Thought of the Day

I looks like we are in the early stages of a stock market capitulation. Bearish sentiment is virtually absolute, the federal government has launched several investigations of hedge funds as well as futures traders and home prices are now roughly in-line with historical multiples of income.

Moreover new home starts are trending well below 1 million units which is not enough to support the roughly 2% annualized US population growth rate.

_Think about it: in five years the US population will be up to 343 million from 330 million today and we are track to build just 2.5 million new homes. In my view, under building should create a housing shortage in the US.

_Once the credit crisis subsides, I think rental REITS will have a great year in 2009as rental rates rise to accommodate the legions of former home owners that unfortunately had to step away from their homes.

_Real estate cap rates should improve in 2009 as low borrowing rates and higher rents boost operating income.

Sharp Trader Think LEH is a Buying opportunity.

While I think it will take a while for Bank EPS to recover LEH is extremely undervalued and given the Fed's willingness to rescue Investment banks I think LEH share have limited downside risk at these levels as the upside is great.

First, LEH has a great Investment Banking and Capital Markets franchise which should recover early in the cycle. I think this franchise has been overlooked by Wall Street.

Second, even after the dilution LEH has great earnings power

Over the past five years LEH average EPS has been roughly $5.00 per share with peak EPS over $7.00. While LEH's peak EPS will be significantly lower due to equity dillution I think $3-5 per share in peak EPS is reasonable for LEH shares. I also expect recover EPS will be in the $2-3 range. At the current price LEH is trading at just 5x recovery EPS of $2.50.

If we apply a 14x market multiple to recovery EPS of $2.50 we drive a recovery stock price of $35 in 24 months. To derive our target price we dicount LEH shares using a 20% discount rate over 24 months thus LEH's intrinsic value is $24.00 by our model.

Disclosure: I sold my 100 shares of FNM at $9.95 and I am entering a limit order to buy LEH at $10.00. Yesterday I added to my GTN position and I have limit order to buy more at $2.00 As we noted below I have roughly a $7.00 price target for GTN shares.