Much Ado About Almost Meaningless Intel Shifts.

WHAT a mess the stock market has become. On Sept. 28, as the market closed, a single company -- Intel Corp. -- announced that its revenue would be up by "only" 3 percent to 5 percent in the third quarter over the previous quarter, and in a flash the entire world was engulfed in a tidal wave of selling of Intel shares in aftermarket trading.

By the morning of Sept. 29, 25 percent of the market value of the world's largest computer chip maker -- which is to say, $100 billion -- had vanished and the "official" market, which is to say Wall Street itself, hadn't yet even opened for business.

At one point in the early morning of Sept. 29, the Dow Jones Industrial Average looked likely to open 200 points down, the Nasdaq electronic stock market didn't look as if it would be able to open at all and people everywhere were talking 1987 meltdown.

But by day's end it was as if nothing had happened at all. The Dow Industrials ended up 82 points, Nasdaq recovered to a modest loss and everyone went home as if the previous 24 hours had been a bad dream from which they'd thankfully awakened just in time for the weekend.

All of which raises some unexpected, and interesting, questions about the prospects for Lehman Brothers Holdings Inc. -- the last remaining major independent brokerage firm on Wall Street -- in the current neurotic market. Trading at $142.13 a share last week, Lehman is valued at $17.25 billion, having run up on takeover speculation that has swirled around the stock for months.

But the rush of takeovers that has swept lately through Wall Street has left Lehman like the cheese that stands alone, sporting a spectacularly expensive price tag when everyone suddenly seems to be streaming from the auction parlor.

Though Lehman is well managed and profitable, one big knock against the stock -- which the jolting news about Intel pulls into sharp focus -- is that investment banking and brokerage activities in Europe now account for almost a third of Lehman's business, and weakness in the euro is what has clouded over the business outlook for Intel and a number of other companies.

Up, then down

The first and most obvious point to be made about the market is that investors, like jilted lovers, now feel betrayed by their half-decade-long fling with revenue growth as reason enough to buy a stock. The entire dot-com sector of Wall Street had been swept aloft on this delusion, and it has now crashed back to earth, wiping out I don't know how many billions of misdirected investment dollars in the process.

Which sector will be flattened next by the loose cannons of investor disenchantment that are rolling around Wall Street? Maybe biotechs? Maybe regional banks? How about utilities, which are up 45 percent so far this year as represented by the Standard & Poor's Utilities Index, which is now selling at 22 times earnings?

There's certainly plenty to choose from when you consider that the S&P 500 is selling for 29 times earnings, or roughly twice its historical average over the last 100 years. As for Nasdaq stocks, well, they've dropped 9.3 percent since the start of the year and they're still in outer space, with the Nasdaq Composite Index selling for 142 times earnings.

So here's the question: Will Lehman get struck low as well? Under the leadership of the fellow who runs the place -- Richard Fuld -- Lehman's revenue has been growing at a rate of 17 percent annually over the last five years, while its earnings have been leaping at a 62-percent annual pace. This in turn has sent Lehman's stock price soaring from about $33 a share two years ago to its Sept. 11 high of $161.

Most of that runup has come since May, on rumors that the company was being courted by a number of big banks as a way to get into the investment and securities game on Wall Street. But now that the takeover story seems to have fizzled, Lehman faces having to justify its stock price on the company's fundamentals as a business, and that won't be easy for any brokerage firm, Lehman included.

Lehman on paper

When times are good and the stock market is rising, brokerage firms are profitable businesses, but when the market is turbulent, they can begin hemorrhaging losses.

On paper, Lehman looks huge, and in a sense it is, with balance-sheet assets of $228 billion as of the end of August. But roughly $221 billion of that sum either doesn't belong to Lehman or is offset by various debts and other liabilities.

Net result, Lehman shareholders actually have only $6.7 billion of common stock equity in the business. The rest of the company consists, on a balance-sheet basis, of borrowed and hedged money --- the exact sort of edifice that all major diversified investment firms maintain. This works out, in Lehman's case, to common equity equal to only about 3 percent of total assets, which isn't very much different from the ratios for Goldman Sachs Group Inc., Merrill Lynch & Co. and Morgan Stanley Dean Witter Discover & Co.

Because all these companies are so leveraged. they can generate huge amounts of operating profit in relation to the equity held by the shareholders. Lehman itself took in net revenue of $2.05 billion in the three months ended Aug. 31.

But in Lehman's case, more than half the company's net revenue comes from what are called "principal transactions" -- a fancy word for what may well amount to nothing more than trading in and out of stocks, bonds and other securities held by the firm. Since the company doesn't spell out precisely what it means by the concept, it is impossible to be sure, but other firms do break out their "principal transactions" numbers and they tend largely to be trading.

Why is this important? Because trading happens to be the most volatile part of the brokerage game, making the companies that depend on it inherently vulnerable to the convulsions of the market.

In Lehman's case, the conclusion seems obvious. At $142 a share, Lehman Brothers is certainly not the bargain it was even six months ago. Since the start of the year it has risen higher, faster than any of its major competitors -- up 68 percent in value vs. 55 percent for Merrill Lynch, 24 percent for Morgan Stanley and 18 percent for Goldman Sachs. So if you happened to be along for the ride, count yourself lucky. The current state of the market suggests that Lehman is not likely to repeat that feat again any time soon -- maybe for a very long time indeed.

Christopher Byron is a columnist for Bloomberg News.