Lehman Reports Senior Executives Are Out...........
................is the headline from Reuters this morning. Surely not a surprise. I talked to a money manager yesterday who said the Wall Street speculation was that Lehman was about to fall. That hasn't happened but the stock is down close to 60% in a month. Let's hope Lehman can right the ship. I'm not holding my breath. Regardless, this is another significant blow to the U.S. banking system. (Sure seems like a different world than when I was writing about major risks in the banking system back in 2006. A time when the world was in complete agreement that we had achieved enlightenment. And, that dividend paying stocks were a great investment. Something else we wrote negatively about. By the way, KeyCorp bank cut its dividend in half today.)
This brings up an important point. What fundamentals changed to drive Lehman's stock down 60% in a month? Nothing. Anyone who uses stock price to gauge fundamentals is a fool. ie, A position that Lehman must be out of the woods because their stock is up near $50 is as ridiculous as stating Potash's stock is up 1,000+% and that is reflective of fundamentals.
Equity markets are doing a very poor job of reflecting reality either present or future. Why? Two main reasons. One, the talent pool has become marginal over a lengthy period of fat and lazy growth on Wall Street. Obviously, we see the outcome of this in the massive crisis of incompetence unfolding. The reality is most on the Street seem to have no idea what they are doing. And, two, we have quantitative trading gone mad. But this is really a symptom of number one. Or as Paul Volcker said -to paraphrase- it seems Wall Street has hired all of these scientists to create these mathematical models but the scientists had no understanding of economics. I think we can infer that Wall Street obviously didn't understand anything about economics either given they relied on these models.
Is there a CEO on Wall Street that can explain how any of these models work? Of course not. That in itself is dripping with incompetence that a banking CEO would threaten his or her depositor, shareholder or investor's money by participating in risky schemes they clearly don't understand. I'm telling you, I could be CEO of Morgan Stanley or Lehman or Citi. I could easily lose just as much money as the current crop of brilliant executives on Wall Street.
If you believe the future lies in quantitative finance, you are likely to be completely wrong. Quantitative finance won't die but most of what we see today will likely cease to exist. And again we will all pretend to be as surprised with that outcome as with every other 'surprising' outcome.
This brings up an important point. What fundamentals changed to drive Lehman's stock down 60% in a month? Nothing. Anyone who uses stock price to gauge fundamentals is a fool. ie, A position that Lehman must be out of the woods because their stock is up near $50 is as ridiculous as stating Potash's stock is up 1,000+% and that is reflective of fundamentals.
Equity markets are doing a very poor job of reflecting reality either present or future. Why? Two main reasons. One, the talent pool has become marginal over a lengthy period of fat and lazy growth on Wall Street. Obviously, we see the outcome of this in the massive crisis of incompetence unfolding. The reality is most on the Street seem to have no idea what they are doing. And, two, we have quantitative trading gone mad. But this is really a symptom of number one. Or as Paul Volcker said -to paraphrase- it seems Wall Street has hired all of these scientists to create these mathematical models but the scientists had no understanding of economics. I think we can infer that Wall Street obviously didn't understand anything about economics either given they relied on these models.
Is there a CEO on Wall Street that can explain how any of these models work? Of course not. That in itself is dripping with incompetence that a banking CEO would threaten his or her depositor, shareholder or investor's money by participating in risky schemes they clearly don't understand. I'm telling you, I could be CEO of Morgan Stanley or Lehman or Citi. I could easily lose just as much money as the current crop of brilliant executives on Wall Street.
If you believe the future lies in quantitative finance, you are likely to be completely wrong. Quantitative finance won't die but most of what we see today will likely cease to exist. And again we will all pretend to be as surprised with that outcome as with every other 'surprising' outcome.
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