Lehman's best operator... BUD for $65 a share?... Google cofounder goes out, way out...

I shorted Lehman Brothers in Extreme Value in April, and this morning's news has pushed the two-month gain up to 44%. The company replaced its COO and CFO. Lehman elevated Herbert McDade, previously the head of its global equities operation, to be the new COO. Chief Executive Richard Fuld called McDade "the company's best operator." Of course, that raises the question: Why wasn't he already the COO, if he's the best? Truth is, bosses love to brag in a grandiose way that someone is the best. But they do so only for as long as the rest of the world agrees, or at least doesn't disagree. As soon as this new COO garners any negative attention, requiring backbone on Fuld's part, the CEO will disown him, and someone else will be "the best." 

Fuld has a reputation for successfully seeing the company through crises on previous occasions (post Long-Term Capital, post 9/11). That's certainly valuable, but wouldn't it just be easier to be more risk-averse to begin with?

The ouster of former COO Joe Gregory and former CFO Erin Callan comes two days after Callan told the world that Lehman just sold equity for a 20% discount to book value, diluting the existing shareholders by 30%. It raised capital it said it didn't need for losses it said it didn't have. 

Lehman and other investment banks (Goldman and Morgan Stanley) will issue their earnings releases next week. That's when they tell you how wonderfully they did without the burden of proving it by issuing financial statements. The financials, it turns out, won't be due for another 40 days. The Wall Street Journal correctly points out, "It is tough to see how the firms can claim to be able to know exactly how much of their capital they put at risk on a daily basis, yet can't come up with a balance sheet for weeks." 

Shares of PSIA pick Anheuser-Busch (BUD) rose today, after Belgian brewer InBev offered $65 a share for it. If the two were combined, they would create the world's largest brewer with $36 billion in sales and more than 300 brands around the world.

Most of the time, a group of traders known as "arbitrageurs" push down the price of the acquiring company by selling it short. But InBev shares are up, too. And why not? What could be bad about owning the world's No. 1 brewer? 

Michelle Leder at footnoted.org says Hewlett-Packard's latest quarterly filing with the SEC contains a warning about the risk of mergers. HP began adding the warning to its filings about a week after announcing a $13.9 billion deal to acquire Electronic Data Systems (EDS). The last time HP used this language in a filing was when it was acquiring Compaq, the merger that got Carly Fiorina fired as CEO. If the EDS deal goes the way of Compaq, you can't say they didn't warn you. 

Ouch! The ego of new Citigroup CEO, Vikram Pandit, just took a punch. Citi is closing a failing hedge fund co-founded by Pandit, less than a year after Citi bought the fund's management company for $800 million. It was rumored Citi would inject as much as $3 billion into it, and the fund's CEO told investors it had found a new source of capital. But he spoke too soon, and Citi decided to close it down instead. 

The Wall Street Journal today ran a list of some of the bad financial bets big investors have made. I've been telling my readers to stay away from banks and homebuilders for a couple of months now, and I've got no reason to change my tune. 

The Federal Reserve survey of its 12 districts, the Beige Book, says economic activity got worse in most regions of the U.S. and "stabilized" in others. It didn't get better anywhere. 

SEC Chairman Christopher Cox thinks it'll make everything all better if bond-rating agencies just put an "s" on the end of their ratings of structured finance products. One SEC commissioner objected to the plan, not because it's just plain stupid, but because he said it was like putting a "scarlet letter" on those products. That's roughly equivalent to worrying Britney Spears is getting too much negative press. 

I mentioned Galt's Gulch on Monday, and we got an avalanche of e-mail about it. Maybe I should think bigger, like Google cofounder Sergey Brin. He's not heading for any mountain gulch. He's paid $5 million to get into a rocket and leave the atmosphere. No kidding. A handful of rich folks have done this in the past few years, but he's the most famous. 

New highs: Sabine Royalty Trust (SBR), XTO Energy (XTO), International Coal Group (ICO), Grey Wolf (GW), Anheuser-Busch (BUD), Pioneer Drilling (PDC).

If you plan to ride a rocket, start a mountain gulch retreat, or sell short a steaming pile of financial excrement, tell us all about it at feedback@stansberryresearch.com. 

"Just a note to let you know I think the Short Report is fantastic!! I just finished closing out my trades yesterday on Jeff's last recommendation for the Q's and after commissions made a little under $11,000 which more than covered the cost of my alliance membership. Thanks." – Anonymous

"Why do you blame people from walking away from their mortgages? Our government defrauds us everyday through the Federal Reserve Board and by selling us out to big money. After watching Bush bail out investment firms then do nothing for victims of the created fraud called the real estate bubble, I don't blame them a bit. Do you expect people to behave differently than our leaders? Most don't." – Paid-up subscriber Jeff Stornelli

Ferris comment: You've reminded me of something Elbert Hubbard said: "Grown men don't need leaders." I don't care how "our leaders" behave. They're not my damn leaders. And I do what I think is right at all times, no matter what anyone around me thinks. Stop being such a damn sheep. 

"Galt's Gulch doesn't interest me; but that S&P 50% projected earning's increase next year certainly caught my attn.! How could that NOT be a typo?" – Paid-up subscriber J. Severa

"Dan, I don't know if it works... but it may. Look at the Q1 '08 S&P Total earnings and the Q1 '08 S&P Financials. Perhaps, since the Financials are such a large component... and were so negative in Q1 '08... that the swing back to positive Financial quarterly earnings in Q1 '09 may make the overall swing +50% for that One quarter-to-quarter comparison? Is that a possible/plausible explanation?" - Paid-up subscriber Steve

Ferris comment: Yes, you're right. But my point is I believe the projections for the financial stocks are still way too optimistic.

Regards,

Dan Ferris
Medford, Oregon
June 12, 2008

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