The Hump Day Fray: Can the Contagion Coagulate?

By Todd Harrison  SEP 10, 2008 9:30 AM

Cumulative imbalances persist.


There was something about Lehman yesterday.

As the investment bank lost precious time, insiders rushed to stem the bleeding and find a lifeline.

You can learn a lot just by watching and Monday Morning, on the heels of the Fannie and Freddie rescue rally, Lehman Brothers (LEH) opened near $18 and immediately swooned into the negative territory.

We scribed at the time that the most likely process (following the massive gap higher in the market) was to press lower (check), sifting winners from sinners (check, and please add Washington Mutual (WM) and AIG (AIG) as latter matters), close higher (check), muddle forward (check) and harsh downdraft (check).

The obvious question everyone wants to know is—how harsh is harsh?

This morning, Lehman attempted to quell fears by announcing earnings—or lack thereof with a $3.9 billion loss—and shared plans to sell the majority stake in its investment unit, spin off most of its commercial real estate assets, slash the dividend, cut jobs and deleverage its balance sheet.

The knee jerk reaction in the stock was a blip higher, from a close of $7.80 to $9 and change, before slipping to the $7 level as I write this.

Wish Lists

The question at hand and the fate of the tape isn't about one company.

For every Lehman, there's a Washington Mutual, which I note based purely on the price action.

For every WaMu, there's an AIG, which joined the ugly club in how it acts.

Old School Minyans know that—for better or for worse—we tell it like it is.

This isn’t something one “wishes” for. I have friends at Lehman. There are families involved.

These are human beings.

We often say time and price are the ultimate arbiters of financial fate and this—the collective “this”—is the other side of largesse, years of living beyond our means and the financial fabrication of worth.

We’ve been monitoring the cumulative imbalances for the last five years, starting with Fannie (FNM) and Freddie (FRE) and the potential for the plague to spread through the derivative machination.

To wit, I just stumbled upon this article, which I wrote in 2004. I don’t know if it’s politically correct or simply narcissistic to quote oneself but alas, it’s not about me. And I quote:

“When I read the news on Fannie last night, I thought that November expiration might have gotten a whole lot juicer. After all, deadlines and accounting issues seem to mean something in most parts of the world. Not in Franklin 's ivory tower and not today.

I see the lack of fear in corporate bond land but I just don't get it. And you know what? I'm not afraid to admit it.

Did you ever have one of those dreams where you see a monster but when you try to scream, you can't utter a word? That's what I feel like sometimes when I watch the financial markets.

I know my job is to focus on the journey rather than the destination and I've admittedly strayed from that mission at times. I also understand that true traders shouldn't care why markets move, they just need to be there when they do.

I get all that.

And I even appreciate that most folks have confused liquidity and debt with a bull market and economic expansion. It's understandable, given the current state of media relations.

The ultimate arbiter is the bottom line and the simple truth is that the market is never wrong. I'm not smart enough to tell you when things like Fannie or debt or derivatives or the dollar will matter—it could be days, it could be years.

What I can and will continue to do is ask you to ask questions of yourself.

Will you be in financial shape if they suddenly do?

And perhaps more importantly, will you be in emotional shape if they don't?

They're not mutually exclusive questions as managing the latter will surely impact the former.”

Nobody seemed to “want” to hear the message at the time—and to be fair, it was “early” four years ago—but they’re surely listening now.

You Hear that Elizabeth? I’m Coming to Join you Honey!

Yesterday, I asked the question: Is The Big One Coming?”

It spoke to the springing leaks in the financial dike, the bottom of the Washington gunpowder barrel, the VXO trading with a two-handle (well below previous fear fulcrums) and, perhaps most important, social mood and risk appetite.

Those last points will be put on parade as the September debt issuance comes to market. The dynamic and dichotomy remains in place—either credit has to improve or stocks will swoon.

We can’t note that enough.

Few things in the market are ever black and white—or green and red, as the case may be—but this is seemingly one of them.

Risk management over reward chasing, discipline over conviction and debt reduction, as a function of choice rather than need.

Some Random Thoughts

Answers I Really Wanna Know…


Positions in CPB, USO

Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at

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