real catalyst for this bond insurer’s rebound will likely be the spin-off of its municipal bond insurance division, a move that is rumored to already be in the works. Investors would then be investing solely in the firm’s strengthened municipal bond insurance business, a very appealing notion." — Andrew Snyder

by Andrew Snyder 

Baltimore — (TFN): The financial backbone of the nation is in danger of breaking. The markets that keep money flowing, businesses running, and the economy growing are faltering. The downturn is taking billions of dollars of investors’ equity with it.

Combined, Wall Street lenders have lost more than $146 billion to bad debt. The damages are staggering and continue to grow with each new quarterly earnings report.  

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Unfortunately, the red ink doesn’t stop on Wall Street. It’s trickling through every arm of the economy. Even folks without a penny in the markets will be paying to recoup the losses as the costs of living in the nation continue to rise. High interest rates and the inflation it causes are knocking at our door.

If the mortgage crisis is pinching the nation’s economy, the damage it has done to the nation’s bond market is downright crippling. The short-term bond market is the piston that ensures the nation’s economic engine is running. Unfortunately that market, especially the usually very strong municipal bond market, has failed.  

What was once a very safe, highly liquid lending tool has seemingly dried up overnight.  It has pulled hundreds of billions of dollars from the American economy.

Bond insurerw set for squeeze

Just a few months ago, municipalities could expect to finance their debt with interest rates somewhere in the range of four percent, often less. The days of cheap money are over, at least temporarily.

Bond Insurance: Buy this battered $8 stock before Warren Buffett does Starting two weeks ago, many bond sellers could not find buyers as cash-strapped Wall Street banks backed out of the market. Those that did find buyers were forced to pay interest rates as high as 20%. It’s a rate we haven’t seen in decades, not since the days of Reagan and the last major economic recession.

With rates well into double-digit territory thanks to the sudden lack of demand, borrowers are scrambling to find other financing options. But until they do, there is going to be some serious fallout.  No group can afford 20% debt for long. If no solution is found, there is going to be real trouble.

Fortunately, there is a way to profit from this situation. Whenever there is a major alteration in the way the nation’s money changes hands, somebody is making money. If you have watched the news lately, you already know Warren Buffett and his Berkshire Hathaway are cashing in. He is shelling out billions of dollars in an effort to shore up the municipal bonds market by insuring much of the debt.

Buffett sees profit potential in depressed bond insurers 

Buffett is not alone. There are a handful of other insurers out there doing the same thing.  But only one of them is offering investors a shot a big profits.

That company is Ambac Financial Group (AMK:NYSE). It’s one of the most prominent leaders in the municipal bond insurance market. As the market vanished, so did its investors. Since December, share price has dropped by more than 80% to reach a 52-week low of $6.00. A year ago, share price was flirting with $100.

Does the company deserve a hit to its valuation? Certainly. Much of the company’s earnings expectation was based on bad debt.  

NYSE, daily high, low, and closing prices
Was this downturn overdone? You bet.

That is why the stock recently surged when Standard and Poors backed the companies AAA rating. It realized the company was as strong as ever. Fortunately, even after the surge, share price is dirt-cheap.  

The municipal bond market is one of the strongest financial tools this nation has.  It was dealt a devastating blow, but it is not down for the count.  The debt market’s correction is nearly over – as evidenced by Buffett’s recent entry – and will be rebounding in no time.  Companies like Ambac that have been significantly slashed will come soaring back.

While the reassurance of its financial strength from Standard and Poors was a great benefit to shareholders, the real catalyst for Ambac’s rebound will likely be the spin-off of its municipal bond insurance division, a move that is rumored to already be in the works. Investors would then be investing solely in the firm’s strengthened municipal bond insurance business, a very appealing notion.

Most of Ambac’s trouble has come from its structured-finance unit. That is why Buffett is looking so diligently at its municipal bond business. He knows a bargain when he sees it.

So do I.  

Where else can you get an opportunity to invest in an industry as strong as municipal bonds and a company as historically strong as Ambac for pennies on the dollar.  

The industry has been dealt a devastating blow. Valuations have been slashed across the board.  Now is the perfect chance to buy low and sell high.

Invest in Ambac Financial Group (ABK:NYSE) now, hold the position for 24 to 36 months and sell your shares as a much, much richer investor.

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Posted by Andrew Snyder · Filed Under US Stocks and Markets 

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