Time for Thain to End the Pain

Although no one has ever accused Merrill Lynch (MER-NYSE) CEO John Thain of being a deer in the headlights, he certainly seems to be taking his sweet time deciding which avenue to take in his anticipated capital raise.

Lehman Brothers is the latest firm to take a swipe at Thain and Merrill:

Merrill Lynch & Co will likely incur $5.4 billion of write-downs in the second quarter, mainly from its exposure to bond insurers, said an analyst at Lehman Brothers.

Lehman analyst Roger Freeman raised his write-down view by $3 billion for Merrill, making his estimate the highest among Wall Street analysts. Analysts have to date expected write-downs to range from $3.5 billion to $4.2 billion.

Merrill is likely to have to raise capital if it does write down these positions, because the charges will leave Merrill Lynch with low capital levels relative to the industry, said Brad Hintz, analyst at Sanford C. Bernstein. Reuters

Picking a bottom in the brokers might be a decision that is best tabled. I am still working on the assumption that the temporary lending facilities to the brokers will be pulled by mid-to-late September, and the brokers have only 90 days to find the money, whether through asset sales or additional capital raises. Until the process is complete, the stocks will continue to be radioactive.

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Merrill’s Painful Slide

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His hands are a bit tied with regard to an equity raise:

Merrill cannot easily issue more common equity, because investors who gave money to Merrill in December and January must receive substantial extra compensation if Merrill raises additional capital at too low a price.

But the market is really turning the knife on John Thain. When it became apparent that selling all or part of Merrill’s stake in Blackrock Inc. (BLK-NYSE), might be his best option, the stock quickly took a header, trading down on heavy volume over the past week and a half.

That is how is goes on Wall Street; the reaction was even slower than I would have expected, and the stock remains under pressure.Thain’s weekend will likely be spent considering his dwindling options.

Looking for a snap back rally in Blackrock? A $20 point ramp in 2-3 days in a reasonable assumption once Merrill’s decision is reached. But the overhang is killing the stock, and the big question is, from what price will the $20 point snapper take place?

Blackrock was an easier short than Merrill, but a wicked bounce is likely out there, somewhere.

Will it come Monday? Tough to say, but if Thain waits until Merrill’s earnings release in July both stocks will continue to twist in the wind.
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Keep your eye on Blackrock...

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Update: Charlie Gasparino came on about two hours after I posted with his update on Thain’s options:

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Merrill may write down $5.4 billion in Q2: Lehman
Reuters

Previously...

June 23rd
Merrill Lynch Springs More Leaks as Stock Sinks to a 52-week Low
1440 Wall Street
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The content contained represent 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 in securities mentioned

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