Ambac's Rally More Like Recovery

NEW YORK (TheStreet) -- Ambac Financial Group's(ABK Quote) outsize third-quarter profit may look like an example of a pendulum swinging back but that's not entirely the case. And while the rally in the stock makes for some impressive headlines, it's really just returning the volatile shares to where they were a few sessions ago.

Yes, both the latest quarter and the year-ago results were heavily impacted by changes in the value of the company's credit derivatives portfolio, but the gain this year and the charge last year aren't really representative of two sides of the same coin.

Before Wednesday's opening bell, the New York-based provider of financial guaranty company reported earnings of $2.19 billion, or $7.58 a share, for the three months ended September 30. Included in the results is a massive gain of $2.13 billion from the change in the fair value of its credit derivatives portfolio. This gain was comprised of $2.87 billion in unrealized gains, offset by realized losses of $732.9 million in the quarter. Reinsurance cancellations with three counterparties were also a contributor in the latest quarter, adding $303 million to net income.

This performance is stacked up against the same quarter last year when Ambac's results were overwhelmed by mark-to-market adjustments of the negative variety. It posted a loss of $2.43 billion, or $8.45 a share, in the comparable period in 2008, weighed down by a fair value adjustment charge on the credit derivatives portfolio of $2.71 billion.

The stock is seeing heavy buying interest in early afternoon action, soaring nearly 39% to $1.54 a share, and it's bringing similar companies along for the ride, including MBIA Inc.(MBI Quote), up 11.2% to $4.57; Radian Group(RDN Quote), rising 11.3% to $6.59; and Triad Guaranty(TGIC Quote), advancing 14.6% to 80 cents.

Volume in Ambac shares reached 75.8 million, more than three times the issue's three-month daily average churn of 21.4 million, and its highest level since Sept. 22.