Sunday, September 14, 2008

Lehman Monday

Now that it looks as if the US government has not bailed out LEH and drawn the line in sand at Fannie & Freddie, let's see if and how the stock market bottoms this time....

The US government finally did the right thing as the list is going to get longer and longer and start involving non financials as well (GM, Ford?). Fannie & Freddie were government already but Bear was the real mistake as that set an artifical bottom in March and allowed market participants to believe that the government would step in (thus creating a premium in the stock market).

Historic Monday (and week) on Wall Street coming up:

1) Lehman gone via bankruptcy (kudos to David Einhorn for calling Lehman out months ago when the stock was at $40)

2) Merrill gone via a takeover by Bank of America: I am shocked that BAC is paying a huge premium ($29) to MER's 17 closing price on Friday. I think that BAC is making a big blunder. If they wanted MER, they should have at least waited until later this week, in case MER traded to single digits. Then they could have offered peanuts. BAC is the same company that bought a hug stake in Countrywide at $18 and watched it go to single digits before paying $8 for the rest of the company. If they had waited, they probably could have got it for $1 or less.

The details are sketchy as I write this: BAC (closed near $34) and deal is supposed to $29 for MER. That would be a 0.85 ratio. I predict that BAC will open near $30 on this news and analysts and shareholders will blast BAC for this. Assuming BAC opens at $30, that would give MER a theoretical price of $25.50 and with the risk inherent in this deal, I would expect MER to probably trade near $22.

3) AIG, a Dow stock, is announcing details of assets sales and asking the Fed for $40 billion in a bridge loan.

4) Washington Mutual is also near bankruptcy or could be sold for next to nothing.

5) Fed meeting on Tuesday. Prior to Sunday, the market only had a 10% chance of a 25 basis pt cut. As I write this, there is now a 60% chance despite all the hawkish rhetoric of Bernanke & Co. Even if the Fed doesn't move on Tuesday, it can move at any time, and an interest rate cut is definitely back on the table, especially if the stock market tanks this week. There are a few hawks on the Fed, but there are also a bunch of academic doves who panic anytime the market goes down a few percent.

Even if we get a panic bottom on Monday, I doubt that it will hold for long, as the world economy is slowing down big time, the financial system is a mess and stocks (and many asset classes) remain overvalued.

Oh yeah, since this is a Canadian site, everything will be fine here, no impact. Housing will continue to go up 5% a year every year and the Canadian economy will be just fine forever...

Full Disclosure: Puts on AIG, MER , SKF and equity in SKF, SDS, QID.

My MER puts are likely to go down versus Friday thanks to BAC's stupidity but they are January paper (bought when MER was in the mid 20s) and I'm not sure that the deal will stick, so I'll have to see what happens tomorrow...



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