Perception versus Value

"In the short term, the market is a ‘voting’ machine whereon countless
individuals register choices that are product partly of reason and partly of
emotion. However, in the long-term, the market is a ‘weighing’ machine on which
the value of each issue is recorded by an exact and impersonal
mechanism."

Benjamin Graham

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In an earlier post, I referenced an article from  today’s NYT, "Lehman Battles an Insurgent Investor."

The gist of the column emphasizes Graham’s first point — the voting process — over his latter point, that of the market as a weighing machine.

I think that unfortunately understates the risk Lehman presents to investors. It also may understate problems with the entire sector.

Einhorn is not trying to talk down Lehman’s stock — not if we understand his methodology, and are being precise about how markets work. Rather, he is trying to make his analysis of Lehman’s balance sheet better understood by the overall market. That is a subtle, but important difference.

Remember, Einhorn didn’t buy those mortgage backed securities on Lehman’s behalf, or lower their debt rating. He is not the one that leveraged them up 32 to 1, or festoon their balance sheet with dicey derivatives.

Rather than focus on " Einhorn’s influence on Lehman’s stock price," I suggest reporters focus on Lehman’s balance sheet, leverage, derivative exposures, counter-party risk, and P&L statements.

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Source:
Lehman Battles an Insurgent Investor
LOUISE STORY
NYT, June 4, 2008
http://www.nytimes.com/2008/06/04/business/04lehman.html

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  1. dblwyo commented on Jun 4

    Here, here. Here, here. You’re on a roll. If you’ll pardon my re-posting a minutes ago comment on the industry’s outlook because it seems still relevant…
    “Yesterday’s vidclip of Saut discussing the terrible outlook for the financials is more than a big canary in the mine; it’s a major indicator that the deep re-thinking of broken business models is starting to get traction. And even reflected in the CNBC chattering heads though most of their guests don’t get it. The industry is going to go thru an enormous re-reg and de-leverage as risk is more properly priced and, hopefully, we’ll see some return to good business practice ala this post and others. FWIW I did a survey of these structural factors in a series of three posts collecting a bunch of readings: http://tinyurl.com/5drt77 http://tinyurl.com/4jhcrl and http://tinyurl.com/4he2wv The last of which looks at the PE business, especially the mid-market. Another post took a pretty deep dive on Citi to see if they were finally going to do the things they should have done ten years ago and reached a favorable conclusion: http://tinyurl.com/5zy8tb
    The question now is execution ! Try looking at JPM’s last investor presentation for how to turn a framework like Pandit’s into some realities. Excellent IMHO.”
    To add Saut’s postscript we’re looking at dropping earnings and high PE compression continuing on for years as these guys re-think their business models. So far nobody seems to be stepping up…with the possible exception of Dimon ? Other candidates ??

  2. MarkTX commented on Jun 4

    “Rather than focus on ” Einhorn’s influence on Lehman’s stock price,” I suggest reporters focus on Lehman’s balance sheet, leverage, derivative exposures, counter-party risk, and P&L statements.”

    Here here…..and exactly.

    One one these day the MSM (and investors?) may actually be interested in the facts and the risks rather than the spin, hype and the scapegoat(s) when things go wrong.

  3. Bob A commented on Jun 4

    Yes it’s a weighing machine. But problem is there are forever people messing with the mechanisms.

  4. Karen commented on Jun 4

    Einhorn is my hero. As a personal investor, I see him as a fair umpire attempting to level the playing field. The king swarm makers steal their gains on the greater fools’ theory while the market turns into a crap shoot on crack.

    BTW, buy his book: Fooling Some of the People ALL OF THE TIME.

  5. Joe Klein’s conscience commented on Jun 4

    BR:
    You should mention Benjamin Graham’s name next time you are on Kudlow. Better yet, if his name was ever mentioned on CNBC(Or FBN) the anchors heads would explode. I bet most on Wall Street would consider him a Communist or something today. Did you know that on his birthday, he’d give his staff presents because he was glad to have their company and their contributions to his life?

  6. Mike M commented on Jun 4

    “..I suggest reporters focus on Lehman’s balance sheet, leverage, derivative exposures, counter-party risk, and P&L statements.”

    Now why would anyone focus on such silly things as fundamentals?

  7. 12th Percentile commented on Jun 4

    This sounds vaguely familiar. Blaming rumors for your low stock price while claiming you are rock solid. Where have i heard this….oh, right.


    The chief executive of Bear Stearns told CNBC that despite recent market volatility, he is not aware of any imminent threat to the Wall Street investment bank’s liquidity.

    Market rumors about a cash crunch at Bear Stearns have driven the bank’s stock down sharply in the last week, but Alan Schwartz insists the company continues to trade with its counterparties.

    In an exclusive interview with CNBC’s “Squawk On the Street,” Alan Schwartz said he does not know where the rumors originated.

    “Part of the problem is that when speculation starts in a market that has a lot of emotion in it, and people are concerned about the volatility, then people will sell first and ask questions later, and that creates its own momentum,” he said.

    Bear Stearns was given a boost this week when Securities and Exchange Commission Chairman Christopher Cox said his regulatory agency is comfortable with the ‘capital cushions’ at the nation’s five largest investment banks.

    Schwartz says he has numbers to back up his insistence that the bank’s position is solid.

  8. Schnormal commented on Jun 4

    it sounds like the people busting on einhorn are the same types who spent early ’03 shouting down anyone who voiced an opinion against the bushie war cheerleaders.

  9. Al Czervic commented on Jun 4

    I used to like that Graham quote but I think it’s out of date these days. The voting machine concept sort of implies the tabulation of “random”, independent decisions into an end result. And of course every vote has equal weight so no one “voter” can unduly influence the result. So the quote seems more appropriate to the time when we still had some semblance of a free market. If today’s market is still a voting machine, it’s almost certainly a Diebold. A long term weighing machine? Well maybe. But it seems that too often, someone has a thumb on the scale.

  10. Steve Barry commented on Jun 4

    Wall Street does not like to hear the truth, so this guy will be skewered. They also don’t want Obama in the White House, because here is the guy who is most likely to say WTF is going on when he finds out what is going on behind the scenes.

  11. scorpio commented on Jun 4

    the Fed apparently thinks 27 X leverage is just dandy. now, historically speaking, that’s way out of line. but so’s this Fed

  12. larrybob commented on Jun 4

    what, you expect journalist, especially business journalists, to be able to read a balance sheet? so much easier to let the issue be about personalities, and “he said, she said” type stories.

  13. Steve Barry commented on Jun 4

    Four charts are all I need to look at now:

    1) Housing prices…shows another 40% downside easy
    2) Credit bubble…shows how much the economy was pumped with debt
    3) 100 year inflation adjusted Dow…we are way above trendline and must correct, even after sub-prime started this mess
    4) Citigroup Panic/Euphoria model in euphoric stage for first time in my recollection.

  14. Dave commented on Jun 4

    Einhorn is Finkle! Finkle is Einhorn!

  15. Steve Barry commented on Jun 4

    Of the three items I just listed, BTW, the first 3 CANNOT be corrected easily and elegantly…the last one could correct itself, but the first three are massive dislocations to correct, and they must correct.

  16. John F. commented on Jun 4

    Isn’t the market always a voting machine as far as banks are concerned, or at can we at least agree that there’s some path dependency?

  17. Steve Barry commented on Jun 4

    Finally, Barry, quick recap on what the dominos are when MBIA and Ambac lose the AAA?

  18. ECONOMISTA NON GRATA commented on Jun 4

    “Rather than focus on ” Einhorn’s influence on Lehman’s stock price,” I suggest reporters focus on Lehman’s balance sheet, leverage, derivative exposures, counter-party risk, and P&L statements.”

    Barry:

    Are you nuts or what….? You’re worse than Einhorn… There you go again with that crazy talk….

    Best regards,

    Econolicious

  19. Groty commented on Jun 4

    The title of the article is “Lehman Battles an Insurgent Investor”.

    Everybody knows Lehman. Fewer people know Einhorn.

    Judging from the title, I don’t think the intent was ever to do a financial analysis of Lehman that would either support or discredit Einhorn’s thesis. I think the intent was more about familiaring NYT readers with who he is, with a 50,000 foot view of why he is negative on Lehman.

  20. daveNYC commented on Jun 4

    The idea that shorts are eeeevviiiiillll will never go away. Probably a whole bunch of annoying psychological reasons for that. The fact that this guy is betting that LEH will go down (and go down for good reasons) is enough to make him an easy bad guy. The fact that he might be right won’t make much of a difference. How popular was Soros after the whole Bank of England thing?

    Personally, I think that’d be a good idea for a book, something on the whole history of short selling/bear funds.

  21. Steve Barry commented on Jun 4

    A short trader executes his trades as such:

    SELL…{BUY…SELL…BUY…SELL}…BUY

    A trader who goes long is:

    {BUY…SELL…BUY…SELL}…BUY…SELL

    With my parens added, you can see except for a phase shift, the patterns are identical. So if a shorter is evil, a trader who goes long first is just as evil…anyone who sells stock must be evil.

  22. daveNYC commented on Jun 4

    If you assume efficient markets, investors and the like (no can openers); then you can say that anyone who sells a stock has a negative view on that stock’s return relative to some other use for the money.

    From there it’s just a hop, skip and a jump to calling them ghoulish investors who are rooting for the company to fail. Why do short-sellers hate America?

    And so it goes.

  23. Steve Barry commented on Jun 4

    Jut listened to Gasparino on CNBC say that the bond insurers are not as important now, because Lehman, eg, could “tap the Fed window.”

    Has anyone seen any papers or articles on how the Fed’s new “powers” could affect markets going forward? There is no free lunch is there?

  24. michael schumacher commented on Jun 4

    The Irony (with a capital “I”) of Bernancke giving his speech at Harvard while he is completely dry and the crowd is getting soaked is just perfect.

    Especially the part about measured inflation in the 70’s vs now……and I’m sure people “feel better” that there are no gas lines.

    You couldn’t write a better script……

    Ciao
    MS

  25. anonymouse commented on Jun 4

    I briefly considered writing the author, Louise Story, but then I read her bio and decided it was a waste of time.

    “Louise Story writes about advertising and marketing, including digital advertising, consumer trends and ad buying and selling. She is interested in how aspects of the Internet are changing the offline world and how consumer attitudes about consumer brands and media content are changing.”

    This is the same person who was b@tchslapped for the poorly sourced article she wrote on the ‘new trend’ of Ivy women putting family before career. Although she apparently has both an MBA from Yale and an MS in journalism from Columbia, the undergrad degree in American Studies suggests a non-quantitative orientation and a vulnerability to well phrased spin.

    BTW: The Graham quote is one of my all time favorites. First introduced to me by Fleck in the internet bubble days…

    For the people who say financial news journos are useless I agree 95% of the time, because the overwhelming majority of them are just putting in their time until they can move on to their one true love… politics. But there’s always the counter example… my hero from my days at Bloomberg was Doug Krizner… smart, experienced and hard headed, but not as cute as Ms. Story.

  26. anonymouse commented on Jun 4

    I briefly considered writing the author, Louise Story, but then I read her bio and decided it was a waste of time.

    “Louise Story writes about advertising and marketing, including digital advertising, consumer trends and ad buying and selling. She is interested in how aspects of the Internet are changing the offline world and how consumer attitudes about consumer brands and media content are changing.”

    This is the same person who was b@tchslapped for the poorly sourced article she wrote on the ‘new trend’ of Ivy women putting family before career. Although she apparently has both an MBA from Yale and an MS in journalism from Columbia, the undergrad degree in American Studies suggests a non-quantitative orientation and a vulnerability to well phrased spin.

    BTW: The Graham quote is one of my all time favorites. First introduced to me by Fleck in the internet bubble days…

    For the people who say financial news journos are useless I agree 95% of the time, because the overwhelming majority of them are just putting in their time until they can move on to their one true love… politics. But there’s always the counter example… my hero from my days at Bloomberg was Doug Krizner… smart, experienced and hard headed, but not as cute as Ms. Story.

  27. Joe Klein’s conscience commented on Jun 4

    Steve Barry:
    Have you noticed all the Obama bashing on CNBC lately? They are crapping their pants for no particular reason. Despite Kudlow’s hysterical ravings, Obama is a centrist, not a lefty(His main economic advisor is Austan Goolsbee for pete’s sake!!).

  28. maximo commented on Jun 4

    Well said, Barry!

    I like Einhorn. Sharing negative views about a company and stocks that are real dogs is no crime.

  29. Puzzling Dragon commented on Jun 4

    Great blog Barry! Always good to read this community’s thought-provoking entries and discussions.

    Re:Steve Barry’s logic of the evil within longs… nice! Looks like something one would get on an exam in an information theory course. Very creative!

    Lehman Upgraded by Merrill?

    First we have…

    Merrill raises Lehman to buy

    “The concerns of a “Bear-like” event at Lehman were unfounded as the company was not subject to the same funding risk as Bear Stearns, Merrill analyst Guy Moszkowski wrote in a research note.

    Lehman has more work to do in remixing the business away from securitization markets, but still has very strong global franchises in investment banking, asset management and equities, Moszkowski said.”

    If the boards of the major iBanks either don’t know what is really on their balance sheets, or simply refuse to admit what is really on their balance sheets, then why are we to believe that some analyst from another iBank is going to know? David Einhorn’s analysis seems much more credible and thorough these days, and it is also consistent with what macro factors are telling us. He seems to be the “analyst” to whom we should pay most attention.

    (Post 1 of 3)

    -pd

  30. Puzzling Dragon commented on Jun 4

    Then we have…

    Lehman Slashes Debt 25%, Raises $8 Billion in Capital

    “Lehman Brothers Holdings has slashed its risky debt holdings by as much as 25% and raised $8 billion in capital this year to shore up its balance sheet, according to an internal memo obtained by CNBC.”

    Is there anything really new here? Or is this just a rehash of earlier steps taken by Lehman…

    “Lehman shares rebounded sharply Wednesday on news that a big bond fund manager is buying the firm’s debt and some positive comments from other Wall Street firms.”

    Likely “other Wall Street firms” that need to maintain counter-party secrecy for fear of the entire house of cards collapsing.

    (Post 2 of 3)

    -pd

  31. Puzzling Dragon commented on Jun 4

    And finally…

    Lehman Rebounds on Buyback Report

    “Shares of Lehman Brothers(LEH – Cramer’s Take – Stockpickr) rebounded after opening lower Wednesday, as investors digest a report that the firm bought back “large amounts” of its own capital during this week’s swoon, according to The Wall Street Journal.”

    So am I reading this correctly? Lehman is using our taxpayer/bagholder funds that it borrowed from the Fed to buy back its own, currently declining, shares. That must somehow be illegal… wasn’t LEH the one bank that recently suggested that it would agree to risk-monitoring by the Fed to use the new credit facilities? Perhaps it is ok for the Fed to monitor, but not someone who really looks into all the nooks and crannies like David Einhorn? And I suppose the Fed would be as transparent as Einhorn about the problems it finds as well?

    Based upon the tidbits in these three posts, it was interesting to see how the market “voted” on Lehman today. In earlier times all of this would be considered good news. Recently (and especially today), it doesn’t look like traders trust the value-representations being made.

    (Post 3 of 3)

    -pd

  32. Risk Averse Alert commented on Jun 4

    That’s funny … I commented on the same NY Times article in my blog. I came to the conclusion the Times ought to rearrange a couple words in their motto, so it more truthfully read:

    “All the Fits News to Print”

  33. VennData commented on Jun 4

    A Yale MBA? Now that certainly is non-quant. Do they still accept “Do Sudoku” in lieu of a GMAT?

    Think Einhorn could take Ms. Story heads up in Hold ’em? …flash cards?

    After the skunking…

    Einhorn: “Zero times anything is zero”

    Story: “There’s no zero in Sudoku.”

  34. BelowTheCrowd commented on Jun 4

    Back in my college journalism days, we were often at a loss for stuff with which to fill up a paper, in which the advertising was already sold, and thus the layout (and thus, amount of space in need of filling) was pretty much pre-determined.

    Our unofficial motto became: “All the News That Fits, We Print.”

    I suspect the same is probably true at most “real” newspapers today, including the NYT.

    -btc

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