SA:Lehman's Short Term Fundamentals Are Shaky
by: Michael Filloon posted on: June 16, 2008 | about stocks: GS / LEH Font Size: PrintEmail Lehman (LEH) had an impressive run on Friday. Investors were giddy for a turnaround in the company and traders couldn't wait to take their money. Most traders put a stop on $20.25 and many purchased it for not much more than that, watching the stock run up to just under $26. I believe many of the traders got out before the end of the day on Friday, logging an excellent return for the day as long term investors continued to buy the stock even after the market close. That is the beauty of institutions with a long and profitable track record; they inspire investors even when things look bad.
Private equity looks to have an arduous road ahead. This is based on the entire market rolling over, with most IPOs failing miserably with the exception of those placed in sectors that are doing well, as with Intrepid Potash (IPI) and Visa (V). The other problem is in the area of structured loans. This packaging debt into securities has scared everyone off, as many of these investments contained subprime and have dried the market considerably.
Global structured financing deals are down 82% in May from a year earlier. This is where the Goldman (GS), Lehman Brothers and JP Morgan (JPM) will watch earnings dry up. In some cases, financial institutions have already written off more than their companies have earned over the past decade or greater. Lehman had a broad exposure to the subprime markets, and this only adds to their problems. These problems are unseen by the likes of Goldman, so there are many better players in this arena.
Lehman's jump the other day was based more on short sellers unwinding positions than anything else, but a lower CPI was the main reason for the market rally. CNBC also announced that Blackstone (BX) was interested in buying a stake in Lehman, which fueled buyout speculation. Lehman also let go of its CFO, which in my mind was uncouth. She had nothing to do with the problems at Lehman as she wasn't there long enough. Since she had nothing to do with Lehman posting its first full year loss ever, it makes you question the reasoning.
The company pre-announced earnings a week early and its $3 billion dollar write down was more than the $2.8 billion that was expected. It also announced to raise an additional $6 billion in capital. Moody's recently changed its outlook on Lehman's credit rating to negative, which could reflect a downgrade in the upcoming months. Fitch recently cut Lehman's ratings to A+ and S&P downgraded its long term debt rating to A from A+. Reuters has Lehman's total outstanding bonds at $117 billion.
Looking at this sector, it is hard to get long Lehman. The huge run up on Friday will probably be met with a rebound in oil and a sell off in the financials, as people take profits. My hypothesis is that LEH stated quarterly earnings early to minimize the bad news this Monday. I believe we will hear there will be additional write downs, and it will try to blame company woes on the employees just ousted.
I also believe it will state a further deterioration of the real estate markets through the end of this year. This poses an increasing problem as the subprime mess is now a mortgage mess. The Fed has stated they will be looking to hold rates, and I believe they will, although the chances of a rate hike decreased over the past couple of days. Investment banks have only one real way to offset their mortgage losses, and that is through investment. They cannot invest if they have to raise capital. The secret is to look at firms such as Goldman that just offered a total return swap to CIT. These firms are not worried about their liquidity.
Since this is a trade, I would recommend putting a stop in at 29.48 as this point seems to be resistance, and even with the large move Friday, no new trend was started. I believe you can take profits at 20.25, but it may be safer to do it at $21 as $20.25 seems to be the bottom. I placed a short at $25.74 on theupdown.com.
Remember, this is not a long term position, as I am still bullish the price of corn on major inventory problems this year due to flooding and a late frost in the Midwest. Long positions include POT, IPI, MON, and DBA. Soybeans were crushed on Friday and look good on a rebound. My current trades in the Goldroom on DBA, MON and POT are up 13%, 10% and 23% respectively. Stick with what's working until there is a reversing of trend, don't be a hero.
Disclosure: none
