Waddle be next for the Financials?
Posted
Jun 02 2008, 04:32 PM
by
Andrew Horowitz
What took them so long? S&P finally trimmed their outlook on Lehman
Brothers Corp and other key financials today. It has become clear that the problems facing the financial sector is far from over. Financial stocks and the markets in general were hit hard as investors were spooked after S&P announced that
they would be lowering ratings and their outlook on these companies. Is this any surprise to anyone?
So now, the long term ratings on these three went from A+ to A and the short term rating went to
A-1. The concerns seem to be focussing in on residential mortgage
loans and residential construction slow downs. Timely, hey?
According to the S&P release shown below, “The downgrade primarily
reflects our concern that the pace and extent of earnings improvement
could be considerably more muted than we previously assumed.” And "muted" is codeword for....?
Thanks for the insight! What makes me nervous is this simple question: How do we know that the assumptions are now correctly calculated? It has been painfully apparent that there had been more bad news to come as the credit crisis was showing no signs of abatement. As
more and more signs point toward an economic slowdown, it’s
assumed that the earnings for the financials will continue to will slow in the coming quarter.
S&P believes that although Lehman has somewhat held it performance in previous quarters, they will now be unable to do so within the current economic
environment. In addition, S&P believes that there will be a slowdown in the broader
investment banking sector and has dropped the ratings on
Merrill Lynch and Morgan Stanley as well.
Here is the release from S&P in all its grandeur:
NEW
YORK (Standard & Poor's) June 2, 2008--Standard & Poor's
Ratings Services said today that it lowered its long-term rating on
Lehman Brothers Holdings Inc. (Lehman) to 'A' from 'A+', and we
affirmed our 'A-1' short-term rating. The outlook is negative.
The
rating action is in conjunction with our review of the global
securities industry. (See "S&P Completes Review Of Global
Securities Industry; Ratings Lowered On Morgan Stanley, Merrill Lynch
& Co. Inc., And Lehman Brothers Holdings Inc.; Outlooks Negative,"
published June 2, 2008, on RatingsDirect.) The downgrade primarily
reflects our concern that the pace and extent of earnings improvement
could be considerably more muted than we previously assumed. Lehman's
earnings performance in recent quarters has held up relatively well
under current market conditions despite write-downs on troubled assets.
However, with a first-quarter end in February, the effects of a
particularly difficult operating environment in March will only be
reflected in Lehman's second-quarter performance. Consequently, we
expect a relatively meaningful deterioration in Lehman's second-quarter
performance owing to a generally slower business environment,
additional write-downs on certain troubled exposures, and the negative
effects of hedges due to basis risk and de-levering of the balance
sheet. "Although we expect write-downs in subsequent quarters to be
more muted, given the extent of write-downs to date, we are concerned
that persistent dislocations in global capital markets could further
weigh on core operating performance for the securities industry as a
whole," said Standard & Poor's credit analyst Diane Hinton.
Adjusted
to exclude write-downs and negative hedges, we expect weakness in
Lehman's operating revenues to be tempered by cost-cutting efforts that
should begin to positively affect the pretax margin in third-quarter
2008.
The outlook is negative. There are many uncertainties that
could affect the future financial performance of the broker-dealer
sector. The ratings could be lowered further if Lehman were to incur
substantial losses either as he result of depressed business
conditions or sizeable write-downs. The ratings could also be lowered
if the firm's ability to sustain potential liquidity stresses should
weaken. Conversely, the outlook could be revised to table if Lehman's operating performance rebounds to more normal levels.
Want to bet that there will be further negative news to follow? This is, and had been, like the tip of the iceberg. Realize the only about 10% of the iceberg shows above water. AND, that is all that is needed for the waddle of penguins to rest before they follow each other into the cold water. Jump boys, jump!
Related Reading:
Smoke Screen: Lehman Preferred Offering
Double Whammy: Bank-Card Companies are Next
Dow off 134 as financial stocks take a beating
A Double Dip Downturn
Disclosure: Horowitz & Company clients do not hold positions in securities mentioned as of the publish date.
