Can Lehman Escape The Broker Earnings Hat Trick? (LEH, GS, BSC, C, XLF)

We are set to get the highly awaited earnings report out of Lehman Brothers (NYSE: LEH) on Thursday morning, and this could be the largest catalyst for brokers and financial stocks since the FOMC.  First Call lists this last quarter’s estimates at $1.44 EPS on $4.29 Billion in revenues.  Estimates have been lowered across the board over the last 60 to 90 days and even more recently, but this is still a call for earnings from operations.  Frankly the range of estimates is so wide on earnings and revenues compared to the past that we’d only advise any such estimates to be a ball-park estimate full of dart boards and blindfolds.

We have seen many comments from the Wall Street community warning that Lehman may through out many CDO write-downs and charges and frankly we wonder how with the current "off balance sheet" or "unknown values" items how any earnings estimate can be used.  We’ve also seen some comments noting that Lehman may escape the scythe.  Can you imagine all the abacus shuffling that had be done to calculate this earnings release?

Lehman is essentially flat to down marginally mid-afternoon ahead of tomorrow’s numbers around $61.00 today.  The 52-week trading range is $49.06 to $86.18.

Morgan Stanley just called Citigroup (NYSE:C) the short of the year.  Now that it has a new team it is quite possible that the old Smith Barney will resume as an independent entity.  Vikram Pandit has left the door open for major lay-offs and unit dispositions.  With the SIV ties and the CDO exposure (outside of everything else) we expect Citigroup to move either way on the Lehman earnings.

Goldman Sachs (NYSE:GS) has remained the "model citizen" out of all the brokers.  Its shares are up almost 2% today at $215.00 and its 52-week trading range is $157.38 to $250.70.  If you will recall, it actually did well on its last earnings and it turns out that Goldman had made much money betting against the mortgage markets.

Bear Stearns (NYSE:BSC) is perhaps the one to watch for much of the same action after Lehman reports as its shares have been crushed more than most bulge bracket firms.  Its shares sit up marginally at $100.70 today and its 52-week trading range is $89.55 to $172.61.

Lehman’s earnings has a chance of dictating the sector’s trading tomorrow.  If it looks like a deer in the headlights then Wall Street may get even more scared than it has been.  But if the company can overwhelmingly convince the rest of Wall Street that all the CDO’s, asset-backed securities, mortgages, and more are manageable then there could be a huge sigh of relief on Wall Street.

We caution one key thing here outside of numbers and outside of any forecasts and expectations.  You can’t just listen to what the company says in its release or even what is said in the conference call.  You have to decide if you trust the information and see how the brokerage community and traders actually say how much they trust what is said.  We aren’t calling anyone a liar here.  There is just a very cautious investment community right now, and trust has to keep being earned and re-earned at this point.

To see the reaction to the major group, we’d look at the Financial Select SPDR (AMEX: XLF).  It has traded over 88 million shares today and those ETF shares are down 0.7% at $30.02.  The XLF has traded as low as $28.10 and as high as $38.15 over the last 52-weeks.

Jon C. Ogg
December 12, 2007

Jon Ogg can be reached at [email protected]; he does not own securities in the companies he covers.