Lehman Brothers Making Market Nervous

The market went on a wild ride Tuesday after opening higher on positive comments from Federal Reserve Chairman Ben Bernanke. He said the Fed still expects the economy will recover during the second half of the year thanks to interest rate cuts, Fed loans to the Financial institutions, and tax rebates. The Dow took those remarks and ran, trading 160 points higher before the wheels came off.

Word that Lehman Brothers Holdings (LEH, $30.61, down $3.22) was planning to raise $4 billion in capital totally took the wind out of the sails for the market as everyone’s attention turned towards the Financials again. The Dow finished 100 points lower and closed at 12, 402. In two days the Dow has lost 235 points.

Lehman took a bloodbath falling to a low of $28.90 before slightly recovering. Rumors surfaced that the company approached the Federal Reserve to borrow money sent the stock sharply lower. If you are borrowing money from the Fed it means you are having trouble getting financed. The fact that Lehman is trying to raise money was a story all morning but when the rumor mill got cranked up, we saw heavy trading in Lehman’s options.

Get this. The June 30 puts (LYHRF, $3.35, up $1.35) opened yesterday morning just under $2.00 and traded as high as $4.40. They still closed 68% higher but an easy double was made if you were following this story closely yesterday. Volume was absolutly sick – nearly 39,000 contracts traded. The June 25 puts (LYHRE, $1.66, up $0.62) traded up to $2.44 before pulling back. Volume there checked in at a whopping 24,000 contracts.

Lehman quickly squelched the rumors that it had borrowed directly from the Fed but the damage was already done. Some analysts now believe the company will post a second-quarter loss deeper than the $300 million that they were expecting in late June. With the recent Bear Stearns debacle there’s no wonder investors started heading for the exits.

The stock is at five-year low and today will be a test for Lehman.

Rick Rouse
Rick@OptionsMentoring.com

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