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Ticker Shock: Three Reasons Not to Trust AIG's Comeback


Monday's top stories and stocks with potential to move.

Great weekend. Got in some running, biking, and time with the family. Two days is never quite long enough, though, is it?

Asian stocks rose overnight. The Hang Seng and the Nikkei were up 2.72% and 1.08%, respectively. However, European stocks were in the red earlier this morning. And here in the US, we're currently trading lower.

Here's what I'm seeing this morning:

American International Group (AIG):
On Friday, the big-name insurer was out with its second-quarter results. Its adjusted profit in the period was a hefty $2.57. I say "hefty" because the Street was at $1.67.

My thoughts:

1. They say you shouldn't fight the tape. But I'm looking at the fantastic rally these guys have had (and frankly, the market, too) and I don't think it's sustainable. I wouldn't want to be the guy looking for a chair if the music should stop.

These quotes from S&P analyst, Catherine Seifert, in a Reuters article on Friday caught my eye and are hard to overlook: "Results were better than we expected and reflected positive mark-to-market gains, not strength in underlying operations." She also noted: "We believe that the turnaround in second-quarter book value may not be sustainable, and that the risk/reward for common equity holders is not attractive."

3. A quick read of the release shows that now all is peaches and cream: "General Insurance net premiums written were $7.9 billion in the second quarter 2009, a 19.2% decline compared to last year's second quarter. Commercial Insurance reported net premiums written in the second quarter 2009 of $5.0 billion, a decrease of 18.2% compared to the second quarter 2008."

It's genuinely nice to see that the company has mounted a heck of a comeback. But in spite of the massive rally, I can't convince myself to dip my toe in the water at this point. I plan to revisit the situation next quarter. Stay tuned.

With the big advances in the major indexes on Friday and the jobs number, not too many people were paying attention to the release from Merck.

But they should be.

Its shareholders approved a combination with drug giant Schering Plough (SGP). I expected this, but it's great to hear, nonetheless, as I think a combination will end up being a terrific boon for Merck and what surely must be a restless shareholder base. (If all goes well, the deal is expected to close by the fourth quarter.)

Two quick thoughts:

1. In the grand scheme of things, Merck's stock has been a dog in heat for the last several years. But I believe that will turn, thanks to the potential for cost savings in the combination with Schering, the products, and the reputation that Schering can bring to the table (assuming the deal goes through).

2. It's a solid deal around the $30 level. Note that it trades at about 9.3 times this year's estimate, which is a steal. And if it can bust through that 52-week high, a lot more folks will be paying attention.
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No positions in stocks mentioned.

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