More trouble ahead for financial sector

The recent sell-off of Lehman's shares shows that investors are still very nervous about the financial sector. The sell-off is a sign that, people are still deeply worried that, another Bear Sterns like incident will happen.



S&P downgraded Lehman's debt rating this week. If you still remember, not long ago, Lehman raised 7.9 billion by selling preferred shares which would definitely dilute its share price. We also remembered clearly that, Lehman claimed that they did not have liquidity problem when they raised that 7.9 billion and I pointed out from another post at that time that, that was a lie. Now, by trying to raise another 4 billion in equity market by selling more common stocks, they prove that, they did lie. And my guess is, Lehman is trying very hard to raise more capital now while there are still investors in the market who are willing to take the risk. 

A week before Bear Sterns went under, its CEO publicly claimed that, Bear had no trouble at all and Bear's book value was $80 per share. Exactly a week later, Bear was at $2. We might need to ask ourselves, how many more unknown secrets are being covered and how much longer WS can keep lying and buying time hoping for a recovery to bail them out.



Lehman might not go down like Bear Sterns as Lehman has a more diversified business model. However, it does not mean that Lehman's trouble will end soon. I would expect some other firms with high leverage ratio to start to raise white flags very soon. All trouble ahead makes LEH a very good short target.



For those who feel that the financial is close of hitting a bottom, watch out below.