we can conclude that Lehman has been getting much smaller much faster than it told anybody they had a right to think as recently as last week.

Jun.16, 2008 in Market Outlook

FINANCIALS FACE DISLOCATION, UNCERTAIN FORTUNES
The theme for the day, kiddies, is size. American International Group (AIG) has got too much of it. General Electric (GE) would figure to getting close to having less of it. And Lehman Brothers (LEH) has a lot less than it did a week ago, and - as it could turn out - may not have enough to continue to compete effectively independently. With their widely disperate market capitalizations - GE, at $290 billion, is the second-largest public company in the U.S., but could lose that crown to Microsoft in a matter of days, while AIG clocks in at $85 billion, and Lehman, the relative pipsqueak, musters $14 billion - the only thing they have in common is that their mass, in each case, has been winnowed lately: GE having tasted a 4 1/2-year low as recently as Friday, AIG having surrendered 41% of its market cap this year, and Lehman Brothers having relinquished 28% in the course of just four trading days last week.

Taking the three in inverse order, and evaluating them through the prism of relative size, we can conclude that Lehman has been getting much smaller much faster than it told anybody they had a right to think as recently as last week. Its gross assets fell $147 billion from the first quarter; last week, it said those assets lost $130 billion, according to Dow Jones Newswires. The difference would appear to be in the firm’s real estate portfolio, where assets have been pared 20%; last week it forecast that the real estate assets would be reduced by a range of 15% to 20%. Clearly, the lessons of last week’s response by the market to Lehman’s combination announcement that it expected to lose $2.8 billion while raising new capital weren’t lost on the firm. Chief exec Dick Fuld was quoted saying, ”Since we announced our second-quarter earnings last week,” the firm has ”taken the necessary steps” to ”ensure that this unacceptable performance is not repeated.” (Of course, investors probably felt that way after the first quarter’s performance.) Once again, this is a firm that appears to be waging a war of confidence, not of strategy or execution. Fuld effectively threw has president and CFO under the wheels of the proverbial bus last week, a move that was seen as tantamount to Fuld saying he was personally guaranteeing that Lehman’s performance wasn’t going to deviate dramatically from the forecast it offered last week. True, it delivered exactly the loss - $2.8 billion - in exactly the measure - $5.14 a share - that the firm foreshadowed last week. But the details showed the more-dramatic paring of the real estate portfolio than had been expected, and until Wall Street knows whether somebody out there is willing to take the other side of a Lehman-initiated transaction, the stock likely remains on probation. That’s not going to quell the questions about whether Lehman can afford to remain independent. The stock has had an up-and-down reaction to the results, but now looks modestly higher.

Meanwhile, General Electric has been the subject of some decidedly un-GE style downsizings recently. Since posting those unexpectedly weak quarterly results in April - shocking investors who had become almost stubbornly acclimated to an enormous corporate contraption that could nevertheless routinely alight within a penny of forecasts - the stock has declined 21%, sending shares to a 4 1/2-year low. There was more bleeding last week, as rumors circulated that the conglomerate would need to raise fresh capital, speculation that GE denied. There’s more pain to come Monday, as the stock probes the lows recorded Friday. The stock has traded another 1% lower Monday, after JPMorgan cut its rating on the stock, citing ”further earnings risks” because of the macro environment in which the company operates, as well as the prospect of ”dislocation” from changes in its portfolio of assets. GE already said it put its home-appliances business on the sales block. But it isn’t expected to halt its review of its portfolio with the sale of one of its smallest, slowest-growing businesses, which makes a modest contribution to sales. There’s speculation that there could be a smaller commitment to consumer financing, which suggests that GE could look to off-load its private-label credit business. There’s also the possibility that some of its transportation lease-finance operations could be spun or sold. JPM cut its earnings forecasts for ‘09 to $2.30 a share, below the $2.44 that represents the Street concensus. But the pervasive theme that keeps coming back is the refrain: maybe this is a company that built too big a portfolio of diverse businesses under previous regimes than the current management stable is capable of corralling.

Meanwhile, AIG has taken the first step in what promises to be a process of addition via subtraction. The activist shareholders amongst the insurance giant’s ranks of investors succeeded in chasing the unloved CEO, Martin Sullivan, out of the village with a combination of pitchforks and light torches. (Really, more like a board meeting and an inevitable outcome, following two quarters of steep losses, but the unruly mob of villagers is such a bucolic image, don’t you think?) The move to oust Sullivan could be construed as a victory for Hank Greenberg, the former chief executive, and architect of the hulking, anything-but-aerodynamic mothership that AIG had become. Even Greenberg’s presumptive return to the royal court, if only in a consigliere role, probably won’t save AIG from some rounds of corporate dislocations, as new management - led by chairman Robert Willumstad - undertakes a comprehensive review of the firm’s portfolio of operations. Shares have traded about 2% higher in premarket action, after having fallen to a low last week.

http://blogs.barrons.com/stockstowatchtoday/2008/06/16/size-matters-lehman-cuts-real-estate-20-aig-faces-new-world-ge-figures-to-down-size/?mod=yahoobarrons

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