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[Note: Article posted simultaneously on my personal blog, www.thestocksurfer.blogspot.com, with charts and pictures.]
I wanted to do a "thought experiment" post on all the reasons to be bullish, but I don't have the time or energy or imagination to pretend this evening. So, I'll briefly ramble in response to a reader's comment:
The Fighting Polak said...
What do you think is going to happen to LEH? Unless someone steps in tomorrow, I don't think it survives the weekend. When you have $2.4B in revenues, but $5.3B in debt obligations, you are not long for this world.
It also occurred to me that there are going to be fewer buyers interested in LEH than were in BSC. JPM obviously isn't going to buy it, GS is too smart, and I would imagine other companies are looking down the line at getting WM or Wachovia cheap. If I'm going to take a risk on some junk, I would prefer it to be WM or Wachovia.
Thoughts?
Well, I do think Lehman Bros. (LEH) will get absorbed by someone, probably over the weekend, but your guess is as good as mine on how it shakes out. For speculation, check the latest on Bloomberg or the Wall Street Journal.
First question: What will the immediate market reaction be? For the answer, flip a coin. The market could bounce, only to plummet the next day, a la Fannie and Freddie. There's just no telling.
Second question: Is this type of thing indicative of a bottom? My best guess is no. I could be wrong. The government could help engineer buyout after buyout to stabilize credit, and we all live happily ever after (probably as renters). Dow 15,000! I would eventually sell my SKF at a loss and move on. But I see very little evidence to support that theory.
So I have my own theory: This is not the bottom. Bear Stearns, Indymac, Fannie, Lehman...that's the beginning. Why haven't the extraordinary government actions since Bear Stearns prevented the dominos from falling? Bear was bought by a bank, and the rally lasted a while. But Fannie and Freddie, the supposed core entities of the housing market, were essentially nationalized, and that rally lasted all of one day! Think about it, that was the beginning of this week. Now we're talking about LEH. Why would a LEH bailout mark the bottom?
I'd like to remind readers what I wrote 2 days ago:
The financials, despite a big pop yesterday morning, are not rallying on the most significant government intervention since the Great Depression. Here's a question: What happens when government interventions of increasing size and scope fail to spark rallies? It's like a junkie who needs more and more drugs to get a high--when the high no longer comes, he's just an addict on the way to self-destruction. Has the market become addicted to bailouts? Please read this article by Kevin Depew on the next stage of the credit crunch. [By the way, I think Depew has used the "junkie" analogy in the past--giving credit where it's due (pun intended).]
We are reaching the junkie self-destruction stage. After LEH, we'll be talking about others. Washington Mutual (WM) is sick. Merrill Lynch (MER) is trading as though something is seriously wrong. Click here for a 3-month chart of Fannie, Lehman, Merrill, and WaMu. What will this look like in a month? A week?
And yet, there seems to be complacency. The VIX is under 25, and many observers are saying the bottom is in and the economy is recovering (nevermind unemployment rising and massive bailouts being necessary). I think this complacency increases the risk of a big selloff. If I'm wrong, I'll lose a little on my bearish trading positions and perhaps miss a few percent on the recovery. But overall my positions are small (by design, not by decline) and I sleep very well at night.
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