The Chart du Jour

Concentrate on Financials

February 17, 2001

By, Barclay T. Leib

Chart courtesy of Big

In the current downleg in equities (that we have forecast for sometime should lead the Nasdaq 100 toward 1735 and the S&P 500 into the 1209-1241 region), shorting financial stocks is clearly a strategy on which to focus. Just think of the following obvious facts:

Gone are the huge fee revenues from the IPO binge;

Gone are the huge fees from the telecom junk bond offerings, with some of those now-underwater securities surely still lying around in a bank portfolio or two;

Gone are the tech mega-merger fees, with FASB recently having ruled as well that pool-accounting (so popular to the likes of Cisco in their many takeovers) is not long for this world as an acceptable practice;

Gone are the corporate clients dealing complex derivatives (previously so lucrative for the banks) but now anathema to engage in because of complicated FAS 133 accounting considerations that for most corporations just went into effect January 1st.

Gone are the days of non-transparent bond markets where dealers could mark paper up and down egreciously to corporate customers. Now every sophisticated bond customer has an electronic TradeWeb system on its dealing desk, with banks falling over themselves to show tight prices with little inherent profit spread. Other markets like foreign exchange (a traditionally highly profitable area for banks) are also becoming far more transparent.

Where are banks going to make any money? Even the yield curve is flat -- with no lucrative carry trades to be played.

How appropriate it is therefore (particularly in this era dominated by false breakouts), that Lehman Brothers, pictured above, finally struggled a few weeks ago to marginal new highs, only to immediately fail. It clearly caught a few stops up there -- and now has proceeded to trade straight down.

In a Wall Street now increasingly dominated by e-commerce transactional capabilities, Lehman has also been left dawdling in its development efforts in this area. Firms like CSFB are starting to steal market share from them.

If Lehman was smart -- they would find a buyer for themselves right now. Sell out, cash in. But alas, our Fibonacci work suggests instead, it will be back to 71 1/4 and then 62 -- if not significantly further down with time.

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