Smoke Screen: Lehman Preferred Offering

March 31, 2008

After hours, shares of Lehman (LEH) took a nosedive, down another 7% to $34.80 before recovering toward $36.60 by the end of trading.

Why? At exactly 4:39pm, Lehman announced a share offering to help them with a much needed capital infusion. Moreover, it is very troubling that on a daily basis, new information is uncovered that is verifying what is on the top of most investor’s minds: The problems are much worse than we are being led to believe.

Coming off a rather limp reception for “Paulson’s Package,” the market is in no mood to hold on to gains today, another sign that investors are not committed and institutions are doing some spring cleaning of their own. I thought that a quick translation of the press release would be a good idea as it seemed rather cryptic.

According to PRNewswire:

Lehman Brothers to Offer 3.0 Million Shares of Convertible Preferred Stock — Lehman Brothers Holdings Inc. (NYSE: LEH) today announced that, in response to investor interest, it intends to offer 3,000,000 shares of Non-Cumulative Perpetual Convertible Preferred Stock. Lehman Brothers also expects to grant the underwriter for the offering an option to purchase up to 450,000 additional shares of the Preferred Stock to the extent the underwriter sells more than 3,000,000 shares of the Preferred Stock in the offering. The proceeds from this offering will be used to bolster the Firm’s capital and increase financial flexibility.

Translation: We need cash. We need it now and we are doing it in a way that will be perceived as beneficial.

“Given the challenging environment and our previously stated view that it will likely continue the balance of the year, issuing convertible preferred is appropriate as it optimizes our funding and accelerates our plan to reduce leverage, and at the same time minimizes dilution to our shareholders,” said Erin Callan, managing director and chief financial officer of Lehman Brothers and a member of the Firm’s executive committee. “We also felt this was the right time as there was a window of opportunity in the market, as we have received significant interest from several key institutional investors, who have been strong supporters of the Firm over time.”

Translation: OH CRAP! We are in deep. Even though we have access to funds through the Fed’s Discount Window, that will look as if we really NEED the money. Maybe we should come up with a plan that seems less desperate. A great way will be to offer bonds, but who would buy those? Hey..what about a preferred stock issue as it will offer upside if we pull through and a yield. We will not be required to pay dividends as we are with bonds, so if the need arises, a cut is possible. The best part: No worries about ratings! No one really pays close attention to the ratings on a preferred, especially a convertible preferred.

The Non-Cumulative Perpetual Convertible Preferred Stock, Series P, carries a par value of $1.00 per share and a liquidation preference of $1,000 per share (the “Preferred Stock”). Upon conversion, the Preferred Stock will be convertible into shares of Lehman Brothers’ common stock, plus cash in lieu of fractional shares.

The non-cumulative dividend rate, conversion rate and other terms are yet to be determined. An application will be made to list the Preferred Stock on the New York Stock Exchange. The offering of the Preferred Stock is being conducted as a public offering registered under the Securities Act of 1933.

Translation: Get it out there…Don’t worry about the details. Look strong, business as usual.

Lehman Brothers Inc. is serving as sole book-running manager of this offering. The offering will be made under Lehman Brothers Holdings’ existing shelf registration statement filed with the Securities and Exchange Commission.

Translation: Who can we get to help with the offering? What other firm in good-faith would present this to their clients? Maybe we should do it ourselves.

Even though this is not dilutive and may actually be beneficial to LEH, it is hard to imagine how investors will react to this offering, especially after they have seen the slide that FNM and FRE took after a similar preferred offering was consumed.

Note: There are rumors that call for the issue to have a 7% yield and a 30-35% premium conversion.

Disclosure: Horowitz & Company clients do not hold positions in stocks mentioned but they do own put options on LEH.

TDI Episode 50: The Analysts are Wrong (DUH!)

March 30, 2008

Guests: Adam Warner, Professor Woolridge and Gal Arav. In this episode, we explore three topics of interest. First we get the lowdown on options with Adam Warner. Then we find out from Professor Woolridge that stock analysts usually predict earnings to be higher than they actually are. Finally, Gal Arav introduces his newest technology wonder, Newsflashr.

Guest Info and Bios:

Adam WarnerAdam Warner is a proprietary option trader
with Addormar Co, Inc. He traded as a member of the American Stock Exchange from 1988-2001, and in several off-floor locations since then. He co-wrote the options column on Street Insight from spring 2003 to spring 2005, and currently writes a blog – The Daily Options Report – dedicated primarily to education about options. In addition, he is a “Professor” at Minyanville, writing a regular roundup column. Adam graduated Johns Hopkins University with a degree in Economics.

Gal AravGal Arav is the founder and creator of InstantBull and Newsflashr. Gal’s developing faster ways to monitor huge amounts of news data. Following a successful run of investing in the stock markets, in 2006, Gal invested in his own startup company to create, a time-saving stock research and message board aggregator. This came after several years of R&D at an MIT spin-off that develops eye-tracking devices where Gal was Product Manager. In 2008, Gal is once again striving to turbo-charge the Web with his latest news aggregator, newsflashr. Gal holds an Engineering degree from The Technion, Israel and a Master’s degree in Operations Research and Decision Theory from Tel Aviv University, Israel.

Randall WoolridgeDr. J. Randall Woolridge is a Professor of Finance at the Penn State, Smeal College of Business. He is a Goldman Sachs and Co. and Frank P. Smeal Endowed University Fellow and President of the Nittany Lion Fund, LLC. With expertise in investing and capital markets, he has published numerous books and articles including the popular stock valuation book, The StreetSmart Guide to Valuing a Stock. His research has been highlighted extensively in the financial media. Recently, he published a study: Wall Street Analysts Still Exuberant In Their Earnings Projections that we discuss in this episode.

Future Episode Guests: John Byrne, Business Week – Jordan Goodman, America’s Money Answers Man – Robert Reich, former U.S. Secretary of Labor

Andrew’s Book
The Disciplined Investor

Stocks Mentioned: (COF) (AAPL) (LEH) (SPY) (GOOG) (BSC) (SAFM) (SKF) (WM) (VM) (CROX)


MarketMASH – March 29, 2008

March 29, 2008

Brett Steenbarger of Traderfeed comments on one of the biggest problems for traders: Denial. “One particularly uncomfortable truth for traders is that their lack of profits is simply due to trading randomness. It’s not a lack of discipline, a lack of trade planning, or a lack of tweaking the right indicators that create losses–all of those are relatively easy to address. No, losses are caused by trading strategies that simply do not work, and that’s not so easily remedied.”

Stockmasters on Starbucks (SBUX) and their new idea to transform the company into a profitable company with global dominance. Wait…uhhmmmmm… that de ja vu all over again?

My friend Brian, the video charting ace is underimpressed with Discover Financial (DFS). Take a look at the chart and you also may say….eeegaddds too!

Apple iPhone 3G anyone? Reports and rumors are circulating around that the plan is set. OMG! What I would do for 3G! I need 3G! I have to have 3G! :-)

One another note… Have you ever listened to Indie Rock? I just can’t get enough of it. You really need to check it out. Relaxing and invigorating at the same time. (listen in iTunes) – Tell me if you like it…

As I was researching Capital One Financial (COF) this week, I came across a great site that tracks insider trading – – Find out who is milking the company and which stocks are moooo-ving because of it. Nice work fellas!

Herb Greenberg is calling out Cramer on his uptick rule discussion and it is causing a comment frenzy. To be sure, the uptick rule is a joke. Short sellers are part of the market, not the problem. You got to love the ignorance when it comes to shorting stocks.

Mike Arrington, editor of the popular TechCrunch wrote an interesting article about his bulging email inbox. (To put this in perspective; I hear that it is so massive that Silicon Alley girls sometimes swoon when they see it.) There was a story within the article that discussed a recent conversation he and I had. Somehow he omitted my name and forgot to provide a link back to my site. But, the good news is that he agreed to be a guest on the Podcast….The bad news is that he wrote me 10 minutes later and canceled when he found out that I would not allow “foul language” on the show. Mike, I hope you reconsider. I am sure you will be @^#%$ awesome. Link to his post HERE.

In what is probably going to shape up to be the scariest stories of next week, UBS has come out with a statement on their new policy for auction-rate securities. You know, those were the ones that were sold as money market alternatives for investors looking for a safe place to park money while earning an above average yield. Now, as liquidity is non-existent, they will mark-to-market, reducing principal value 5%-20%. That is really going to piss-off a whole lot of investors!

Thanks to Analytical Wealth for this funny….

Euro Preferred

It Doesn’t End: Lehman Defrauded/Forgery

March 28, 2008

Lehman (LEH) now seems to have problems of another kind. Just when you thought it was going to get better, we hear of a new kind of ugliness. What next?

If nothing else, it is keeping us on our toes as the “good news” just keeps on pouring in!


13:32 LEH Lehman Brothers may lose *Y35 bln yen due to fake Marubeni documents, according to Nikkei – DJ (39.21 +0.50) -Update- DJ reports the co now stands to lose some *Y35 bln as a result of a investment deal in Japan that involved forged documents said to be from Marubeni, The Nikkei reported in its Saturday morning edition. Senior officials at Asclepius, a wholly owned unit of LTT Bio-Pharma, solicited funds from investors, according to sources familiar with the matter.

OH, by the way, that is $352 million converted, give or take a million.*

* Corrected 3/30/08

The Disciplined Investor

Learning that we never learn: Citibank

March 27, 2008

“Education costs money, but then so does ignorance.” – Sir Claus Moser

Phew…Only $1.66 billion. It was only a short time ago that a billions dollar payment would be a big concern. Remember back to the 1998 collapse of Long-Term Capital management when an initial $1.8 billion hedge fund loss announcement lead to a global meltdown? I suppose that it was different as it was a decade ago and the dollar was worth a lot less back then. Then again….

The recent news of the Enron settlement by Citigroup (C) would normally cause a substantial stir and a marked concern by investors. But the truth is that this is a drop in the bucket compared to the real write-downs we are witnessing.

Citigroup settles with Enron creditors – International Herald Tribune

Citigroup said Wednesday that it would pay $1.66 billion to the Enron Bankruptcy Estate, which represents creditors of Enron, the energy trader that engineered one of the biggest U.S. corporate frauds. With a trial scheduled for next month, Citigroup was the last of 11 financial institutions to resolve claims going back to 2003. Citi’s shares fell $1.37 to close at $22.05.

Ironically, the Enron collapse was also due to derivatives, leverage and off-balance sheet arrangements. Sound familiar? I thought we had learned our lesson from that? The Enron, LTCM, and subprime are all the same animal, just in a different flavor. AND, touching the hot surface has not helped keep us out of the fire as we (investors) are lied to, over and over again..and apparently very stupid.

The most troubling news though is not that John Meriwether’s hedge fund is seeing record number of outflows related to a 28% loss in his Relative Value Opportunity fund has seen in 2008. Rather it is that after the amazing loss and market turmoil caused by his last fiasco, that his funds would ever see the inflows to begin with.

What do you think…have we learned our lesson?

Disclosure: No Positions in stocks mentioned.

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