Merrill Lynch's lapse
Posted
Oct 05 2007, 04:56 PM
by
Matt Koppenheffer
Even with many of the largest banks and investment banks reporting disappointing earnings and major portfolio write-downs, the flop that Merrill Lynch is expecting for its third quarter is impressive.
In a press release today, the company revealed that it would take a $4.5 billion (that's net of hedges) write-down on CDOs and subprime mortgages, and nearly another $1 billion on financing provided for non-investment grade lending -- including loans for LBO deals. The losses will push Merrill into the red for the quarter to the tune of $0.50 per share.
So many may find themselves scratching their heads as they see Merrill's shares up over 2% today. In fact, the firm's shares are up over 7% since the close last Friday. The news about Merrill's losses is certainly no secret -- there are plenty of other articles out today screaming the write-downs in the headlines.
Then is the press release some odd flavor of good news? Well, not exactly. The reason why we're not seeing catastrophic movements on the part of Merrill, Citigroup, Deutsche Banks and others that have revealed major write-downs is that the markets have been preparing themselves for this for months now.
Impatient as always, Mr. Market hates waiting until news actually happens and so is always trying to read the tea leaves and guess what might happen in the future. In the case of the banks and investment banks, midway through the year investors started getting very bearish about the problems the group would face from the subprime meltdown. Then bearishness fired up further in August when the credit markets started locking up.
For Merrill, this meant a 25% drop in its shares between mid-May and August as investors estimated what the troubles might mean to Merrill's numbers. Now that the losses are being tallied, it's time for investors to start evaluating whether Merrill's big price drop was enough to factor in its losses or if the market has been too harsh.
(Full disclosure: I do not have any financial position in any of the stocks mentioned)
