Michael Hecht Cut His Estimates and Price Target on Lehman Brothers (LEH)

According to Jonathan Kennedy's Article on ClusterStock.com, Michael Hecht, A Bank ofAmerica'a Analyst, joins Deutsche Bank's Mike Mayo and Merrill Lynch's Guy Moszkowski, who also lowered their outlooks for Lehman this week. Hecht also said that the sale of Lehman's asset management arm Neuberger Berman wouldn't be motivated by the need for capital, but rather by the desire to "unlock shareholder value."

Hecht cut his estimates and price target on Lehman Brothers (LEH) this morning, citing the firm's exposure to the debt markets. He said that while on the one hand Lehman has successfully transformed from a one-business firm to a more diversified investment bank, Lehman remains the most fixed-income sensitive firm. Asset management remains a highly valuable asset, leading us to believe that a potential Neuberger monetization would not be motivated by capital shortfall but rather unlocking shareholder value and we think leaves the door open for a partial spin versus outright sale.

There are certainly parts of Lehman's business that are attractive, but it still has $20 billion of Alt-A mortgages and $40 billion in commercial real estate loans on its balance sheet. These would likely pose a concern to any potential acquirer despite the firm's relatively high tier 1 ratio.

Hecht maintains his Neutral rating and cuts his price target from $23 to $20.

Wachovia (WB) and BOFA (BAC) Have Bottomed; Meredith Whitney Missed Boat (WB, BAC, JPM, MER)

Meanwhile Tom Brown of Second Curve Capital and Bankstocks.com says the most famous stock analyst in the country, Meredith Whitney, has missed the turn in financial stocks. The sector will double or triple in short order, Tom says--including Wachovia (WB)--and some stocks will charge even higher. Tom's key arguments, some of which are expressed in the interview below:

1. The stocks rally before fundamentals (in this case bad loans) peak
2. Most companies have plenty of capital (contrary to the bear argument)
3. Core earnings power remains strong
4. Valuations now take into account the rest of the downturn

Tom's been early on this call before, obviously. But he's right about stocks rallying before fundamentals.

The big question is whether future writeoffs from Alt-A, prime, credit cards, auto loans, and commercial real-estate loans will force banks to raise additional capital (and, if so, how much). Meredith remains steadfast in her belief that banks (and investors) are still underestimating the future carnage. Tom thinks the worst-case scenario is already in the stocks. Except for WaMu (WM).

Related Posts :

1. The Turn in the Financials: If You Wait for Good News, You’ll Wait Too Long
2. The Citi Killer Strikes C, UBS, MER, BAC and WB
3. Six Reasons to Short Financial Sector Again
4. There’s Never Been A 300-Point Rally in A Bull Market
5. US Stocks are Still Overvalued

Please Note!
This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer on the bottom for more information.

You are welcome to republish this article, or any portion thereof.
Please, cite the actual/original source. I would be grateful if you could link back.

The Turn in the Financials: If You Wait for Good News, You’ll Wait Too Long

Bottoms happen at times (like now) when everyone’s convinced there’s no hope

By Thomas Brown
Source: Bankstocks.com
August 8, 2008.


It’s of course my view that the financial stocks have made a bottom; I even have a strong suspicion the very day it occurred: July 15. And as I’ve noted here before, essentially no one else on the planet seems to agree with me. That’s life.

Rather, the bears insist on seeing some kind of fundamental improvement in the outlook for the sector before they’re willing to invest. So depending on whose checklist you’re reading, non-performing loans need to peak and start to decline. Or net chargeoffs need to begin to come down. Or loss provisions have to fall. Something good needs to be on the horizon.

Sorry, the stock market doesn’t work that way. Remember, the market is a discounting machine: it anticipates key events so early on the vast majority of investors don’t even think those events are possible. In the case of the financials now, that means stock prices will turn higher (and already have, I believe) when most investors believe that things are still getting worse. It happens every cycle.

So there’s no use trying to concoct your own list of mental milestones. Instead, go back and look at what happened (and in what order) during the last major credit crackup, in 1990-91. If you do, you’ll see that the bears have things all backwards. By the time their wish lists happen, the stocks will be zooming.

Take a look at the chart below. It shows banking industry net chargeoffs and loan loss provisions for the years 1988 through 1993. If you’d bought the stocks back then according to the logic most analysts are using now, you’d have dipped your toe in the water maybe in late 1991, when chargeoffs and provisioning was peaking or, more likely, in early 1992, when it was clear they’d started to fall.


And how would you have done? Not too darn well. Look at the chart again, along with the chart of an index of large-bank stocks below it. As you see, by late 1991, the recovery in stocks was already nearly half over, and the stocks had more than doubled. By 1992, they’d tripled. Nice call!


Rather, the index bottomed in October 1990, when chargeoffs and provisioning were still going up. At the time, no one thought things would get better anytime soon, (they were right!) the same way no one seems to think things are going to get better any time soon now.

As I say, I believe the financials have made their bottom. Valuations are compelling, and the companies’ earnings outlooks have at least begun to stabilize. In particular, in the quarter just past, the inflow of new problem loans began to fall, and the rate at which early-stage delinquencies rolled into later-stage buckets declines. That’s what the beginning of an improvement looks like. Investor anxiety, meanwhile, is at a peak.

Eventually, these small glimmers of improvement will lead to what the bears say they want to see: a decline in problem loans, say, or declining net chargeoffs. The problem is, by the time that happens, the stocks will already have soared.

Last cycle, smart investors began buying at the first, tentative signs of improvement. That’s what smart investors should be doing now, too.

What do you think? Let me know!


Related Posts :

1. There’s Never Been A 300-Point Rally in A Bull Market
2. Six Reasons to Short Financial Sector Again
3. US Stocks are Still Overvalued
4. Market Lessons From 2007
5. Valuations are The Key to Long-Term Returns
6. Dow Jones 300+ Point Moves and Bear Markets
7. GS was Downgraded: The Credit Markets Will Not Calm Down Until Housing Prices Stabilize
8. The Citi Killer Strikes C, UBS, MER, BAC and WB

Please Note!
This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer on the bottom for more information.

You are welcome to republish this article, or any portion thereof.
Please, cite the actual/original source. I would be grateful if you could link back.