I was speaking with an old friend and colleague of mine today, and he reminded me of something I had forgotten. As I have mentioned before I was a stockbroker, and I worked with my friend for a few years. While we were at the same firm one of my bigger positions was in Lehman.

Now at the time, thru most of the 90’s I felt that Lehman was a great buy. It was one of the better managed brokerage houses, and well diversified. It weathered the Mexico financial crisis without huge exposure, and had few losses in derivative trades, that took down Barrings.

In fact after I left the brokerage industry and entered the investor relations industry I wrote a review of Lehman back in September of 2005. At the time the stock was trading at the post-split price of $56.60. That was 2x book value and an excellent price in my opinion. The stock went on to run, reaching a high of $85.80 in January 2007. A nice 54% gain in 16 months. Who would be unhappy.

I believe at the time I stated

“Perhaps as Warren Buffett has said, “Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years.”

Well it’s been 3 years now and that same investment looks horrendous. I have to admit that if anyone has held the stock all the way down they have to be pissed off. The company ruined its great cash and book value with bad calls in mortgage and asset-backed loans. The fact that a buyer must be found is the clearest answer of how risky the investments they made were.

I have to say that I am glad I am no longer a stockbroker. But I would also like to say that the call I made was correct at the time. And that I believe that I would have pulled my investment in January of this year at the latest, around $66. My posts of that time identifies that I was looking forward to a horrible year, and that is coming to pass as well.

So I am man enough to stands up and say what I called correctly, and what I missed as well.

But I’ll add this. If I had free capital that I could leverage without fear of loss, I’d buy options and/or stock in Lehman right now. With great risk sometimes comes great reward.

Now some would say I am insane. I don’t think so. My bet is that Lehman is too diversified and too large to be allowed to fail. Like Bear Stearns something will be done to mitigate the loss in the company.

There are too many stocks, 401k’s, pensions, and other assets directly tied to the financial institution. There are too many stockbrokers and staff. Too many corporate loans. And definitely too many mortgages to let this go under completely. My bet is that they will be absorbed by another brokerage or bank. Possibly even an insurance company.

And consider this. Politically this would be horrible if it fails. It will hurt both Democrats – because Congress failed to act to help ensure mortgages would not get worse and helped in the loss of jobs – and Republicans – because this is happening on President Bush’s watch.

Plus, if this bank is allowed to fail it will shake confidence in U.S. financials and the Dollar. Loans and Treasury bonds will be called or sold to deflect losses and prevent future hits. The combination of these events and the resulting hit to the economy will be devastating. I would imagine a full 3% of the nation would be sent to soup lines directly.

So if I am right Lehman will be taken over, but at what price? I expect a range of $3.50 to $5. At the top it means a gain of 41%, at the bottom a loss of 4%. I like those odds. Especially in this environment.

Now I could be very wrong. The Government might let this brokerage fail. That will hurt a lot and have repercussions, but ultimately it will be good for the market. But I think seeing Lehman tank or sell for $2 is distasteful for too many. A slight premium to the current close of $3.65 would be a big positive for the market.

And if you have read some of my posts on how I see the economy I don’t think you are too surprised by this outcome.

“The Fed has been providing banks extra money to ensure their solvency, but not requiring that loan reserves be increased. It’s kind of like stopping a leak in your tub by adding more water. The problem is not getting fixed and may get far worse. And all the panic about the mortgage industry seems to have done nothing but whip up polispeak from political candidates and political parties, each looking to sway voters. …

As a result of all these things I expect that the Dow Jones will drop to 10,200 by December. If I am correct about Congress and Senator Obama - for the reasons stated - then I further expect a drop to 9,300 during 2009. A significant bear market indeed.”

I still stand by these thoughts I mentioned in July. I still say Citigroup is the real big fear. I still think that crude oil prices will run back up to $160 per barrel over the winter. I still expect large increases in inflation and unemployment. Freddie Mac, Fannie Mae, and Lehman are the tip of the financial iceberg. Be prepared.

My friend stated

“Well this is just like Xerox and Kodak. Back in the day they were on everyone’s list to own. They were thought to be too big to drop. But today nobody speaks about them. Why shouldn’t the same thing happen to financials?”

That is very true. But the real question is how we transition to the new financial stock leaders. Opportunities always exist in even the worse markets. You just need to sit back and pay attention, and know your risk tolerance.

I may be wrong again, but I’m willing to tell you my thoughts. You can make your own decisions on how best to manage and invest your holdings.

[By the way, here are how a few other of my calls went.


• AMD – May 2005 – $16.08 High $40.54 in February 2006 now $5.75
  
• AMLN – February 2005 - $22.48 High $50.81 in October 2007 now $20.18
  
• ERTS – November 2004 - $47.79 High $68.12 in January 2005 now $44.99
  
• SIRI – September 2004 - $3.00 High $7.95 in December 2004 now $0.95
  
  Just wanted to be clear and honest on what I have publicly said in the past.]
  

Labels: AMD, AMLN, ERTS, LEH, Lehman Brothers, mortgage crisis, SIRI, stock market investors, stockbroker

If you have looked at the stock market (U.S.) lately then you cannot have missed a couple of things. Banks are still reeling, Lehman Brothers being the latest in a string of major financials that have had to seek out financing to shore up massive losses. Oil companies are getting a lot of negative publicity due to the election year politics. Energy alternatives are sparking another round of interest, as the generally do every election year for the past roughly 20 years.

But what has garnered a lot of attention is the sector that no one has really spoken about in some time. The technology arena. In particular the latest mega-deal, Yahoo and Microsoft. Everyone has heard some aspect of it, and opinions are flying.

Now the deal officially died last week. Microsoft won’t raise their price or even offer one for Yahoo. Yahoo for its part made a deal with Google, allowing ads from the leading search engine to appear on Yahoo for $300 million. So the shake up begins.

Microsoft has had it’s price raise because it won’t be buying anything, and stockholders will be happy about not having the books burdened with Yahoo. Google is happy as they seriously increase ad revenue with the increased exposure. The likelihood of increase revenues for higher ad fees and increased numbers are on the horizon and analysts will be checking the quarterly reports to see if a new trendline confirms this speculation.

Those looking at what may happen should keep an eye out on Yahoo. After failing to be bought by Microsoft, and only securing a deal that really benefits Google the shareholders are boiling. The desire for bigger profits is going to weigh heavily on the CEO and Board. Something is going to need to be done.

I expect that a couple more deals and the takeover of a smaller technology company will be in the air for Yahoo. Plus an expanded advertising sales campaign will likely unfold within the slow summer quarter showing better numbers as fall unfolds. If I am correct opportunity may abound in the disappointment this deal failing has caused.

But that is just one outlook. What do you think?

Labels: energy alternatives, Google, Lehman Brothers, Microsoft, search engine, stock market, stockholders, Yahoo

On the best day, in the best markets, investing is difficult and stressful. But the current market environment is far from the best of anything. Even so there are a few things we can definitely say about this current cycle. Most notable is that this may well be the year of raw resources, commodities, and the mining and energy companies that find them.

As many of the stockbrokers I have worked with are wont to say,

“You don’t need to be a rocket scientist to figure this out.”

[Something I stopped saying after having said that to a rocket scientist who still disagreed with my analysis of a stock position.]

Energy is a critical issue in every world market right now. Whether it comes from oil, ethanol, coal, geothermal or any other source. Considering the constant demand in the U.S., the increasing demand in China and India, and the growing desire to have cleaner energy (for whatever reason) this is not a short-term issue. Yet oil and energy companies are under political attack. And thus there is an opportunity. If you know where to look.

There are far too many speculating in the commodities markets, particularly oil, right now. The rise in oil is attributed by many to be directly tied to that speculation. Given the current political environment and election I would not be surprised to see legislation enacted to raise the margin requirements in commodity trading up to 50%. Even if it is not raised (or to that level) the mere action of talks occurring in D.C. will hit that market hard. So I suggest another old broker ideal, look where the market isn’t hottest.

Coal. It’s one area that isn’t getting a lot of conversation on cable news channels at this time. It’s a fuel that is available, abundant in the U.S., and with current and future technology cleaner than ever before. It’s also easier to improve technology to make it even more clean, and last I checked no environmentalists were seeking to block its mining to save any owls.

Gold. When economies are shaky, or perceived to be, everyone wants their hands on at least some of this yellow metal. With Lehman Brothers reporting a $6 billion bailout similar to other financials earlier this year, the economy is in question still. While gold has retreated in recent months from its run at the start of the year its way off the lows. And it would take little to spark another run, like maybe a weak dollar. Sound familiar?

The other precious metals. If gold is good, platinum is sweet. And silver is their poor cousin.

Uranium. If we aren’t using oil, and coal hasn’t been looked at, the only immediate answer left is nuclear. Short term it solves many questions, and it’s very clean. As pressure builds for politicians to investigate all energy alternatives nuclear will hit the table again. Add just one or 2 new power plants and there will be a spike in this mined resource on expectation of a growth spurt in the industry not seen since the 70’s.

Now there are other reasons to be in mining stocks for the near, mid and long term. I don’t think most need more though. No one knows which of these mined materials will be the first to run. The political environment hinges on the person elected President. The economic forecast is in shadows currently.

But probability says at least one if not all of these will have their value increase. And the best hedge may be owning the mining stocks as opposed to the particular individual material. Yet another old saying is

“don’t mine the gold, sell the picks and axes”.

The turmoil in the stock market is hardly over. The price of oil may even out. At least till winter hits. But I will guarantee that talk about energy, and therefore mined materials will not end before the Presidential election at it’s soonest. Any rocket scientists want to speak up?

Labels: economic forecast, energy alternatives, ethanol production, Lehman Brothers, mining stocks, nuclear energy, political environment, precious metals, presidential election, rocket scientists