Updated from 11:59 a.m. EDT
Yesterday, in an interview on
with Maria Bartiromo,
( LEH) CFO Erin Callan called on the
to investigate potentially abusive tactics of short sellers, whom she claimed were responsible for the continued pressure on her company's shares. (It is important to note that I currently have no stake, long or short, in Lehman's shares).
Callan's claim was shared by many Lehman shareholders, members of the media and others, including our own
Implicitly, Lehman's CFO seemed to place a primary role on short sellers as the proximate cause for Lehman's share weakness. And, by inference, Ms. Callan dismissed the role that the following items may have had in the slide of the company's shares:
- Lehman's disappointing earnings and revenue results, down 30%;
- a levered balance sheet in which Lehman's liquidity is, to some degree, dependent upon the "kindness of strangers";
- its broad mortgage and fixed-income exposure; and
- an uncertain profits future, though she alluded to the likelihood of continued challenges "for several quarters to come" late in the interview.
Lehman's CFO contended that "perception trumps reality" and that the $4 billion convertible raise this week "endorsed the value of the franchise" -- even though, days before, Callan dismissed the need for capital.
When push came to shove, however, she claimed an escalation of the rumors and observable trading volume in Lehman's shares necessitated the capital-raising mode, which caused about a 6% dilution in the company. Her contention was that, recently, the normal daily trading volume had risen by nearly tenfold, suggesting that short selling (which purportedly continued to pressure Lehman's shares) was dramatically on the rise.
Let's examine her claims that short sellers have had an untoward role and have pressured Lehman's share price.
- At yesterday's close, Lehman's equity capitalization stood at $24.45 billion.
- Lehman has 551 million shares outstanding, and its float is approximately 528 million shares.
- As of March 11, 2008, only 46.5 million shares were short, representing only 8.4% of the outstanding shares and only 8.8% of the float.
- Over the past three months, Lehman's average trading volume was about 29 million shares a day, and over the last 10 days, the average trading volume was nearly 45 million shares. Therefore, days to cover are only 1.6 and 1.0 days, respectively, very low ratios.
- The short interest has risen by only 3.3 million shares since last month.
Now, let's do a quick compare and contrast with
- The short position in Merrill is about 37 million shares, or 4% of the outstanding shares and of the float.
- The short position has risen by 5.5 million shares in the last 30 days and represents 1.2 days to cover on the three-month average daily volume and slightly less than 1.0 days based on the last 10 days' average trading volume, not materially different to Lehman.
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.
Know What You Own
: LEH operates in the financial services industry, and some of the other stocks in its field include
( BSC) and
. 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
At the time of publication, Kass and/or his funds had no positions in the stocks mentioned, although holdings can change at any time.
Doug Kass is founder and president of Seabreeze Partners Management, Inc., and the general partner and investment manager of Seabreeze Partners Short LP and Seabreeze Partners Short Offshore Fund, Ltd.