Time to short! Cramer likes it!
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Wrong! Rear Echelon Revelations: The Wild Card
By James J. Cramer
10/1/98 7:31 AM ET
Either something is out there we still don't know about, or these brokerage stocks are way overdone to the downside. Let's focus on Lehman Brothers (LEH:NYSE) for a second. Here is a stock that I had a position in that -- I still can't believe it -- traded up to 40, where by great fortune I was able to move out of it.
Three times since then I have been tempted to get back in. Why? Because I like to buy brokerage stocks below book value and Lehman is now well below book. As brokerage houses have real capital, the book value for a place like Lehman is significant.
Which is why I come back to the first issue: What do we not know? In 1990 everybody assured us that the banks were fine all the way down, and yet, in the end, dividends were slashed, institutions were closed, and the Fed had to take rates down to where the banks could print money. A Saudi prince saved Citicorp (CCI:NYSE). Could that be happening again? Could there be so many clients who have borrowed so much money that they can pull down the institutions? Or have costs gotten so out of control and underwriting so bad and online trading so meaningful that profitability has been permanently impaired?
Let's say all of the above are happening -- then what? First, you can't own any of the stocks. None of them. They will not bottom of their own accord. They will bottom only after they slash payrolls, cut dividends and merge with each other. The troubled banks of 1990, banks like Manufacturers Hanover and Security Pacific, got merged into Chemical and BankAmerica (BAC:NYSE).
If there is something out there we do not know about, a company like Lehman merges with another broker. The capacity gets taken out, the back office shrunk and profitability returns.
Here's the problem with that Panglossian scenario. Even then, we still have to find out what's really ailing these stocks. We have to find out why they are not bottoming.
Could it still be Long Term Capital? Maybe, although at this point, I have to believe that even that is getting priced in to some of these stocks. Could it be that there are many more Long Term Capitals? I don't think so. Nobody else fooled around on the scale it did.
Most of the time I like to act ahead of when everyone knows something.
That's why I keep wanting to pick up some Lehman. But like in 1990, I will only get burned. So I wait to find out what others know. And when we all know what ails these stocks, I can buy. And not a day or point before that.
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