Lehman Sells a Limb; AIG Sells Out

Lehman sold part of itself this evening to Barclay's for $1.75 billion.

"Barclays' purchase includes Lehman's North American sales, trading, and research and investment banking businesses, as well as its midtown Manhattan headquarters and two New Jersey data centers." Source

Lehman still has other assets, including international units and its famed asset-management firm.

"Barclays said it intends to immediately begin discussions with international authorities to acquire similar operations of Lehman outside of North America. Barclays also has agreed to provide $500 million of debtor-in-possession financing to Lehman.

Meanwhile, Lehman said it's in advanced talks to sell its investment management division, which includes money manager Neuberger Berman, to a third party.

The division was once valued by as much as $10 billion, but now could fetch much less considering Lehman's bankruptcy, the Associated Press reported. Source

Lehman has about 700 million outstanding shares, so the assets sold today represent about $2.5 per share. (I'm not stating that the shares will trade at that level tomorrow - that's just the asset prices divided by shares.)

Considering Lehman still has other valuable assets to sell off, it seems like shares should continue upward from the $.30 closing price today. Barclay's bought Lehman's North American business for just $250 million - roughly the closing price - implying that a lot of the troubled assets were packaged in that deal. The relatively clean parts - buildings, investment management firms - should fetch nice premiums.

I also added to my original AIG position, but that may not turn out so well. AIG agreed to accept $85 billion in government financing in exchange for warrants representing 79.9% of shares. The $85b isn't payment for the shares - rather, it's a loan, which accrues interest at Libor + 850 basis points (currently totaling over 11%).

So the good news is, AIG will definitely survive, and they have plenty of assets to sell to repay the loans. The bad news is that current shareholders - myself included - will be substantially diluted.

However, the credit rating agencies should upgrade AIG's ratings tomorrow morning after this capital infusion, and AIG will have time to sell assets in a orderly fashion. I don't expect a FRE/FNM-like 90% haircut to $.30 tomorrow morning, but the reaction will probably be negative. However, the government did imply that their goal was to maximize shareholder value, in contrast to the explicitly statement that common holders came last with the FRE/FNM situation.

Considering AIG's after-hours closing price under $3 represents a 95% decline from the top, the dilution may be pared with the survival of the company.


All I can do at this point is dream for good opening prices tomorrow. Both of these purchases represent timing and speculation more than Buffett-like investing. I couldn't keep my hand out of the cookie jar. Tomorrow, and continuing onward, we'll see if I enjoy sweet rewards or endure stomachaches.

Wall Street Values BSC at $90/share

Wait... hold on a second... Didn't Bear Stearns close at less than $5/share today, because of the pending buyout at $2/share?!?

Well, it's true that Bear's market cap at the end of today was $650 million, a horrifyingly low number based on its value of more than $20 billion less than one year ago.

But here's another way to measure the value of Bear Stearns; JPMorgan's price increase today.

JPM shares were up $3.77 today, as the company announced that it was planning to acquire BSC at $2/share. Clearly, investors think that JPM is getting a great deal, as it was one of the only financials to rally on a day when the XLF, the S&P Financial Sector ETF, fell 2%.

So, about that $90/share valuation...

JPMorgan was up $3.77 today, and there are 3.4 billion outstanding shares. Therefore, JPM's market cap increased $12.8 billion today. If you divide that $12.8 billion by Bear's 136 million outstanding shares, the value of JPM's increase translated into Bear shares would price BSC at $94/share.

Now I don't think that BSC is worth $90 per share; there are clearly issues that BSC needs to resolve. However, it does show that investors, whether they are right or wrong, value Bear at much, much more than $2 share.

So what does this mean?

I certainly don't think that the deal will close at $2 share. Today, Bear shares were changing hands at more than twice that much, implying that another party would make a higher offer or that JPM needed to raise its price. The offer does have to be approved by Bear's shareholders, and I think that the 1/3 of shares owned by company employees will lead the vote against the current buyout offer. The Fed did guarantee Bear funding for 28 days, and JPM's new backing of obligations will last a year, as the deal is pending, so Bear's shareholders have some time to think about what to do.

Now, as confidence is restored, the discount window is open, and JPM is insuring obligations, Bear might not need to sell itself at all. As I disclosed before, I own a tiny stake in Bear, and I won't be adding to it at these prices; the uncertainty just isn't worth risking more money. I paid $30 for my shares - thankfully not $50 or $100 or $150 - and I may never see that $30 price again.

Just as many negative factors came together over Long Island, forming the perfect financial storm that capsized Bear's stock, clearing skies, and promise of cheap, available, and guaranteed money may just prove to be a lifeboat for Bear shareholders. Whether it means a buyout at $10, $20, $30, or $50, or the continuation of Bear operating independently, this display of valuation by JPM's investors shows that Bear is worth a lot more than $2/share.




"I trade with TradeKing: $4.95 stock and options trades, plus lots of tools. It's simply the best way to invest. Click here to find out more."

JPMorgan Plunders Bear Stearns

I was absolutely shocked to see the headline; Bear Stearns bought out at $2 per share.

Prior to the news release, the low estimate of merger-price speculation was at $15/share, a discount of 50% from Friday's closing price. Many analysts expected Bear to fetch more than the $30 closing price from a potential suitor.

I do not understand how Bear's board members sold themselves out for $2/share, or $236 million. The value of their headquarters was estimated to be $12/share by Barron's - why would the board sell out to an offer so far below the value of Bear's tangible assets?

I guess there may be some ghosts on the balance sheet, but I am honestly dumbfounded by the $2 price. I wish I could say I did not own BSC (or was short), but unfortunately, I bought a few share on Friday as I thought that the buyout would be for more than peanuts.

Hopefully another bidder comes along, as it appears as though Bear is a steal at this level. Also, the deal is subject to shareholder approval; considering that employees own an estimated 1/3 of the company, I don't see all of those people losing much of their nest eggs without a fight.

In other news, the Fed also cut the discount window.

As the shockwaves from both events hit investors, futures plummeted. All major indexes are now looking to fall at least 1% tomorrow.

Who wins? It's hard to say. It looks as though shareholders of any US stock will lose tomorrow, and certainly, the evaporation of billions of dollars of BSC will not help millions of investors' portfolios.

As my title suggests, it looks like JPMorgan has stolen itself a building, a clearing house, and many other businesses for far less than the market was valuing them at. Though I'll only get one share of JPMorgan from my BSC, I may look to add more as this may provide very lucrative once cooler heads prevail.


"I trade with TradeKing: $4.95 stock and options trades, plus lots of tools. It's simply the best way to invest. Click here to find out more."

FED TO THE RESCUE

The Fed cuts rates 0.75% overnight after index futures were pricing in a 5% decline.

More to come in a full writeup on the state of the markets.






"I trade with TradeKing: $4.95 stock and options trades, plus lots of tools. It's simply the best way to invest. Click here to find out more.

Oil is Bubbling

As I alluded to in my longer posts about oil, I stated that there was some potential for some short-term upside, due to today's inventory report and pending Fed rate-cut decision.

I pointed out that when inventory reports were negative, they were dismissed as irrelevant, but when bullish, they were said to be the most important data ever. That was supported today; a slight decline in inventory popped oil up to a new record high.

Thankfully, I'm still holding my COP calls.

If the Fed cuts this afternoon, oil could go even higher.

It's a matter of momentum vs. fundamentals. As an investor that tries to trade on fundamentals, oil shouldn't be $94. However, just like in a stock like BIDU or CMG, momentum can, and will, push the price higher even when its illogical.

I think I'm going to hang tight in my COP calls position until after the Fed reports. I don't know when to exit... it's so hard to predict when people will realize that this price is ludicrous. Oil may very well hit $100 within a week, but I want to keep reaffirming that in 3 months, I think it'll be closer to $70.

Christmas in December: Fed Aftermath

Investors that held long positions as of 2:14 Tuesday should appreciate Mr. Bernanke's decisions. The interest rate cut catalyzed a rally that has now lasted two sessions and 3-4%.

I personally can thank him for some investing success. I had purchased September calls for Abercrombie (ANF) and Hovnanian (HOV) about a month ago, when they were both close to the respective strike prices (80 and 12.5). In the month, they were flat or down, and my options were going to expire worthless.

However, Mr. Bernanke came to the rescue and surprised the market with a 50 basis point cut. Both Abercrombie and Hovnanian shot up, and the contracts became in-the-money. (Interestingly, I half-jokingly predicted with almost 100% accuracy the Hovnanian gains; read my post here.)

Anyway, just because I should disclose this anyway, I sold my options in both Abercrombie and Hovnanian, and I sold my equity position in Hovnanian today with a well-executed stop-loss order. For the record, I still love the homebuilder's prospect's for the future; I will be looking for a lower reentry point sometime very soon. However, I feel the run-up to 15 was largely unmerited and a bit of a chain-reaction, so I'm currently waiting on the sidelines for things to settle down.

Thanks to Mr. Bernanke, my personal portfolio was up 10% on Tuesday, and I am now exactly even for the quarter. (Prior losses in Hovnanian, Syntax-Brillian, and others had hurt my performance).

Looking ahead, I am uncertain; the crystal ball that I used to predict the rally Tuesday is now out of commission. I watched Mad Money tonight for the first time in a while, and Cramer predicted that this is just the beginning of a huge bull market. I can't say that I agree with taht statement; with still-unresolved (and possibly still worsening) housing/credit problems in the United States and Europe, I don't think the world markets are financially sound enough to have an organic, fundamentally-based rally. The euphoria from the interest rate cuts may last a few more sessions, then people will probably start to profit-take.

My advice? Keep your eyes on the long-term prize. I'm long Toyota (it's the biggest position in my portfolio, at about 20% of assets). It is down a couple bucks from where I bought it in the middle of the summer, and frankly, I'm not too sure it's going to go up significantly anytime soon (due to the possibly-weakening economy, tight credit, etc). However, I'm 97% sure that in two or three years, based simply on fundamentals, Toyota could easily be a $200 stock.

Trying to profit from volatility is tempting, and if you succeed, congratulations. But if you look at the world's greatest investors - people like Warren Buffet - they seek out great values, and great companies, and reap great returns.

Hovnanian update

I just found this little write-up:

http://www.cnbc.com/id/20810847

Two things:

1. Apparently, the sale went well, at least in some regions. Like I said in the analysis, I think that will be good, at least in the short term.

2. Also, they said that they would release official sales figures Tuesday. Coupled with the Fed meeting, Tuesday will probably be a make-or-break day for Hovnanian, depending on the news.

It's going to be a wild week... like I said before, I like the long term prospects of the company; the short term is too unpredictable and risky.

Individual Stock Analysis: Hovnanian (HOV)

The housing bubble has been one of the most talked-about topics over the past year. Due to low interest rates and lots of individual and corporate speculation, housing prices artificially blossomed right after the turn of the millennium.

As a homebuilder, Hovnanian (HOV) benefited from this trend. I have a chart below in the article, and take a look at it; the "stock price" is my approximate average yearly price based on real monthly close price over the past 10 years. As you can see, Hovnanian's stock enjoyed an incredible increase in the years up until July of 2005, when it had a monthly close of $70. The stock was trading in the $3-5/share range in the late 1990s, and if you had timed the low precisely, you could have purchased shares for $2.75 each in May 2000, scoring yourself a 25-bagger if you had timed the low and high precisely.

(That's unrealistic, and not the point of this article. But in doing the research for this analysis, those were some interesting statistics I sorted through).

Fundamentally, Hovnanian is very cheap right now. I can't do this analysis based on P/E, because Hovnanian is currently losing money (as homebuilders regularly do during the negative parts of the housing cycles). Plus, according to lots of professional, successful analysts, price to book value is a much better indicator of true company worth.

Below is a chart plotting my approximate average yearly share price versus a mathmatical function of the yearly price/book value ratio. (Price data was obtained at finance.yahoo.com, while price/book ratios were found at Morningstar.com.)

The formula that I used to create a chart that exemplified my point was:

((Book Value x 4)/1.6)^2. The formula allowed the data to be comparable on the same graph. If you'd like a further explanation, click here to download a short explanation in microsoft-word format.

My point is, the share price of Hovnanian has closely followed its book valuation over its history. However, today represents its lowest price/book ratio in the 10-year statistical history, by far. Here is the history, in one-year intervals:

Year	1997	1998	1999	2000	2001
Price/Book	0.9	0.9	0.6	0.8	1.6
2002	2003	2004	2005	2006	TTM
1.7	3.2	2.5	1.7	1.2	0.4

Youcan see that the price/book value is inflated in a great (overvalued/bubble) housing market, while depressed in a tough housing market. However, even during the bottom of the previous housing cycle in the late 1990's, the lowest price/book ratio Hovnanian had was 0.6. Today, that ratio is 0.4. That number is one-third lower than the previous low, which is statistically significant; if the stock was trading at a 0.6 book value today, it would be over $16/share.

So, strictly on valuation, I think that Hovnanian is currently looking fundamentally cheap. However, I think that there are other reasons why Hovnanian is attractive right now. The company does business in at least 19 states, with multiple markets within most states. They create housing developments, but also will build one of their housing plans on an individually-owned lot. This diversified business model will, I believe, help to cushion the effect of this housing bust. Yes, Hovnanian is exposed in some of the worst markets, like Florida and California, where housing is expensive and speculation was rampant. However, it also has operations in communities right around me in Western Pennsylvania, where housing prices are steady, or even increasing.

Hovnanian has already cut many of its losses, writing down land and options in some of the most expensive, volatile markets. I'm not going to naively predict a full housing recovery in the near term, but I believe that Hovnanian has already accounted for many of its liabilities.

Plus, two short-term events could positively affect Hovnanian's business.

First, the "Sale of the Century," a three-day event this past weekend that included price slashes of up to 20% on Hovnanian homes, could generate lots of cash, allowing the company to keep operating normally while removing some of its financial obligations. Though a deeply-discounted home will obviously not yield as much as a full-price home, right now I think it's important for Hovnanian to unload lots of the homes and land that they currently have to pay to maintain. An important feature of the sale is that many of the less-expensive properties will now fall below the price cutoff of a jumbo-mortgage, allowing buyers access to more affordable rates, especially because the lending market has tightened.

Second, the result of the Federal Reserve meeting on Tuesday will surely affect Hovnanian. Surely, a cut will be beneficial, allowing freer access to capital for all. I think that the general market reaction is going to be more unpredictable; it currently seems like either a 25- or 50-basis point cut can be the right or wrong decision. However, I think that the news of any cut, which should occur, will at least be a symbolic gesture that will help restore some confidence.

I have no idea when the bottom of the housing market, and stocks like Hovnanian, will occur. Personally, I initiated a long position in Hovnanian around $15/share, when I thought it was cheap; it's 52-week high is around $40. However, I have no idea if $10 a few days ago was HOV's bottom (that's the least likely scenario), or if it may fall back to $10, or $8, or even less in the coming months or years. However, I think that Hovnanian has the fundamentals to survive this bust; even if it becomes more troubled than it is, I can see a large bank or investor not allowing the company to go out of business.

Hovnanian was probably overvalued at $70 when the housing market was at its over-inflated peak, but I don't think it's a $10 stock either. Based on a rough average price/book valuation of 1.5, that translates to a stock that would be $40 based on today's book value. Even if that estimate is high, it's clear that Hovnanian is clearly NOT a $10 stock.

I don't give financial advice, but if I did, I would not recommend getting into this stock tomorrow morning in anticipation of good news concerning the sale and the Fed. Those are two short-term good-news injections that may temporarily raise the stock price. However, I think the big picture is more important; Hovnanian is trading at a historic low, both in terms of actual price AND valuation, and as the housing market recovers, in 1, 2, or 5 years, Hovnanian's share price should mirror the change.

Disclosure: Author is long HOV.

Wild Day, Mild Finish

Following Friday's fiasco, today's trading began unpredictably. Futures began positive, then leveled off. During the course of the day, the markets swung up and down: the Dow traded in a range of 150 points, ending the day up marginally, while the Nasdaq was down almost 1% at one point, and ended with a loss of one-quarter percent. The S%P 500 recovered from a 1% deficit to close almost unchanged.

There were some movers today:

• Apple (AAPL) announced that it had sold its 1 millionth iPhone, and recovered $5 (3%) of last week's losses. The announcement verified that the iPhone is selling very well; Apple's own goal was to sell one million units by the end of September. The news today seemed to calm investor's nerves, after the unsettling price cut on the device last week.
• Countrywide (CFC) fell 5% today after announcing Friday that it was terminating another 12,000 jobs.
• Homebuilders declined, with all major companies falling by over 2%. My Hovnanian (HOV) led the way, giving up another 5% to close at a multi-year low. Hopefully, if the Fed decides to cut rates, the homebuilders will be the first to react positively.
  
• Harley-Davidson (HOG) fell an additional 3.5% today after declining almost 10% on Friday. A bleaker earnings forecast caused the decline; however, I feel as though the stock price may be over-reacting.
  

That's all for now; hopefully I'll have a chance to write another individual stock analysis later tonight or tomorrow.

Pre-Market Report

What will trading on Monday, September 10th be like? It's not certain, but lots of indicators are pointing to another day of selling. Asian markets were down during their sessions, and the market could likely keep reacting to the unfortunate economic news from Friday. Plus, there is now speculation that the Fed may not cut rates during its meeting this month, because of fears of uncontrollable inflation.

I think it's going to be a wild day. But, who knows, the indexes might end up flat for the day. Some stocks I'm personally going to be watching:


Apple (AAPL), still reeling from the negative opinions stemming from its price cuts and new product line, has lost almost 10% of its share value over the last few days of trading. I think it will continue slipping today, but it also might hit a bottom.

Countrywide (CFC) announced on Friday that it will be cutting approximately another 12,000 jobs.

Homebuilders (in particular, I own Hovnanian (HOV). As a sector, they posted major losses on friday, mostly because of the weak economic data. A rate cut could really help homebuilders, so if speculation is positive (or an early rate cut occurs) they could move significantly.



That's all for now; check back later for daily post-close wrapups every day, plus insight into the market and individual companies. Subscribe to my blog, or just bookmark it!

First Day, and what a day!

What a day, week, and month to start publishing a blog about the stock market. Today, the three major indexes were all down 1.5-2%, with some big-name individual stocks falling 5% even without any mention of bad news.

There has been lots of news in the past week, and even more market reaction.

Apple cut the price of the iPhone, and introduced new products. Investors freaked out because of fears of lower margins, and the stock has fallen 10% in just a few days.

Homebuilders are hovering at or near their 52 week (and, in many cases, multiple-year) lows. I regrettably bought Hovnanian (HOV) around 16, assuming that was a bottom, and it has fallen since. I believe the industry will eventually recover, but it's certainly going to be a tough period over the next few years.

Poor data on jobs shook the market today (Friday, September 7), as a loss of 4,000 jobs, compared to the estimated creation of 100,000, represented the worst report in years.

There were few bright spots in today's trading; arguably, the best result is that it now seems inevitable that the Fed will cut interest rates significantly later this month. Until then, this September seems like it will live up to its historically volatile, negative nature.

Personally, I'm primarily invested in value positions, since the short-term future of the market is so uncertain. Hovnanian is obviously the extreme laggard in my portfolio, but some of my other positions, like Toyota, are also now lower than the price I purchased them for. However, I'm in it for the long run, and I have supreme confidence that my investments will recover and flourish.

Until then, I may speculate on short-term performance by playing options.

There will be more on my individual positions, portfolio, and investment ideas to come.