MBIA Inc. (MBI) and Ambac Financial Group, Inc. (ABK) have been at the center of the credit and housing crisis as insurers of sub-prime, sub-A loans, and prime housing loans. Analysts continue to drop the earnings estimates and the stocks themselves fall to new lows weekly.

MBIA Inc

            MBIA fell to a new 52 week low on Friday as the market continued to struggle and the bond insurer saw its earnings estimates decreased during the most recent week. Surprisingly the company has not slashed its dividend which is still at an outrageous 32.6%. Dropping another 5% on Friday the stock reached $4.03 a share, the lowest over the last year of trading.

            The company missed its last earnings estimate terribly, posting a loss of 3.01 a share while analysts were expecting a loss of only 0.19 cents. But analysts have now reduced the company’s expected earnings across the board down to a loss of 1.09 in the current quarter and a loss of 6.22 a share for the current year.

            20% of the shares are currently short and with no revenue or earnings in the foreseeable future, MBIA could easily see more drops and a few short squeezes on its way lower.

Ambac Financial

            Ambac Financial, lower in value than MBIA, doesn’t have the outrageous dividend payment still outstanding but is in a similar situation on all other accounts.

            Missing its last earnings quarter by 359%, analyst have slashed their expectations from a loss of 0.78 cents to a loss of 1.33 a share for the current quarter and from a loss of 2.75 a share to a loss of 9.16 a share for the current year.

The Trade

            You could short either one of the two bond insurers or purchase a Put when there are not additional shares available to be shorted. I would purchase a January 2009 Put at the 2.50 Strike price for ABK and I would purchase a January 2009 Put at the 5.00 Strike price for MBI. This will allow time for the stock to fall and to avoid a short squeeze close to an option expiration date.