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."
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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
Wednesday, June 04, 2008 | 12:15 PM | Permalink
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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 ??
Posted by: dblwyo | Jun 4, 2008 12:44:21 PM
"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.
Posted by: MarkTX | Jun 4, 2008 12:45:56 PM
Yes it's a weighing machine. But problem is there are forever people messing with the mechanisms.
Posted by: Bob A | Jun 4, 2008 12:54:30 PM
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.
Posted by: Karen | Jun 4, 2008 12:59:23 PM
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?
Posted by: Joe Klein's conscience | Jun 4, 2008 1:00:45 PM
"..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?
Posted by: Mike M | Jun 4, 2008 1:01:01 PM
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.
Posted by: 12th Percentile | Jun 4, 2008 1:01:10 PM
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.
Posted by: Schnormal | Jun 4, 2008 1:05:36 PM
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.
Posted by: Al Czervic | Jun 4, 2008 1:08:58 PM
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.
Posted by: Steve Barry | Jun 4, 2008 1:16:12 PM
the Fed apparently thinks 27 X leverage is just dandy. now, historically speaking, that's way out of line. but so's this Fed
Posted by: scorpio | Jun 4, 2008 1:22:02 PM
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.
Posted by: larrybob | Jun 4, 2008 1:25:40 PM
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.
Posted by: Steve Barry | Jun 4, 2008 1:48:25 PM
Einhorn is Finkle! Finkle is Einhorn!
Posted by: Dave | Jun 4, 2008 1:48:58 PM
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.
Posted by: Steve Barry | Jun 4, 2008 2:09:41 PM
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?
Posted by: John F. | Jun 4, 2008 2:10:41 PM
Finally, Barry, quick recap on what the dominos are when MBIA and Ambac lose the AAA?
Posted by: Steve Barry | Jun 4, 2008 2:15:11 PM
"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
Posted by: ECONOMISTA NON GRATA | Jun 4, 2008 2:19:08 PM
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.
Posted by: Groty | Jun 4, 2008 2:23:03 PM
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.
Posted by: daveNYC | Jun 4, 2008 2:32:54 PM
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.
Posted by: Steve Barry | Jun 4, 2008 2:52:58 PM
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.
Posted by: daveNYC | Jun 4, 2008 3:35:19 PM
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?
Posted by: Steve Barry | Jun 4, 2008 3:45:04 PM
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
Posted by: michael schumacher | Jun 4, 2008 3:47:41 PM
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.
Posted by: anonymouse | Jun 4, 2008 4:07:47 PM
