Harry Newton's In Search of The Perfect Investment
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9:00 AM EST Wednesday, June 4, 2008: Our
Lehman Brothers (LEH) short is paying off nicely. It's hard to see LEH surviving.
Once the dodo hits the fan in the financial world, everyone bails. You would,
too, if you thought your money at Lehman was in jeopardy, which it probably
is. The "run on the bank" dropped Bear Stearns. Today's Lehman news
focuses on management's desperate attempts to raise capital. It's selling assets
and scouring the world for new capital. Shortly, it will announce a huge quarterly
loss. Rumors are flying. Sadly, Lehman is doing a lousy job responding.
Wall Street Journal sums it up:
Seeking Overseas Capital
Holdings Inc., facing a sharp decline in its stock that will make it more
difficult to raise fresh capital, may look to a foreign land for a strategic
The Wall Street
firm has managed to raise capital from a rich base of existing U.S. shareholders,
but this week reached out to overseas investors, including at least one in
The firm has
a long history in South Korea, an effort led by the firm's well-connected
vice chairman Kunho Cho. The options for Lehman include the Korea Development
Bank and Woori Financial Group. One person familiar with the situation said
it is unlikely Korean Investment Corp., an investor in Merrill Lynch &
Co., would be an investor.
The news comes
during a rough week for Lehman, whose stock topped the New York Stock Exchange's
most-active list Tuesday and closed down 9.5%, or $3.22, at $30.61 on the
New York Stock Exchange. Tuesday's trading wiped $1.72 billion off of Lehman's
market value and the closing price was Lehman's lowest since August 2003.
Wall Street Journal reported that Lehman, which is set to post one of the
biggest quarterly losses in its history, was considering raising fresh capital.
Analysts and Wall Street executives believed the capital raise could top $4
billion. Lehman maintains it is well positioned to weather the current credit
crisis and said raising capital is simply one of many options it considering.
The Wall Street
firm's shares had tumbled nearly 15% at one point Tuesday as investors who
feared their stakes would be diluted sold shares and rumors flew on trading
desks that Lehman had gone to the Federal Reserve for funds. Lehman said that
But a second
rumor, that Lehman was buying back shares, turned out to be true, people familiar
with the situation said. Such buying helped the stock pare its losses Tuesday.
Still, the stock has fallen 18% in the past three sessions.
It was unclear
how much stock Lehman Brothers bought back, but with shares trading at roughly
22% below its book value at the end of the first quarter, the buying could
be seen as a vote of confidence by management.
the past year, the announcement of a capital-raising by financial firms has
been a buy signal for investors. Yet for Lehman, which has already raised
$6 billion in capital during the crisis and seen its stock fall, selling shares
may be prohibitively expensive, according to a person familiar with the matter.
it could be viewed as a waste of precious capital, though Lehman has nearly
about $40 billion in liquid assets on its balance sheet and has access to
funding from the Federal Reserve, so short-term capital issues are not a major
concern for Lehman.
The New York
Times also had a major piece today on LEH.
an Insurgent Investor
David Einhorn thinks another big Wall Street bank is headed for trouble
and he is not being quiet about it.
For eight months
now, Mr. Einhorn, a rabble-rousing hedge fund manager, has pilloried the venerable
Lehman Brothers in an effort to drive down the banks stock price, which
he is betting against.
is not amused. In recent weeks, the banks chief financial officer, Erin
Callan, has tried privately to rebut Mr. Einhorn to nervous investors, who
have feared for Lehmans health ever since Bear Stearns succumbed to
a panic. But despite Ms. Callans efforts, Lehmans stock keeps
falling: It tumbled 9.5 percent more on Tuesday, in a deluge of selling, bringing
its loss for the last 12 months to 59 percent.
The battle over
Lehman has captivated Wall Street and left the bank struggling over what to
do next. The bank, which is expected to post a quarterly loss of roughly
$1 billion in a few weeks, may also raise capital to shore up investor
confidence. The bank has sold more than $100 billion in assets in recent
months to shore up its finances, according to a person close to the company.
That person said new capital would most likely come from a source other than
the public markets.
who runs a $6 billion hedge fund called Greenlight Capital, has been profiting
from the Lehmans growing pain. Critics say he is needlessly fanning
fears about the precarious health of the financial industry at the very moment
executives are struggling to stabilize their ailing companies. Many on Wall
Street still wonder if hedge funds like Greenlight helped bring down Bear
Stearns and spread false rumors about the bank, a possibility the Securities
and Exchange Commission is investigating.
In an interview
on Monday in his Midtown offices, Mr. Einhorn, fresh from his latest round
of television appearances, said he was not out to tell Lehman Brothers how
to fix its problems. He questioned how the company valued the assets on its
books, and whether it was disclosing all the risks it faces. Investors have
good reason to question banks: Worldwide, financial companies have suffered
more than $380 billion in write-downs and credit-related losses in
the last year, laying bare their shoddy risk management. Lehman has been singled
out because of the large role it played in the mortgage market and its reluctance
to disclose information about its assets compared with other Wall Street banks.
has been one of the deniers, Mr. Einhorn, 39, said.
said he began betting against Lehmans stock last July, and he has been
right so far. But things have not always gone his way. His long battle against
the Allied Capital Corporation prompted the S.E.C. to investigate comments
he had made about that company, an episode he discusses in his new book, Fooling
Some of the People All of the Time, which he is busy promoting.
And he was a board member and longtime fan of the New Century Financial Corporation,
a big subprime mortgage company that filed for bankruptcy last year.
Still, Mr. Einhorn
could be a thorn in Lehmans side for years to come. For six years he
has been using a short trade as a way to bet against a rise in the stock price
of Allied Capital and MBIA, the bond reinsurance company.
got a lot of conviction, and he persists in his convictions for a long time,
said Adam Zoia, managing partner of Glocap, a recruiter in New York that has
worked for Mr. Einhorn.
instigated the latest dive in Lehmans stock price two weeks ago when
he encouraged other investors to short the stock at a large conference in
New York. When Standard & Poors lowered its debt rating for Lehman
and several other Wall Street banks on Monday, Mr. Einhorn joined the ratings
agencys conference call on Tuesday and asked whether the agency reviews
Lehmans valuations of its assets.
42, spent an hour on the phone with Mr. Einhorn answering questions before
his speech. Afterwards, she found herself rebutting some of his assertions
Lehman issued a public statement denying market rumors that it had turned
to Federal Reserve for cash through a special program put in place after Bear
Stearns collapsed. Ms. Callan and other Lehman executives declined to comment
on Mr. Einhorn for this article.
It is impossible
to quantify Mr. Einhorns influence on Lehmans stock price. But
hours before his speech two weeks ago, trading volume exploded for Lehman
stock puts, which are options to sell the stock and profit if its falls. That
day, more than 200,000 put contracts against Lehman were sold, up 49 percent
from recent typical Lehman put trading.
the banking analyst at the Sanford C. Bernstein & Company and Lehmans
former chief financial officer, said he could hardly walk a few feet at a
conference at the Waldorf-Astoria last week without having investors ask him
about Mr. Einhorns views.
management has spoken with some analysts about Mr. Einhorn, but they have
declined to comment publicly beyond a statement that says Mr. Einhorn cherry
picks and misconstrues information.
furious, Mr. Hintz said. If you get distrust of your accounting,
then it affects the valuation of the company forever going forward.
workers are calling Mr. Einhorns strategy short and distort.
Many hedge fund managers talk freely with one another about companies, but
they typically shun publicity. Mr. Einhorn, by contrast, is working with a
financial public relations firm, the Gordon Group, to promote his book and
views on stocks.
on shorting Lehman is only going to get traction and be successful if he can
succeed in convincing people to drive down the stock, said Michael Claes,
a managing director at the public relations firm Burson-Marsteller. Thats
best accomplished with media exposure.
But Mr. Einhorns
public approach leaves him open to being criticized himself. Mr. Hintz of
Sanford Bernstein said in a report on Monday that supporters of Mr. Einhorns
latest arguments are piling on against Ms. Callan. And Buckingham
Research Group said his concerns were just wrong.
recent criticisms also seem will-timed to take advantage of the markets
concern around weak second-quarter results that we expect for Lehman,
the Buckingham analysts wrote in a report.
Lehman, to be
sure, will have to explain its second-quarter earnings to be announced in
the next two weeks. Ms. Callan has said the bank will take more write-downs
and that some hedge trades were not effective.
its counterparts, is racing to use less leverage. The bank had a gross
leverage ratio of 31.7:1 at the end of the first quarter, meaning it had
borrowed $31.70 for each dollar of equity. Lehman has whittled that
ratio down to 25:1 through its more than $100 billion in asset sales, said
the person close to the company who was given anonymity because he was discussing
a pending financial filing. A small amount of the sales were to two hedge
funds set up by former Lehman executives.
likes to point out that Lehmans management has incentives to be positive
since compensation is tied to performance. Short sellers, he said, receive
undue skepticism, and he said he thought he would be getting far less attention
if he were discussing a positive view on a company.
Aside from Lehman,
Mr. Einhorn would not say if he is long or short other financial companies.
But Greenlight Capital has twice as much money invested in long positions
across its entire portfolio than it does shorts, he said. So a collapse of
Lehman that turned into a broad economic panic could hurt Mr. Einhorn, too.
He said he would
keep the Lehman trade going until he is proven right or wrong.
the better, Mr. Einhorn said, but the world doesnt work
on my schedule.
Kurzweil's wonderful predictions: Ray is a successful inventor who
likes to predict the future. Here's a happy piece from The New York Times.
Is Now? Pretty Soon, at Least
By JOHN TIERNEY
Before we get
to Ray Kurzweils plan for upgrading the suboptimal software
in your brain, let me pass on some of the cheery news he brought to the World
Science Festival last week in New York.
Do you have
trouble sticking to a diet? Have patience. Within 10 years, Dr. Kurzweil explained,
there will be a drug that lets you eat whatever you want without gaining weight.
greenhouse gas emissions? Have faith. Solar power may look terribly uneconomical
at the moment, but with the exponential progress being made in nanoengineering,
Dr. Kurzweil calculates that itll be cost-competitive with fossil fuels
in just five years, and that within 20 years all our energy will come from
Are you depressed
by the prospect of dying? Well, if you can hang on another 15 years, your
life expectancy will keep rising every year faster than youre aging.
And then, before the century is even half over, you can be around for the
Singularity, that revolutionary transition when humans and/or machines start
evolving into immortal beings with ever-improving software.
At least thats
Dr. Kurzweils calculation. It may sound too good to be true, but even
his critics acknowledge hes not your ordinary sci-fi fantasist. He is
a futurist with a track record and enough credibility for the National Academy
of Engineering to publish his sunny forecast for solar energy.
He makes his
predictions using what he calls the Law of Accelerating Returns, a concept
he illustrated at the festival with a history of his own inventions for the
blind. In 1976, when he pioneered a device that could scan books and read
them aloud, it was the size of a washing machine.
ago he predicted that early in the 21st century blind people would
be able to read anything anywhere using a handheld device. In 2002 he narrowed
the arrival date to 2008. On Thursday night at the festival, he pulled out
a new gadget the size of a cellphone, and when he pointed it at the brochure
for the science festival, it had no trouble reading the text aloud.
Dr. Kurzweil said, was no harder to anticipate than some of the predictions
he made in the late 1980s, like the explosive growth of the Internet in the
1990s and a computer chess champion by 1998. (He was off by a year
Deep Blues chess victory came in 1997.)
aspects of technology follow amazingly predictable trajectories, he
said, and showed a graph of computing power starting with the first electromechanical
machines more than a century ago. At first the machines power doubled
every three years; then in midcentury the doubling came every two years (the
rate that inspired Moores Law); now it takes only about a year.
has other graphs showing a century of exponential growth in the number of
patents issued, the spread of telephones, the money spent on education. One
graph of technological changes goes back millions of years, starting with
stone tools and accelerating through the development of agriculture, writing,
the Industrial Revolution and computers. (For details, see nytimes.com/tierneylab.)
Now, he sees
biology, medicine, energy and other fields being revolutionized by information
technology. His graphs already show the beginning of exponential progress
in nanotechnology, in the ease of gene sequencing, in the resolution of brain
scans. With these new tools, he says, by the 2020s well be adding computers
to our brains and building machines as smart as ourselves.
confidence is not shared by neuroscientists like Vilayanur S. Ramachandran,
who discussed future brains with Dr. Kurzweil at the festival. It might be
possible to create a thinking, empathetic machine, Dr. Ramachandran said,
but it might prove too difficult to reverse-engineer the brains circuitry
because it evolved so haphazardly.
Francis Crick used to say that God is a hacker, not an engineer, Dr.
Ramachandran said. You can do reverse engineering, but you cant
do reverse hacking.
predictions come under intense scrutiny in the engineering magazine IEEE Spectrum,
which devotes its current issue to the Singularity. Some of the experts writing
in the issue endorse Dr. Kurzweils belief that conscious, intelligent
beings can be created, but most think it will take more than a few decades.
He is accustomed
to this sort of pessimism and readily acknowledges how complicated the brain
is. But if experts in neurology and artificial intelligence (or solar energy
or medicine) dont buy his optimistic predictions, he says, thats
because exponential upward curves are so deceptively gradual at first.
imagine theyll keep working at the present pace, he told me after
his speech. They make linear extrapolations from the past. When it took
years to sequence the first 1 percent of the human genome, they worried theyd
never finish, but they were right on schedule for an exponential curve. If
you reach 1 percent and keep doubling your growth every year, youll
hit 100 percent in just seven years.
is so confident in these curves that he has made a $10,000 bet with Mitch
Kapor, the creator of Lotus software. By 2029, Dr. Kurzweil wagers, a computer
will pass the Turing Test by carrying on a conversation that is indistinguishable
from a humans.
as confident those graphs are going to hold up for fields besides computer
science, so Id be leery of betting on a date. But if I had to take sides
in the 2029 wager, Id put my money on Dr. Kurzweil. He could be right
once again about a revolution coming sooner than expected. And Id hate
to bet against the chance to be around for this one.
to buy prescription drugs: Most people get
their drugs through insurance. Your insurance insulates you from sticker shock.
No more. Once I turned 65, I lost prescription insurance. With my hayfever raging,
I decided to try something called Vermamyst, a nose spray. My dentist gave me
a prescription. I found a $25 coupon on the Internet. And shopping I went. My
local pharmacy wanted $116. Drugstore.com wanted $44. Both prices include the
$25 rebate. My local pharmacy wanted nearly three times what Drugstore.com
wanted for the identical thing. I wonder how much they've been ripping
my insurance company off over all those years when I had insurance.
note, I'm not objecting to the original high price of the drug (whatever it
is), since I'm a shareholder in too many biotech companies. But I am objecting
to enormous local retail pharmacy markups.
reader, what creative solutions do you guys have to buying prescription drugs?
Email me, please:
shock - Part 2: I just got my first bill from
Amazon with sales tax added. Yuch. Bye, bye Amazon. Hello, Borders. Yes and
No. I checked three items. Amazon was cheaper on two -- sufficiently cheap,
even after paying the wretched sales tax to New York. Now there's a new wrinkle.
On one item Borders was more up to date than Amazon was. It had a new item,
which Amazon didn't. Back to square one. Check. Check. Check.
airline fare surcharges: American
Airlines recently hired a senior "marketing" executive from a leading
telephone company. As a result, American's fares have blossomed. Here's one
a reader sent me for his upcoming trip:
guru Jim Kingsdale thinks oil is on its way down, for now. He
points to media attention as a contrary indicator (see yesterday's
portfolio was up 16.6% in May, its largest gain ever. His latest post
is on Energy
oil takes its toll on brothels:
In Nevada, business at its 25 legal bordellos is down 25% to 45%, depending
on the location. A major reason is diesel. U.S. retail diesel-fuel prices jumped
16.6% in the past week to a record high of $4.50 a gallon. In rural southern
Nevada towns such as Indian Springs, diesel has hit $5.25 a gallon. Fueling
an 18-wheeler can now cost an independent trucker more than $1,000. Many
brothel customers are truckers.
French Tennis Open continues.
Watch it in high definition (HD). The quality is mind-blowing. The best HD seems
to be from DirecTV and shown on my Samsung DLP big screen TV. HD is the only
way to watch sports. The Tennis Channel is 455 on Time Warner Manhattan
and 217 on DirecTV. ESPN is 209 on DirecTV and 29 and 729 (HD) on Time Warner.
Your channels will be different.
As you watch the tennis, You'll notice: 1. How deep they hit the ball. 2. How
much they move the ball around, from side to side. 3. How often they run around
their backhands. 4. How consistent the better players are. They simply make