Yes I thought Lehman was a buy - in 2005

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.]
  

Researching Biotechs to find a cure for recession

Well the biotech sector is starting to get renewed attention. No real surprise as it’s one of the bastions that stock market investors go to when a recession hits. It’s part of the group that gets a boost every time the R-word is mentioned, along with Gold (which is already on a tear).

But recently there has been a few pot shots taken at a few of the industry standards. The big boys are not looking so good, according to some, and that leaves the question of where to go. Some think that the biotech’s that got a boost from the JPMorgan Healthcare Conference this year are where to go. Others are just trying to see what is next.

One place not to go may well be Pfizer. As noted on Motley Fool there are many reasons. One of the most important I feel is the question of the drug pipeline. In the case of Pfizer there really isn’t one. In fact they are running into the problem that is deadly to many successful biotech stocks, patent expiration. Without the protection of a patent, sales inevitably fall precipitously, no matter how big your company is or the nature of the drug.

For Pfizer they will be losing 2 of the biggest drugs in the last 15 years. In fact the most explosive and popular drug in perhaps 2 decades or more will be opening up to generic competition, namely Viagra [the other drug is Lipitor]. If anyone thinks that won’t kick the company in the seat of the pants, then you probably think gold is a sell right now.

Of course Pfizer is not alone, as Genentech is in a similar situation. Though they do have a few new innovations on their aging pipeline that may give them a small boost, or at least cushion the patent exiration blow. So where do you look instead.

Well Adam Feuerstein over at TheStreet.com (I read a lot of the information there too) posed a new outlook that may catch on, if it hasn’t already. His theory basically is that many feel the top names at the JPMorgan conference are the top picks for the year. To that end he is following them.

He’s selected a list of 10 names, some well known others not, that he will watch throughout the year. They are:

Pharmasset
Idenix Pharmaceuticals
Intermune
Allos Therapeutics
Incyte
Isis Pharmaceuticals
Nektar Therapeutics
Viropharma
Seattle Genetics
Biogen Idec

It’s an interesting group. Again the key is always the pipeline. To me that is the beginning and end of any choice of biotech stocks. Strong, growing pipelines are of interest. Lagging pipelines are not.

Will this list prove to be true? Are they a one shot deal? We will see, but the short term of one year is never enough to know. I will tell you one thing though; no matter which biotech’s lead the industry, and whether the industry leads the stock market, as fear of recession and the impact of the mortgage crisis continues to unfold, this will not be the last you hear about this.