Wednesday, June 4, 2008

It Ain't Over Till It's Over: Financial Fallout, The Dirty LittleSecret, and Housing Hardships,

Financial Fallout: We've Found the Bottom...and continued to dig...
"I think what keeps some investors awake at night is not just so much the bad news that’s currently priced in to current valuations in some of these stocks, but what may come next...and that seems to be another shoe that has yet to drop." (1)
John Brady MF Global

Lehman Brothers (LEH) has shaken the financial markets again, when only a few weeks earlier many of the analysts claimed that the financials bottom was hit. That was about the same time when the table was pounded on XLF (now down an additional 5%), and RKH (with a loss of over 10%). Now, I'm not the expert but it is increasingly obvious that many of the professionals are not experts either. According to Dennis Gartman, Founder of the Gartman News Letter "I’ll be honest, I'm short all the bank stocks, because I think Lehman's in trouble, and it's not going to end for a while.” (2) LEH "rallied" today with rumors that a partnership (someone with money) maybe be willing to "team up" with this albatross. More than likely, LEH will be down again tomorrow. Down 10% two consecutive days, then a 3% up-tick on day three means NOTHING. One could only guess the sheepish grin Mr. Einhorn from Greenlight Capital (who is short on LEH) is wearing today!

Credit Card Companies (see over 150 choices at deserve additional redress at this they could well be the next "dirty little secret" on Wall Street. In an article entitled The Next Credit Crisis: Beyond Their Means, Jeff Cox underscores the credit card boon that could easily become a bust. (3) In the short term, card issuers are experiencing an over-whelming demand. The smart banks have made appropriate underwriting revisions while others banks simply require applicants to a have nothing but a pulse. Companies like V and MA while not directly exposed to the risk of dead-beat card holders, may run the risk of a dried up credit market in the United States. (4) During the merger mania period, JPM and C have picked up some wonderful banking assets, but also some of the weaker credit card risks as well. BAC went as far as buying up Cleveland based MBNA (who was a leading credit card issuer) making them the largest credit card underwriter in the United States. (5) Capital One Finance (COF) could well be left holding the bad in this quartet. As Scott Black of Delphi Management in Boston, referred to COF "an accident waiting to happen" because of the high proportion of sub-prime loans. (6)

Housing Hardships:
LOS ANGELES - Ed McMahon, who for decades appeared as Johnny Carson's sidekick on "The Tonight Show," is fighting to avoid foreclosure on his multi-million dollar Beverly Hills home, according to published reports. (7) In this case, McMahon is recovering from a broken neck, and regardless of his income level should have some type of a safety net so the house is not lost. However, McMahon is over $644,000 dollars behind in taxes. The house is listed for sale at a cool $6.25 million, and has been on the market for two years.

Recently, the New York Times published at article entitled: The Trouble in Housing Trickles Up.
The national mortgage delinquency rate is currently 4.35%. With increased inventory, slowing hobs, and a number of ARM's coming due, things look particularly weak for XHB, PHM, and other builders like KBH.

In conclusion, the current economic environment highlights a convergence of economic perils. While Big Ben Bernanke has pledged to protect the dollar, he has a considerable amount of work before him. While many analysts, economists, and political leaders are whispering the R word in inner circles, it is becoming more apparent that the man on main street may be able to call a recession easier than the man on Wall Street.

Please note the area where McMahon's home is located.(8)

Sources Cited


AX said...

Good timing, Bri. After recommending a short on Lehman last Friday to my brothers, I was kicking myself for not having the courage to jump in myself. I suspected one day this week that there would be a bounce based on mild news like a benign (or rigged) jobs report, and waited until LEH spiked to short it. I bought into 1/09 22.50s. This may be volatile, but I believe Lehman has a real shot to suffer a run. While I don't think the Fed will allow a crash, the stock could go well under 20.

Following Einhorn and Ackman is never a bad plan. We'll see, as LEH spinmasters are using a lot of the same vernacular Schwartz did....

Tiger Coach said...

Ax... I have not moved on LEH yet...but will probably follow the same plan you I do expect a bounce.

I in on BAC 1/30s...after writing the article, I convinced myself it was a strong play.

I will be sure to key an eye on Einhorn and did you like the foreclosure chart? Yikes!