Merrill Lynch Springs More Leaks as Stock Sinks to a 52-week Low

Merill Lynch (MER-NYSE) is printing new 52-week lows on the heels on Bank of America's guesstimate that Mother Merrill will take a $3.5 billion writedown:

Analyst Michael Hecht expects continued markdowns on troubled asset inventories, tough comparisons and weakness in a number of sales and trading areas for the second quarter.

Hecht forecast a quarterly loss of $1 a share for Merrill, compared with his earlier view of a profit of 21 cents a share, saying the marks on its collateralized debt obligations and mortgage-related exposures would be more severe than prior expectations. Reuters

Nine months ago Merrill was being hailed as the most forthright of the bulge brackets, with many claiming they had taken their medicine. Wrong. Of course, John Thain needs to raise capital in one way or another; will he go back on his mid-April promise?

April 17th
“For those of you who like to blog,” said Thain, “We do not have any plans to raise any additional common equity and [chief financial officer Nelson Chai] actually agrees with that.”

Thain might have left the door open to other forms of capital raising, but it would be rather amusing if he relents, much like Erin Callan. The clock is ticking, and with an equity raise becoming more prohibitively expensive by the day, Thain is in a bind. On June 13th he hinted their stakes in Bloomberg LP and Blackrock Inc (BLK-NYSE) could be monetized, but they are not in a strong negotiating position vis a vis Bloomberg and Blackrock has traded heavy in anticipation of a full or partial sale. While Goldman is giving Blackrock's stock a boost today with constructive comments, the impact could be short-lived.

Of course, raising fresh capital might not be so easy, even if Thain decides to move forward:

“The window for capital-raising is closing,” Brad Evans, a portfolio manager for Heartland Advisors, told the newspaper. “Investing in a bank right now means investing in a large portfolio of loans that are essentially a black box.”

While Evans’ comments were geared more toward regional banks than bulge bracket brokers, the sentiment no doubt carries over to all things financial.

Judgment Day for financials was delayed as the rating agencies held off on downgrading Ambac and MBIA’s ratings until last week, but the cracks in the dam are becoming apparent to even the most casual observers of the financial markets, and the race to the bottom is on.

Or course, some firms, like Goldman, will emerge stronger, given their competitors are being vaporized. The landscape for the brokers should become much clearer by Halloween, but the next few months might be best viewed with your head in the sand.

Nobody ever said capitalism was pretty. But it sure is getting a stern test.

_____________________________________________________________

The water won’t be safe until the capital injections reach an end. And there is certainly some confusion over posture regulators are taking. This piece from Tech Ticker is relevant, but would have been more timely, and useful, several weeks or months ago.

June 23rd

____________________________________________________________

Update:

Charlie Gasparino addressed Merrill’s options late in the day, apparently they will have to work with Blackrock, who has first right of refusal on Merrill’s stake in the firm.  No doubt this has been overhanging Blackrock’s stock, and if they can resolve the situation with Merrill, it could be a win-win, with Blackrock’s stock likely to trade higher on the news, should it be resolved to everyone’s satisfaction.

____________________________________________________________

BofA sees $3.5 billion writedown at Merrill, $7 billion at UBS
Reuters

Investors Hide as Banks Come Knocking
Wall Street Journal

Thain Sets Bloggers Straight
1440 Wall Street
----------------------------------------------------------------------------------------------------------
The content contained in this blog represents the opinions of 1440 Wall Street. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author. No Position

Comments:

<< Back to main