Next, let's move on to an analysis of the put trading in Lehman in order to see if this issue pressured the company's shares. Like the other brokers, the outstanding interest in the out-of-the-money puts has increased, but the amount of skin in the game is insignificant (as the put values are in pennies). The purchase of out-of-the-money put options does not impact a company's share price, though it does increase the stock's volatility. For example, there are 25,000 April $10 and April $15 puts open; they trade at only 4 cents and 8 cents, respectively.
In summary, I believe that the placement of Lehman's $4 billion convertible was a wise capital move for the company, and an even wiser move was made in placing the security with a small group of current stakeholders, which precluded more short selling through the convertible arbitrage. That being said, the allegation that short sellers unduly influenced the price of Lehman's shares seems to have little basis in fact.
It is my continued view that short sellers -- and I am clearly talking my book -- play a far less important role in influencing share prices generally. The dedicated short community is well under $10 billion -- less than one-fifth the size of Fidelity's Magellan Fund. There is no empirical evidence that the short-selling asset class, the elimination of the uptick rule or that the role of short sellers (as part of the long/short hedge fund class) are in any way responsible for the bear market of 2007-2008.
There are ample fundamental reasons (especially of a credit kind) for the market's weakness, but the short-selling blame game is quite simply a figment of the bullish cabal's imagination -- and an easy excuse for their mistakes.
Doug Kass is the author of The Edge, a blog on RealMoney Silver that features real-time shorting opportunities on the market.
Know What You Own: LEH operates in the financial services industry, and some of the other stocks in its field include
Citigroup(C Quote - Cramer on C - Stock Picks),
Goldman Sachs(GS Quote - Cramer on GS - Stock Picks),
Morgan Stanley(MS Quote - Cramer on MS - Stock Picks),
Bear Stearns(BSC Quote - Cramer on BSC - Stock Picks) and
JPMorgan(JPM Quote - Cramer on JPM - Stock Picks). These stocks were recently trading at ($24.66, +3.44%), ($180.44, +2.02%), ($49.97, +2.29%), ($10.81, -0.37%) and ($47.00, +0.82%) respectively. For more on the value of knowing what you own, visit TheStreet.com's
Investing A-to-Z section.
Doug Kass
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