After hours Tuesday Goldman Sachs slashed its earnings outlooks for some of its major rivals, citing mounting write-downs on mortgages, a slowdown in overall activity, and legal expenses.
Analysts led by William Tanona reduced third-quarter and full-year forecasts for Citigroup JPMorgan Chase, Morgan Stanley and Merrill Lynch .
However the downgrade that really got the attention of the Fast Money traders was that of Lehman Brothers.
WHAT'S WRONG WITH LEHMAN?
Lehman could lose $9.65 per share for the year, versus a prior forecast for a loss of $2.10 per share, the Goldman analysts said. Lehman may reduce its mortgage exposure in the third quarter by 20 percent, or $15 billion, which could lead to a $2.5 billion to $3.5 billion write-down, the analysts said. Its share-price target was cut to $22 from $40.
The market is running scared of Lehman, says Pete Najarian. It bodes poorly for the open on Wednesday.
But they’re not running scared enough, adds Jeff Macke. I’m hoping that Goldman’s latest downgrade causes a panic in the Street so we can get over this idea that banks are cheap.
"Goldman is making a guess like every other analyst is making a guess," says Sanford C. Bernstein analyst Brad Hintz on Fast Money. "The issue with Lehman is that they have $60 billion dollars of mortgage exposure and about half of that is in commercial mortgages."
Hinz, however, is optimistic long term. "Let’s just say that Lehman is going to survive. The Federal Reserve is not going to allow any brokerage firm to fail. When they decided to support Bear Stearns they grabbed the tiger by the tail." (See the full Fast Money discussion in the video).
Someday the credit crisis will be nothing more than an unhappy memory. When that day comes Hinz believes Lehman could look a lot like the company it was in the late '90's, "without a mortgage franchise and without a mortgage asset business. But with a powerful fixed income franchise and powerful equity business."
I hope investors didn’t pile into Lehman because they saw it down on Tuesday, says Guy Adami. We haven’t reached capitulation, yet.
THE OTHER FINANCIALS
Meanwhile, shares of financial companies were the biggest drag on the Dow and the S&P 500, with Bank of America and Wells Fargo down more than 3 percent each. The KBW index of bank stocks fell as well.
It seems to me that things have gotten much worse in the banks overall, says Karen Finerman.
Financials are fine as trading vehicles as long as you have an exit plan but as a long term investment they’re terrible because you don’t know what you’re buying.
If you want to play financials make sure you also buy puts for protection, counsels Pete Najarian.
If you’re looking for a play it’s worth noting that Brad Hintz has an outperform on Morgan Stanley . “That’s because they’re exposure is the least of the group. But the space is “unforcastable” as this point. And that says let’s keep away from them… until they clean their balance sheets.”
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Trader disclosure: On Aug 19, 2008, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Adami Owns (C), (AGU), (BTU), (GS), (INTC), (MSFT), (NUE); Macke Is Short (TM); Macke Owns (MSFT), (WMT), (DIS), (CY); Najarian Owns (AAPL) And Is Short (AAPL) Calls; Najarian Owns (CSCO) Call Spread; Finerman Owns (GS); Finerman's Firm And Finerman Own (C) Leap; Finerman's Firm Owns (MSFT), (SUN), (TSO), (VLO); Finerman's Firm Is Short (SPG), (COF), (IYR), (IWM), (IJR), (SPY), (MDY), (BBT)
Hintz Owns (MS), (CME), (ETFC), (RJ), (AMTD)
Accounts Over Which Bernstein And/Or Affiliates Exercise Investment Discretion Own More Than 1% Of (GS), (LEH), (MER), (MS); (GS), (LEH), (MER), (MS) Are Or In Past 12 Months Were Clients Of Bernstein, Which Provided Non-Investment Banking Securities-Related Services And Received Compensation For Such Services; An Affiliate Of Bernstein Received Compensation For Non-Investment Banking Securities-Related Services From (GS), (LEH), (MER), (MS)