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.

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

Motorola: Secret Meeting Transcript

March 26, 2008

It is amazing that shareholders put up with this horrific decision making. Instead of the company splitting into two, how about a brand new board of directors along with a new management team. True to the old adage: An new broom sweeps clean…

I wonder if this is what happens behind the closed doors at Motorola (MOT):

Board Member 1: We need to do something, I think that some investors are questioning our decisions.

Board Member 2: Really? I think we still have them believing that we have another Razor coming out.

Zander: Razor? Who said Razor?

Board Member 1: How about a stock split? Yeah, that may put them off the trail.

Zander: Split? Who said Split?

Board Member 2: Well, I don’t know, maybe we should work on a new design for the Razor3? Remember how popular we were in 2003?

Board Member 1: Maybe a dividend, or a how about a buyback?

Zander: Shopping? I want to go!

Board Member 1: How about we split the company so we can have two companies. That will let us hide out longer and undetected. Yes! Yes!

Zander: What about me?

Board Member 2: I want to be President now! I want to be President!

Board Member 1: Of course you will be!

Zander: What about me?

Board Member 2: I want shares, I want shares!

Board Member 1: More shares! It looks like we are doing something! We are so smart!

Zander: Smart, Zander Smart….

Board Member 1: OKAY, I am going home….Let the lawyers deal with it now.

Board Member 2: Me too. I am going to pick out furniture for my new office. But I need to get lunch first. Wow, it is 11am already! Ed, do you want lunch?

Zander: Lunch? Lunch? I want Lunch!

Meeting adjourned.



Capital One Downgrade

March 25, 2008

Follow up from yesterday’s comments and trashing of Capital One (COF). It seems that we are not alone on this.

COF: Downgraded – JAGNote by Friedman, Billings, Ramsey Co., Inc.

COF: Downgraded – The firm noted they are downgrading shares of COF to Underperform from Market Perform and reiterating a $40.00 price target. Believe that recent Fed actions and government proposals have resulted in indiscriminate buying/short covering of financial stocks. Problems with broker/dealers and the secondary mortgage market that plagued many market participants were not issues for COF.

Therefore, recent actions to promote liquidity in the secondary mortgage market have not changed our fundamental outlook on COF, leaving the hares overvalued in the face of deteriorating credit quality, in firm opinion. Expect the shares of COF to trade down as investors realize that the recent stimulus will not prevent significant consumer credit deterioration in 2H08 and 2009 as unemployment continues to increase, negatively.

Double Whammy: Bank-Card Companies are Next

March 24, 2008

Aside from Visa (V) or Mastercard (MA), it doesn’t seem as if the credit card issuers have been getting the attention they deserve. With all of the panic and concern surrounding the brokers and builders, perhaps plates are too full to take on any more. Yet, I have been thinking about how easy credit policies made available for housing created a monstrous economic problem. Even so, it does seems plausible that companies issuing collateralized debt could eventually see a recovery if the underlying property can be liquidated for some portion of its worth. But, what happens as defaults rise on credit/bank card debt, which is only backed by the full faith and credit of the borrower?

Consumer Debt on the rise

During the past few months, investors have pummeled Discover Financial (DFS) and others lenders over fear of rising defaults and delinquencies. Here is an example of the recent news and behavior of credit companies caused by the subprime problems (2/12/08 Washington Post):

The subprime mortgage meltdown has spilled into the credit card industry in other ways. Banks have reported steep write-offs related to the mortgage mess, and their stock prices have plummeted.

“Credit cards historically have been a very profitable segment for the banking industry, so what they’re doing is trying to squeeze customers as much as they can, particularly for accounts they don’t see as profitable or as high risk,” said Curtis Arnold, founder of, a consumer resource on credit cards.

Bank of America (BAC), for instance, notified some customers last month that their rates would increase as a result of a periodic review of their credit risk. Chase (JPM) last fall increased the rate paid by new customers of its Freedom card. Bank of America and Chase are also among some banks that have increased ATM fees for other banks’ customers to as much as $3. Capital One (COF) has changed its cash-advance fee for new customers from 19 percent to 23 percent.

Beyond the current economic crisis, there is an even more troubling issue confronting the industry with the pending legislation known as H.R. 5244: (MSNBC Consumerman)

‘The Credit Cardholders’ Bill of Rights Act of 2008, known as H.R. 5244, would protect cardholders from arbitrary interest rate increases and unfair fees. Maloney, who chairs the House Financial Institutions and Consumer Credit Subcommittee, is quick to point out that her bill does not have any price controls. It does not cap rates or fees.

Interestingly, it looks as though some analysts are continuing to recommend a BUY rating on COF and other names within the sector and are oblivious to the mountain of problems facing bank card companies, aka: The Double Whammy: (Yahoo/AP)

Amid difficulties with mortgages in the U.S. and unloading corporate debt, banks are competing more than ever for market share in their core business — deposits. A large source of profit, banks are introducing newer, higher-yielding accounts to attract more customers’ cash.

COF Analyst ratings

The grease that keeps the wheels turning for these companies is capital. In times when money is easily available, bank-card companies utilize their customer accounts to lend money to the credit card customers. As credit card balances rise, new capital is needed to meet the consumer demand.

In order to bring in fresh capital, brokers such as Lehman (LEH), JP Morgan and Goldman Sachs (GS) raise money through note, bond and stock offerings. What do banks do? Of course if they are publicly traded they have the ability to do the same as the brokers and other companies, yet a quieter and quicker maneuver is the bring in new deposits through higher yielding savings accounts. This also helps to bring up the reserve requirements for loans issued through credit card issues and direct loans.

The simple point shows that as customers continue to look for safer alternatives and margins are squeezed as delinquencies and defaults rise, banks that do a big business within the consumer credit card arena could be hit by both problems of limited capital available to loan and ceilings on the fees they can charge for those loans.

The problem for COF is not restricted to our country. Over the past several years, Capital One move aggressively into England and offered Read more

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