Smelling a Short-Squeeze in Lehman

Lehman Bros (NYSE:LEH) is trading down this morning in reaction to:

1) News of 3 funds closing (non-event)

2) Deutsche Bank's Mike Mayo saying while LEH's liquidity seems okay, he continues to expect more write-downs to equity (est. $2 bln in 2Q08) and tougher revenues this year. As a result, their estimates for the quarter and the year remain below consensus ($0.43 vs. $1.07 for 2Q08 and $3.95 vs. $4.69 FY2008) and still have a negative bias. Given an adjusted BV of estimate of $47 that is est. one-fifth above the stock price, and a new ROE range close to the avg. since the IPO (15%) but a price-to-book ratio that is one-third below, the firm maintains their Buy rating.

Notablecalls: While Briefing.com highlights DB's call this AM I know for a fact that Mayo was out with the call yesterday just before close (you see the 1 pt sell-off?). That makes LEH a bounce play around $39.50. He's not even negative on LEH.

I smell a squeeze.

Comments

[venividivici]

So 1) is a non event. Well I suppose it is given that such events have become commonplace for the investment banks. And what about some Japanese conmen relieving Lehman of $350 million? Hah, another non event. I smell something entirely different and it stinks to high heaven.

[Ryan Freund]

#1 is certainly not a non-issue. it underscores the issues that Lehman is having with both liquidity and bad bets. 3 hedge funds sold? imagine the hedge fund industry's reaction to that! run on the bank, much?

[deefree]

didn't LEH just sell $5 billion of 7.25% preferred converitbele into $50 stock non callable for 5 years? Let's see--7.25 * 5 = 36.25 simple %. $50 - (36.25 * 50) = $42. So short LEH to $42, long the preferred, you're hedged to $42, let the upside run. Unless LEH goes bankrupt which is impossible since they have access to Fed window but no minimum capital rules. Thanks Ben Bernanke! And don't you fret none about the poor folks, they can manage to buy $5/gallon gasoline to get to the supermarket to buy $4/loaf wonder bread.

[cheesecake]

deefree you are nuts, everybody knows wonder bread is only $2 ;)

[helplessobserver]

I can't follow deefree's math but it looks like what they must teach in business school nowadays. His comments on the Fed are propping up not just LEH but all the investment banks. The coming inflation wave will force the Fed's hand.

[deefree]

it's what they teach in business school all the days--i rounded some of the numbers--and it's called "riskless arbitrage". the wall street journal article today that details how LEH is putting bad loans to the Fed (i.e. US Taxpayer) is another example of arbitrage. Bet the quant that figured that one out will get big cash bonus. Rest of us get el shafto taxero.

[cat & mouse]

I understand now, as to why certain analysts prop up Lehman and their ilk investment banks. The visible reason is that you have the FED coming to their rescue, when bankruptcies are inevitable. FED wants to avoid this bad situation, to prevent follow up bankruptcies of other banks and firms. The firms depend on the banks for loans, so the banks must be stable. This action of the FED are really laudable, although it is a bad practice, because ultimately they are saving the investors, so that they do not lose on their investments.