A Bit Late to the Party, Aren't We S&P?

One thing I respect is an analyst or service getting in front of the 'news'. Fresh, original and thoughtful analysis is quite useful as it gets one to think and make decisions. Basically making a call after the horse has left the barn is not too hard, in fact it is more like piling on.

Well, on Monday Standard & Poors downgraded the debt for some major brokerage houses. Perhaps they also downgraded the equity, but it's hard to tell. This downgrade may be logical in the sense that brokers will need to raise more capital in the near term, but this almost seemed too obvious... months ago, when the stocks of these companies were 20-30% higher! Hindsight is 20/20 of course, but it's hard to believe these ratings agency couldn't see the forest through the trees, especially after the Bear Stearns disaster. We won't go too far here, but suffice to say the customers of the ratings agencies are... (fill in the blank with your favorite bank or broker).

Another Latecomer to the Party - Chairman Bernanke

Apparently Ben Bernanke had a shock or revelation at the gas pump or at the grocery store... higher prices! Indeed... welcome to the American Nightmare, Mr. Chairman, glad you can see the light. On June 4, Bernanke, a noted inflation hawk who has changed his stripes to boosting economic growth, acknowledged inflation expectations are too high, and are mostly intolerable. Really now, Mr Bernanke? Most of America has been screaming this for months now, sir, while you and the Fed have been squawking about 'contained inflationary expectations'. Well, we Americans did not have to wait for you to come on board to believe it.

Certainly the higher prices and weaker dollar have made for difficult times for all of us, yet Mr Bernanke believes this is not a 1970's redux. Oh, thank goodness... I thought he may be pulling out a polyester three-piece suit and dancing shoes! To be sure, inflation today does not compare to the 1970's in real dollar terms (now that is ironic). So, the steps to take? Clearly with higher oil being a crimp in the cost side, the Fed will have no choice but to raise rates, hopefully after the recovery has started. You can see the odds have increased now for rate hike later this year.

Fear Is in the Eye of the Beholder

A broker that is on the skids, capital starved and is being hit relentlessly by short sellers and put buyers. Making new lows each and everyday with no light at the end of the tunnel. We've seen this movie before (remember Bear Stearns?), but this is now part II.

Apparently Lehman (LEH) is the victim this time around, and the vultures are swirling... and bringing friends along. Certainly Lehman was able to fend off the attackers back in March but this time around 'may be different'. It's hard to believe a venerable firm could go down, but we did see this happen in March. Besides, Lehman's books have some bad assets, and once they get religion, things may get better. The proclaimed bottom was in, right? No more disasters was the mantra and while the fear index has declined nearly 40% since armageddon day (Mar 17), there is not much likelihood of another tragic end to a broker... or is there?

Put activity has rocketed higher as well as implied volatility. Expectations are for a monstrous move down for the broker. Fear is in the air. We hope this is only smoke and mirrors but the damage may have already been done and when the vultures swirl, they are hungry to feast on the carcasse.

Disclosure: None

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Bob Lang

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