Stocks have jostled around lately like rocks at the bottom of a paper bag, always threatening to break down but never quite developing the energy.
This week’s trading was brought to you by the letter E, for "entropy," which is a measure of disorder with a system.
Virtually every sector has risen and fallen and then reversed course at least twice during the week, leaving the big indexes up around half a percentage point.
Leaders were coal, mining, steel and oil, all up around 3%. Losers were thrifts, tires and health care facilities, which are a bunch of words not usually seen in the same sentence, all down around 3% to 5%.
The star of the show however has been Lehman Brothers (LEH), the once proud investment bank that is now reduced to dismembering itself and selling parts to the least objectionable bidder.
Seriously, folks, if you ever find yourself really wishing upon a star that the Korean Development Bank will buy your business, you might as well have last rites administered. That is the sort of acquirer whose phone call you answer before Banco Paraguay but after just about everyone else.
After reporting a larger-than-expected loss on Wednesday and saying the future is going to be great, LEH shares fell another 8.5%. Considering that came on the heels of a 45% plunge Tuesday, it just hasn’t been a good week to be a LEH stake holder.
The Feeling is Mutual
Likewise it has been a pretty rotten session for Washington Mutual (WM), where shares slumped 30% to their lowest level in two decades on Tuesday, then fell again under $2 on Wednesday before recovering a bit on Thursday.
I feel really bad about this one since, as a Seattle resident, I have a lot of friends there and like true believers at companies everywhere, many still have a lot of their own wealth tied up in it. Let this be a lesson to everyone: Your company does not have to be a big, fat fraud like Enron to blister your personal portfolio.
Like Lehman, WM ended up with a lot of bad mortgages and mortgage derivatives on its books when the music stopped last year and had no one to sell them to.
Now many mortgage holders are defaulting or delinquent in payments, and that rips a hole in your cash flow spreadsheet. The big news this week was that a couple of potential buyers were said to have backed out of plans to buy the company due to some accounting rules changes that would have made the purchase less palatable.
Just to give you an idea of how crazy this market has been even for a lot of off-Wall Street geniuses this year, consider a headline that Fortune magazine ran on April 8: "The smart money saves WaMu."
The story reported that private-equity shop TPG had invested $7 billion in the company through what were believed to be onerous terms: WM issued TPG new stock equivalent to 20% of shares outstanding at $8.75, which was already well below the market price at that time. Fortune said that was a cagey deal by TPG founder David Bonderman, reminiscent of deals he made when working for the billionaire Bass family in the 1980s to scoop up troubled thrifts.
Do the math. And unless he managed to sneak out of the deal with some tricky language, Bonderman is down $5.1 billion on his stake. Ouch! That’s the kind of move that might just have the "smart money" label ripped off your Wikipedia entry.
These kinds of financial services companies have not polluted our recommendation list at Trader’s Advantage, though we have made great profits on Fannie Mae (FNM) by shorting it and buying puts. Come and see our latest plays to take advantage of this highly volatile market environment by clicking here.
This article was written by Jon Markman, contributor to InvestorPlace Media. For more actionable insights likes this, visit www.InvestorPlace.com.
