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Lehman Estimate Cut, Rating Downgrade Complete Bearish Trifecta

Riding the short side of the Lehman Brothers Holdings Inc. (LEH) trade continues to be the right move. Dow Jones noted earlier that Oppenheimer’s Meredith Whiney cut her estimate for the second quarter to a loss of $.75 per share from earnings per share of $.75 (mean estimate among analysts is earnings per share of $.20), seeing higher compensation expenses, a write-down to the carrying value of the investment bank’s minority stake in hedge fund GLG Partners and continued weakness in the capital markets. As negative as that might be, the Standard & Poor’s rating cut of Lehman mid-day though is what’s really accelerating the move to the downside, with shares now down about 7.63% to $34. Adding that to last week’s overhang of Greenlight Capital’s David Einhorn and his attack on the quality of earnings and the need for future write downs, and you have a perfect trifecta for the bears. Again coinciding with the move lower is a general pickup in put option activity across the board. There is some notable action in the June puts with a $30 strike price, 9,701 contracts have traded there, and steady accumulation in the sub-$30 puts all the way to $17.50. The market is expecting a continuation of the move lower and having broken below $35 support, it is really a look out below scenario as the March closing low of $31.63 comes into play.

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