Tuesday, July 01, 2008

Barclays: Lehman, count me in

Rumors are swirling that Barclays will be buying Lehman. Barclays CDS moving wider, Lehman moving tighter. Not by enough to say a deal is a foregone conclusion, but there is a fair amount of detail to this rumor. Usually that means there is some truth to it.

If such a deal were to occur, Lehman CDS would certainly move tighter, but it wouldn't immediately be equal to Barclays (which is in the 120's, similar to BAC or WFC, Lehman is around 280). This deal may play out something like Countrywide, where questions about the deal's completion persist for weeks or months. CFC CDS has been running 100-200 bps above BAC's for most of the last 5 months. I'm just saying, trade on this rumor at your own risk.

In other news, CIT is selling their home lending unit for $1.5 billion. CDS is about 60bps tighter.

Ultimately we need to see these market pariah's dealt with one way or another. As long as all these question marks persist, the market won't move higher. Unfortunately, it isn't like Lehman and CIT are the last of the question marks. The path of least resistance is lower and wider, and that will continue until there is some catalyst the other way. I could imagine a scenario where bank earnings (which are coming this month) come out better than expected. One would suppose that actual expectations (not what the Street surveys are, but trader expectations) are quite low. But that's not my view, so I'm inclined to stay underweight in credit and short stocks.


Tejvan Pettinger said...

I'm glad I didn't have any banking stocks. I'm surprised Barclays are wanting to buy another bank, given their own credit problems

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