NEW YORK — Rapid and heavy trading Tuesday sent shares of former financial titans American International Group Inc., Citigroup Inc. Fannie Mae and Freddie Mac soaring higher.
This comes amid elevated trading volume and no specific news from any of the companies.
A surge of optimism appeared to start Tuesday with Citi's share gains. The stock moved higher right after the opening bell and then continued on a steady pace through much of the session, recently up 7.6% to $3.84.
At about 1 p.m. EST, the optimism in the cheap shares of Citi seemed to spread. AIG shares at that point spiked sharply higher. In the next half hour, Fannie and Freddie followed suit.
AIG was up 14% to $33.09 in recent trading, earlier hitting a high of $34.80, a 20% gain. Freddie was recently up 12% to $1.33 and earlier topped off with a 18% rise. Fannie had added as much as 16% but was recently up 11% to $1.11.
It appeared that a factor in the rally in Citi shares was an interview that Bruce Berkowitz, manager of the $11 billion Fairholme fund, gave to Fortune magazine. Berkowitz said he bought more than $700 million in Citi shares recently and thinks the worst is over for holders.
"The price is right," Berkowitz said in the Fortune story. "It's just a question of when it becomes obvious to everyone that the worst is over."
Citi shares were also being helped by a report that Barclays PLC (BCS) was looking for more U.S. assets and by a Fox Business Network report that the government was looking to sell its 27% stake in Citi, possibly as soon as within the next three months.
A spokesman for Citi declined to comment.
AIG had the biggest percentage gains Tuesday as speculation swirled about outlawing shorts in financial firms the government owns and as chatter circulated in the market that the company may soon sell assets at better prices than previously expected.
Monday, AIG and MetLife Inc. (MET) agreed to a $15.5 billion deal for AIG's second-largest foreign life-insurance business. The complicated and widely anticipated deal would leave U.S. government-controlled AIG owning roughly a fifth of MetLife, the nation's No. 1 seller of life insurance.
"There's basically enthusiasm for progress that AIG, as well as some of these other firms, have made at repaying the government," Standard & Poor's equity analyst Cathy Seifert said. "Obviously what AIG has done is a significant achievement."
AIG declined to comment about Tuesday's share gains.
Despite Tuesday's enthusiasm, Seifert cautioned that common stock holders should look at what's left for shareholders.
"Selling off these stakes is good for the company's prospects, and it's a good macro call on the ability of the capital markets to function, but investors still need to be cautious regarding AIG's underlying operations fundamentals as they relate to common shareholders," Seifert said.
Morningstar analyst Bill Bergman said equity investors have been playing on AIG's risk, often trading the stock like it's an option.
"It's very volatile because there's not that much equity, and the simple possibility they might come out of this with something [has lifted AIG's stock]," Bergman said.
He added that a turnaround is possible for AIG and that any news can move the stock "pretty substantially" as "the market cap is just a sliver of the total assets of the company."
For Citi and AIG, options activity was also spiking Tuesday. Trading in Citigroup's call options, which convey the right to buy the stock, was also noteworthy Tuesday. Traders appeared to have an eye toward next month as they topped the open interest in Citi's April $4 calls. At a price of 16 cents, holders of the contract stand to make money if the stock tops $4.16 before April 16.
In AIG, by mid-afternoon traders had picked up nearly six times the open interest in AIG's March $40 calls. At a price of 55 cents, holders of the contract stand to make money if the stock tops $40.55 before March 19. Significant options trading also swirled in AIG's $35 and $45 March call contracts.
The Citi gains were also likely boosted by the fact that about 447.8 million of its 28.48 billion shares outstanding are shorted.
And with the stock quietly building up technical momentum over the last couple weeks, as it consolidated above the 50-day simple moving average, it didn't take much to turn a slight gain into a big rally.
Analysts at CrediSights said late Monday that Citi is "back from the brink and back in business," calling the stock "just plain cheap." The analysts did concede there remains work to be done.
It's not the first time that these stocks, almost wards of the state in their current condition, with heavy government ownership, have gone on a tear. The last week of August had seen each of the four hit their high marks of the bull market that reached its one-year anniversary Tuesday. While none approached those highs Tuesday, the rally looked familiar.
