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Off to the Races

A slew of big brokerage houses report earnings next week with Lehman Brothers leading the pack Tuesday morning. One research firm has put out an interesting method of trading the financials – one with high risk, but high potential returns.

Fox-Pitt Kelton is recommending investors buy the companies most hurt by the mortgage crisis. After all, they will be who benefit most from a Fed rate cut, the thinking goes. The firm recommends Lehman Brothers (LEH) as well as Washington Mutual (WM), Discover (DFS) and MBIA (MBI).

But Guy isn’t buying it. He would sell LEH because the numbers have the potential to be disastrous, he said. Goldman Sachs (GS) will be the winner, Lehman the loser, and Morgan Stanley (MS) will finish second when it all shakes out, he predicted.

Karen Finerman is intrigued, but still inclined to stay away from this sector, especially MBIA, she said.

The negatives of owning Goldman Sachs are already out there, Pete Najarian said. As for other firms, he notes that the volatilities in Bear and Lehman are twice as large as normal before earnings. Lehman’s volatility is at 60% now versus 30% before it last reported, he said.

Jeff Macke is a fan of this “path of maximum frustration” outlined by Fox-Pitt Kelton. Go to the heart of the problem, he said, although he considers Lehman a trade, not an investment.

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Trader disclosure: On Sept. 14, 2007, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders: Macke Owns (INTC), (SWY); Najarian owns (CREE), (GS); Finerman’s Firm Owns S&P 500 Puts, Russell 2000 Puts, (BEAS), (ASD), Is Short (LEAP); Finerman’s Firm and Finerman Own (HD)

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