Lehman’s Head Joker Reshuffles the Deck
Dick Fuld's efforts at self preservation continue to impress me....he still has a job, after all.
But his empire is being hollowed out, and his efforts to win might prove to be a loser, in the end. With everyone hip to his game, and deciding to wait and see, he is trying to force the issue:
Lehman Brothers Holdings Inc. may set up a company funded by outside investors to buy some of its mortgage assets, aiming to dispel concern the firm faces crippling losses, people familiar with the discussions said.
Investors in the new venture would also manage the holdings, which are linked to commercial real estate, the people said, declining to be identified because the proposal hasn't been made public and no decision has been made about how to proceed. The New York-based firm had about $40 billion in commercial-mortgage assets as of May. Bloomberg
This might be an arm's length transaction in appearances only; somebody needs to keep an eye on Fuld and his machinations. Even his high-powered friends have been silent of late, but chances are he can crash on Mayor Bloomberg's couch in a pinch.
Sellside Continues to Shill for Copper Bulls
It would appear the manipulation in the copper pits knows no bounds. Homebuilding activity in the U.S. is all but dead, and automakers are on life support. Even Japanese homebuilders are going belly up, but the the SellSide keeps spinning a story:
Copper's 14 percent slump from a record on July 2 may be nearing a bottom as metal consumers pay a bigger premium for immediate delivery than for three months from now, indicating supplies have tightened....``The widening spreads are a real sign that supplies have tightened,'' said Donald Selkin, the chief market strategist at National Securities Corp. in New York. ``Users are having to pay up to get the product they need. It's a sign that the collapse in copper may be over.''
The copper-price gains will be ``aggressive'' in the next two years as supplies are limited and demand remains strong in China, Citigroup Inc. said last week. Miners will continue to face ``serious challenges on the supply side,'' BHP Billiton Ltd., the world's biggest mining company, said on Aug. 18. Bloomberg
How often can the copper bulls play the China card? If I were them I would be worried about a post-Olympic hangover, but they continue to make their case, conveniently ignoring the collapse in other base metals like lead, nickel and zinc. Copper rose merely 600% this cycle, outpacing the record 225% gain in put in before the Civil War in 1860's.
Transition Year at thinkorswim Group Inc.
In early June I was looking for an entry point on thinkorswim Group (SWIM-NASDAQ).
Vetting the name with battle scarred veterans of Hedgistan left my uneasy however, as they seem to have memories like elephants when it comes to at least one member of the management team.
I was asleep at the wheel, however and missed the move from the July lows. Still no position here, but the evolving model at the company is of interest. A major change in the company’s education/seminar business might de-emphasize the segment’s contribution, and probably account for some of the recent strength in the stock.
Audrey Snell from Kaufman Brothers is cutting her price target, but the longer-term thesis here is probably getting stronger…
* We are reducing our estimates for thinkorswim Group, Inc. for 2008 and 2009 slightly to reflect the change of mix in revenue as brokerage increases while education’s contribution moderates.
* We feel the education contribution is likely to curtail rapidly in the second half of 2008 and 2009. By 2009, we expect only one-third of revenue contribution to come from education, while two-thirds is contributed by brokerage, at higher margins.
* This acceleration of the mix change and moderation of education’s contribution is due to the significant decrease in the price point of the education foundation course, from $999 to $299 and a near-term shift, we expect, to more online web courses, from seminars. This has the direct effect of significantly and rapidly reducing deferred revenue from education down to an estimated zero in 2009.
* While we view the new model as a more profitable, healthier economic model for the future, clearly 2009 will be a transition year in which we estimate EPS will be flat to slightly higher with 2008 but the composition of that EPS contribution will be nearly 90%-95% from brokerage as education essentially breaks even to contributing slightly.
* We have reduced our revenue and EPS for 3Q08 and 4Q08 to $92.97 million and $0.24 and $94.154 million and $0.24, from $98.97 million and $0.27 and $103.67 million and $0.28, respectively. For 2008, our revenue and EPS estimates are now $375.11 million and $0.92 from $391 million and $0.99.
* For 2009 the change is greater because of the zero contribution from education deferred revenue, the full year effects of a $299 price point in the foundation course, and a rise in the tax rate from an estimated 27% in 2008 to 39%. Pretax income is estimated to rise from $86.5 million in 2008 to $104.84 million in 2009 on the higher margin brokerage business contribution.
* We have lowered our 12-month price target to $15.00 from $16.00, which is calculated at 16.3x our new EPS estimate for 2009, in line with longer-term earnings growth rate expectations, given that we believe SWIM is gaining market share in the online brokerage business and, specifically in the derivatives trading segment.
* The reason for our change in estimates is related to our new calculations on the accelerated rate of deferred revenue declines in the education segment as a result of the change in the price point. By 2009 we believe there will be zero contribution from deferred revenue in this segment, and with it, the elimination of sales transaction volume (STV) metrics. We are not anticipating any growth in the education segment for 2009, given the lower price point. We are also lowering our estimate of upsells in the mix to 30% from 40% currently.
* We do, however, think the P/E should expand over time as SWIM becomes more widely known as an online brokerage company, and its operating leverage, driven by volume increases, drives margins.
* We reiterate our BUY rating.
Innovations here and companies such as Interactive Brokers make E-Trade and Ameritrade seem dowdy by comparison, but until the public’s appetite for equity trading returns the wind will be in everybody’s face.
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The content contained in this blog represents the opinions of 1440 Wall Street. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author. No Positions
Dick Fuld: Still Alive and Kicking
Will the soap opera at Lehman Brothers (LEH-NYSE) come to a conclusion this weekend?
Perhaps, but I am not holding my breath. Late August has never been a period of great productivity on the Street, although the Korean's probably did not get the vacation memo. But even if you are busting your hump, getting counterparties to pick up the phone this time of year is next to impossible, and work inevitably slows to a crawl.
The asset management operations at Lehman are a big part of the ongoing shell game; perhaps you recall reading about the overlooked subsidiaries here first, or at least early on when many people had trouble distinguishing Blackstone from Blackrock.
Bloggers and journalists have been predicting Dick Fuld's demise for months now, but he is still standing, punch drunk or not. Fuld's antagonists have valid points, but clearly have no grasp of history when it comes to handicapping Lehman's crafty executives.
After American Express bought Lehman in the mid-80's many executives decamped for greener pastures. Several ended up hooking on with media banker Roy Furman and hedge fund pioneer Bernard Selz. They spent a few years dressing Furman Selz up before selling it to Xerox two weeks before the crash in 1987.
