March 18, 2008

Market Comments for March 18, 2008

1) The price action of Lehman Brothers these days is frighteningly similar to that of Bear Stearns just before it went bankrupt. In the last week Lehman's share price has dropped from $60 to $20. At the very least this has to be considered a near death experience. Today CEO Richard Fuld came out and said that there were no liquidity concerns at Lehman. Thanks to better than expected earnings announced today the stock is back up to $45. If they go under the way that Bear did they will get taken over the same way at a nominal price, say $1/ share, wiping out the equity holders but not actually going bankrupt. That effectively wipes out all of the shareholders but preserves the rights of bond holders, minimizing the impact on the financial community. Watch out for LEH!

2) The big news today was the Goldman Sachs earnings which came in at $3.23/ share vs. and expected $2.58/share. They disclosed that their leveraged loan book shrunk from $47 billion to $20 billion, a staggeringly rapid shrinkage of their balance sheet. This shows you how quickly the whole industry is downsizing.

3) The homebuilders most likely to go bust are those that have the highest reliance on revolving credit facilities. Those are WCI, and Hovnanian. The most liquid and financial strongest homebuilders are  NVR Inc., MDC Holdings, KB Home, and Toll Brothers.

4) With the Fed rate cut from 3.0% to 2.25%, and the inflation rate now at 2.5% on its way to 3%, real interest rates are now officially negative.

5) Bear Stearns stock today traded up to $8, four times the bid from JP Morgan. This is not a cash deal but an exchange for JP Morgan stock which is up big today. There are also moves by Bear employees to sue to tie up the deal in court for a few years. In the meantime the sub prime market will recover and Bear will regain the $80/ share in book value the firm had a few months ago. Many shareholders also believe they will do better in a plain vanilla bankruptcy or that JPM will increase their bid. Another big payday for the lawyers.