David Moenning's Daily State of the Markets: 9/10
Lehman Taketh Away
Here’s a link to listen to an Audio Version of the report:
It appears that the warm fuzzies Hank Paulson gave to the bulls over the weekend were taken away in spades by Lehman Brothers (LEH) yesterday. This story and the corresponding market action is really quite simple as it is becoming apparent that Lehman is having all kinds of trouble rounding up the capital it needs to stay in business.
While there were other factors at work yesterday such as some crummy economic data and more hedge fund dumping of commodities and material stocks, the key ingredient to the 280 point plunge in the Dow was the worry that we are seeing another shoe dropping in the credit crisis. And the bottom line is that until investors can be assured that the sky, or in this case, the banking system, is not going to fall, then the bears will remain in control of the action.
Shares of Lehman plunged yesterday in response to several news stories. First there was the Dow Jones report that the Korea Development Bank was done working on a deal to purchase a healthy chunk of the investment bank. The sticking point, which has become a resonating theme in this saga, was apparently the price being asked by Lehman. Next, CNBC reported that while Lehman was hoping to get 8-10 times EBITDA for the sale of its investment management business, prospective buyers were only willing to buck up a multiple in the range of 6-8 times. And finally, Ladenburg Thalmann analyst Dick Bove said that he expects a much larger loss for the quarter than his original estimate of -$6.33 per share.
The end result was symbol LEH dropped an eye-popping -44% yesterday, taking the banks, brokers, and the major indices down with it. The worry is that the Fed may not be able to round up a buyer as they did with Bear Stearns this time around and thus, the game of “Who’s next?” is becoming a national pastime for traders.
But, we can’t blame the entire mess that was yesterday’s trading on Lehman Brothers. Nope, we also had some disappointment from the economic calendar in the form of Pending Home Sales and Wholesale Inventories, as well as another round of liquidation in the commodity and materials stocks.
Finally, we should note that while yesterday’s carnage merely reversed the DJIA gains from Monday, the S&P 500 and NASDAQ both broke to new lows from a short-term perspective on an increase in volume – which is never a good thing from a chart-watcher’s point of view.
Turning to this morning, once again we don’t have any economic data to review before the bell. Stocks had been higher in the early going in response to Wall Street firms saying they were still trading with Lehman. However, after Lehman’s earnings report and proposed restructuring plan, which doesn’t seem to leave much value in the firm, the mood has soured a bit.
Running through the rest of the pre-game indicators, the foreign markets are down. Crude futures are moving a little lower despite a production cut from OPEC with the latest quote showing oil trading lower by $0.14 to $103.12. Interest rates are a smidge higher with the yield on the 10-yr currently trading at 3.62%. And finally, with about an hour before the bell, stock futures in the U.S. are pointing to a slightly higher open. The Dow futures are currently ahead by about 10 points; the S&P’s are up by about 2 points, while the NASDAQ looks to be about 18 points above fair value at the moment.
Stocks “In Play” This Morning:
Today’s Earnings Before the Bell:
Lehman Brothers (NYSE: LEH) – Reported -$5.92 vs. -$3.09
News, Upgrades/Downgrades/Brokerage Research:
Lehman (NYSE: LEH) cuts annual dividend from $0.68 to $0.05, will sell majority stake in investment management business, spin off commercial real estate assets, and break up the company into a ‘good bank – bad bank’ structure. Estimates and target reduced at Bank of America
American Eagle Outfitters (NYSE: AEO) – Upgraded at Bank of America
Merck (NYSE: MRK) – Downgraded at Bernstein
Burger King Holdings (NYSE: BKC) – Initiated Outperform at Credit Suisse
Verisign (VRSN) – Target reduced at Deutsche Bank
Janus Capital (NYSE: JNS) – Removed from Conviction Buy list at Goldman
Eaton Vance (NYSE: EV) – Added to Conviction Buy list at Goldman
Franklin Resources (NYSE: BEN) – Downgraded at Goldman
CEMEX (NYSE: CX) – Upgraded at JP Morgan
Vulcan Materials (NYSE: VMC) – Downgraded at JP Morgan
AT&T (NYSE: T) – Estimates reduced at JP Morgan
Verizon (NYSE: VZ) – Estimates reduced at JP Morgan
Apple (Nasdaq: AAPL) – Mentioned positively at Oppenheimer
Burlington Northern (NYSE: BNI) – Upraded at UBS
Norfolk Southern (NYSE: NSC) – Upgraded at UBS
Disclosure: Mr. Moenning and/or related firms hold long positions in: NSC
Note: All earnings reports compared to Reuter’s consensus estimates
** For More of David Moenning’s Market Analysis, Stock Portfolios, and Trading Ideas, visit: www.TopGunsTrading.com
The opinions and forecasts expressed are those of David Moenning, President of Heritage Capital Management and Co-Founder of TopGunsTrading.com and may not actually come to pass. Mr. Moenning’s opinions and viewpoints regarding the future of the markets should not be construed as recommendations of any specific security or Heritage Capital program. No part of this material is intended as an investment recommendation. Neither the information nor any opinion expressed constitutes a solicitation to purchase or sell securities or any of HCM’s programs. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that investment objectives outlined will actually come to pass. Investors should consult an Investment Professional before investing in any investment program. Neither Mr. Moenning or Heritage Capital Management nor any of their employees shall have any liability for any loss sustained by anyone who has relied on the information contained herein. Mr. Moenning and employees of HCM may at times have positions in the securities referred to and may make purchases or sales of these securities while this publication is in circulation. The analysis contained is based on both technical and fundamental research. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.
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- Goldman Sachs Conviction Buy List
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- Deutsche Bank
- UBS
- JPMorgan
- Henry Paulson
- Pending Home Sales
- Bear Stearns
- Lehman Brothers
- Bank of America
- Janus Capital
- Richard Bove
- David Moenning
- Ladenburg Thalmann Financial Services
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- Crude Oil
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