Financials

Should You Dump Lehman, WaMu—Or Is It Too Late?

Jeff Cox, |Special to CNBC.com
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As Wall Street confronts its latest earthquake in the financial sector, investment advisors are telling their clients to hold on tight until the tremors have passed.

AP

Even shareholders in Lehman Brothers and Washington Mutual, two banking giants who have lost most of their value in violent trading this week, might be better off at this point to just sit tight in hopes that a buyer comes in to save the day.

After all, there's not much room to go before being completely wiped out on the two companies' shares, so time and generous companies with deep pockets might be only way to get above water.

JPMorgan Chase , which expressed interest in acquiring WaMu earlier this year, is still interested in the bank, sources close to the firm told CNBC Thursday. But JPMorgan wants more clarity on WaMu's balance sheet, the sources said.

Lehman has lost 75 percent of its value while WaMu is off 60 percent this week alone. Though Lehman closed sharply lower again Thursday, WaMu recovered in late trading—along with the rest of the market—to post a gain.

"The downside from there is not that much," says Richard Sparks, senior analyst at Schaeffer's Investment Research. "If you're in a situation where you're at a huge loss you might as well roll the dice and cross your fingers and hope for the best."

Sparks, though, acknowledges that neither situation is easy and he'd be reluctant to provide hard-and-fast advice to anyone who owns either stock.

Still, he notes that option trading Thursday for Lehman has been active, with 50,000 calls traded at the September strike of $5 and 27,000 calls on the January $22.50 strike. That indicates sentiment that a buyer might swoop in and pick up Lehman at a premium to shareholders, at least those at more recent levels.

"Lehman doesn't really have a lot of bargaining power to try to get the price from where it is," Sparks says. "There are quite a bit of people out there who are buying (Lehman options) with the expectation that Lehman will be purchased and it will be at quite a bit higher than the current level."

Time To Get Out?

While speculation over Lehman's future on the heels of a dismal earnings report has sparked uneasiness in the market and some fairly wild swings in the major averages, market sentiment is far from panicking.

The Volatility Index remains at relatively benign levels in the mid-20s, and stocks tiptoed into positive territory as the trading day neared its final hour Thursday.

"There's a feeling that the market already is discounting whatever happens to Lehman," says Diane de Vries Ashley, managing partner at Zenith Capital Partners. "We're basically suggesting don't do anything dramatic. This is not a good time to double-down or double-up or double anything in whatever bets you might have taken."

It's also not the time to let what's happening with the Wall Street banks deter investors from making moves on undervalued stocks that populate the stock market in such uncertain times, she says.

"No panic, be cautious, there's a lot of good stuff around," de Vries Ashley says. "Don't hesitate to go get it."

Investor psychology is critical at a time when such large-scale events, like the collapse of Bear Stearns and the troubles at Lehman, grab headlines and perhaps make things seem worse than they really are.

"Investors are concerned about the safety and stability not necessarily of Lehman Brothers but of the financial system and their securities," Lawrence Glazer, of Mayflower Advisors, said on CNBC. See his full analysis in above video.

"What we try to do is hold their hand and remind them that we've been through these events before. And typically these cataclysmic financial events ... proved to be good equity-buying opportunities. Investors need to be patient and not react to that market news."

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