Market Update/Is Lehman Toast?

Its great to be back home tonight!

Blood is starting to flow into Wall St. as the financials got buried again today. Homebuilders are also falling apart. I warned the contrarions in late April to sell the home builders on the post Bear Stearns bounce.

I want to briefly talk about where I think we are right now, and then touch on Lehman because the stock acted real bad today.

As we know, the market is always forward looking and I think that it decided it doesn't like what it sees for the second half of the year.

The market is still worried about subprime and the toll it will take on banks, but these numbers are close to being baked into the cake. Now Alt-A and Prime loans are not in this cake but they should be(thats when the fun really begins).

What the market sees now is massive doses of inflation, rising interest rates, and a collapsing consumer.

What did the market see that brought us to the lows in March?

Subprime, Bear Stearns, and the fear of inflation and the consumer tanking are what took us to the lows in March.

One stick save by the Fed and we were off to the races with a bear market rally. Well now here we are almost 3 months later, and the market now sees the consumer collapsing versus just worrying about it.

Subprime has destabilized many regional and investment banks, and inflation has pushed oil to levels that the Fed never dreamed of. This has them painted into a box. If they raise rates they risk the fate of the financials, housing, and the stock market.

If they lower rates they run the risk of putting the last few nails in the coffin of the consumer via inflation which is almost 70% of the economy.

My point here is what they were worried about in March is actually happening NOW. This is a big difference pschologically for the bulls. They also are not as confident that the Fed will save the financials because of the "Moral Hazard" risk that they are very close to crossing.

They had liquidity to play with to go ahead and save Bear Stearns, because inflation was high but bearable.

Now it looks like Lehman is in trouble, and throwing more liquidity into the system is risky due to the inflation threat. Whats a Fed president to do? He must feel like General Custer right now.


Lehman

Lehman looks like they are in deep trouble. This was the last thing that Ben Bernanke needed. Their stock price free falled to $23 which is Wellllllll below $28 which was where the stock was priced for their $6 billion capital raising. Imagine investing $6 billion at a "discounted" price of $28 and then see the stock price drop almost 20% below what you paid for it a few days later. You think they might be just a little pissed off?

Merrill Lynch then comes out and downgrades Lehman a week after they had just given them an upgrade. Here is the downgrade:

"June 11 (Bloomberg) -- Lehman Brothers Holdings Inc. fell the most since the takeover of Bear Stearns Cos. as Merrill Lynch & Co. analyst Guy Moszkowski cut his rating on the firm to ``neutral'' a week after telling clients to buy the stock.

Lehman, which lost 64 percent of its market value this year, fell $3.75, or 14 percent, to $23.75 at 4:15 p.m. in New York Stock Exchange composite trading. Options traders increased bets that shares of the fourth-largest U.S. securities firm will fall to $15 by next month.

Other analysts lowered ratings on Lehman yesterday because of the second-quarter loss. Wachovia Corp. shifted to ``market perform'' from ``outperform'' and Credit Suisse Group switched to ``neutral'' from ``outperform.'' Oppenheimer & Co.'s Meredith Whitney reduced her estimate for the year to a loss of $3.34 per share from a gain of $1.58

`Fire Insurance'
``People are taking a shot that it could go down to $15,'' said Stefen Choy, founder of Maxima Financial, a market maker on the NYSE Arca exchange in San Francisco. ``Everyone smells the smoke so they're buying fire insurance. People got so scared about what happened to Bear Stearns that they just grab those now.''

Final Take:

Is Lehman toast? Time will tell but the price action sure seems to indicate that the risk of this happening is very possible. If this stock gets to $15 I don't think Lehman survives. The bets by the options traders that it drops to $15 are really bets that Lehman is done.

Hell, Bear Stearns was sold at $10 a share. If Lehman goes to $15 it will be because its gobbled up by someone else with some help from the Fed. The big question is will the the Fed just let them die?

Lehman's portfolio was very similar to Bear Stearns with similiar leverage. Meredith Whitney did point out tonight on CNBC that they do have a stronger brokerage house than Bear, and they were also were more diversified. She wasn't ready to put them in a body bag.

All I know is the fact that the shares went almost 20% below the discounted offering price of $28/share today is a very bearish sign. Something stinks here!!!

Folks, if investors keep getting burned on capital raising's like this, the money flow is going to stop.

As the losses mount, the only thing Wall St. will be raising in the future is the American Flag every morning. You can only sucker an investor so many times. Most of the major banks have burned all of these guys. The SWF's have turned into Casper after losing billions on these sucker deals.

If this happens then what will the financials do? This is when the real fireworks go off. Consider these problems the sparklers in the park before the fireworks show starts.