Perception versus Value

Wednesday, June 04, 2008 | 12:15 PM

"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


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.


Lehman Battles an Insurgent Investor
NYT, June 4, 2008

Wednesday, June 04, 2008 | 12:15 PM | Permalink | Comments (34) | TrackBack (0) add to | digg digg this! | technorati add to technorati | email email this post



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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: and 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:
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

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