Lehman Bros losses put it at the edge of Massive Asset sale Cliff (Update)

Less than 24 hours after losing nearly half of its Market Cap, Lehman Brothers (LEH) gave Wall St. another reason to be somber about the future and health of the investing house. The whispers that Lehman was in dire financial straits have been resonating for some time, but as they grew louder so did the negotiations with Korea Development Bank, which eventually halted.

The end of those negotiations was the prologue of Lehman's 40% sell-off on Tuesday, and the announcement of a $3.9Billion quarterly loss is another driving stake into Investors spirits regarding the firm. Write-downs totaled $5.6Billion, causing the massive loss, which was even worse than analysts had expected ($2.2Billion). The company is also trying to shore up capital by auctioning off over half of its asset management group, cutting its dividend and setting up a spin-off of real estate holdings.

While all that looks dire, and Investors are still licking their wounds from the end of talks with KDB, Lehman has bought itself a little time by outlining this strategic plan on the heels of massive losses. Investors are willing right now to give the company a little bit of rope, but the first sign of additional trouble, in the form of further losses, an uneventful auction process or whispers of unattractive sale prices for some of its assets, will see traders and investors alike moving swiftly to other companies and other sectors.

A tough task is facing management these days; as headlines mount clients and employees are more likely to leave, which would make an already unstable liquidity position all that more turbulent. However some deals have already been outlined by Lehman, including a $4Billion formal engagement with BlackRock Inc. to sell UK based residential mortgage holdings and the spin-off of a commercial real estate public company named Real Estate Investments Global in the first quarter of 2009.

Oh and Lehman also slashed the dividend from $0.68 to $0.05, and the market's history with banks cutting their dividends and their correlated market performance over the last year has been well known. But in trying times for the financial industry, drastic measures must be taken to keep liquidity at somewhat reasonable levels.

It wasn't that long ago that with the help of the Fed, Bear Stearns had to be saved, but now it is closer than ever that Lehman stands near that same edge. I think Lehman will be alright as the market rights itself eventually, given it survives the fire sale, but with it being in this sector with these problems it'll still be able to be gotten for cheaper than $8/share.

Update: Sept 11/08 correction to Bear Stearns rescue details.
Disclosure: Author holds no position in LEH

Investment Banking Earnings start the Rally, Fed rate cut kicks it into Gear

Markets came out to a flying start this morning as Goldman Sachs (GS) and Lehman Brothers (LEH) showed the Street that in fact all is not dead in the world of Investing. Lehman, which was creeping into talk circles of being the next Bear Stearns, showed just how well it can keep itself going with a better than expected quarter.

More of the same came out of Goldman Sachs, which beat estimates again, providing the guiding light for buyers jumping back into the financial sector. The earnings numbers were sharply lower than a year ago at both firms, but both also registered upside surprises on top of beaten down analyst opinions. Lehman earned almost $500Million of $0.81/share vs. the expected $0.72/share. More importantly the company on the conference call downplayed any cash strapped concerns by announcing that Lehman has a strong balance sheet with $30Billion in cash on hand as well as $64Billion in very liquid assets. A very strong foundation that'll keep it afloat, by any measure!

Shareholders and investors rejoiced at the quarter sending depressed Lehman stock up almost 50%. At the other end of Wall Street, Goldman Sachs shares gained 16% to $175, following a better than expected quarter. Goldman earned $1.51Billion, $3.23/share in profit vs. the expected $2.59. Management gave speeches of confidence in the cash position at Goldman and investors were very impressed at the raw numbers and the ease at which GS seems to maneuver around the economic landscape.

The market momentum continued throughout the day and once the news hit the wires that the Federal Reserve cut the Interest Rate in the US by .75% the market seemed poised to go nowhere but higher. The day finished at the peak of the session, and the Dow (420 points, 3.5%), the Nasdaq (90 points, 4.2%) and the S&P (54 points, 4.2%) all recorded substantial gains.

Disclosure: Author owns GS

Buyers flock into the Markets as Fed Cuts Rates by 50 Basis Points

The moment the markets were waiting for arrived at last. The Federal Reserve Interest Rate decision. A decision that swung markets heavily into Bullish territory as Interest Rates were cut by a full half percentage point. The Dow finished higher by 336 points while the Nasdaq and S&P were higher by 70 and 43 points respectively. All accounting for gains of over 2.5%.

The morning was highlighted by positive earnings and guidance from Electronics Retailer Best Buy (BBY) and Investment Bank Lehman Brothers (LEH). Best Buy posted earnings of $0.50/share versus the expected $0.44/share and beat the top line Revenue expectations of $8.45Billion by posting a monster number of $8.75Billion. Best buy even strengthened and tightened its outlook for the full year giving the market something to cheer about.

Lehman Brothers admitted that losses from Mortgaged related investments hit earnings but it compensated by posting dramatic tradings gains which more than offset those losses. As such Lehman lifted the entire banking and investment banking industries pushing stock higher broadly, and lifting its own shares 10% in the process. With the Fed's announcement of the 50 basis point rate cut, stocks immediately flew higher and continued to rally towards the end of the day. The biggest investment banks, which report earnings in the near future used the Lehman numbers to push even higher.

Goldman Sachs (GS) made back $13 to break the $200 share price barrier, a gain of almost 7%, while Morgan Stanley (MS) gained almost 6%. Financials came back strong on the news as not only did the Fed cut the interest rate by .5% but also cut the discount rate by another .5%. This was seen as a tremendous positive on the financial sector and investors piled back into these stocks.

Apple (AAPL) made it official this morning that the iPhone was coming to the UK. It announced a partnership with O2 to be the exclusive carrier of iPhone in Britain. Shares were up slightly on the news but drifted with the market before taking off following the rate cut announcement.

While investors were cautious approaching the Fed meeting, there's reason to cheer and smile now! However, the drastic 50 basis point cut should be viewed with still some caution, as once the news sinks in will investors be reading too much into the actions of the Fed and their long term economic effects? Its hard to say at this juncture because the main goal here was to alleviate the pressure from the credit collapse and get people talking economic strength again and not recession. I for one think that having a 50 basis point cut splashed across front page newspapers all across the US will spur optimism and a renewed faith in economic well-being. This is the best thing the Fed could hope for, and its a lot better for the average Joe to be discussing strength rather than a possible oncoming recession.

With the Fed pointing the market in the right direction its time to look at Technology for the holidays and the upcoming earnings seasons. October will be a month worth watching as major names in Tech report earnings and give guidance for their holiday expectations. The guidance game will be one to watch intensely and if Best Buy has given any indication today its that it'll be a holiday filled with shoppers.

Disclosure: Author is long AAPL, BBY, GS