Earnings Reports

Merrill Lynch Moves Its Earnings Call

Merrill Lynch announced that it was going to move its earnings conference call from a pre-market 8 am time slot to after the market closes. Of course, in the current climate this prompted all sorts of concerned or gleeful whispers (depending on whether you were long or short Merrill). The last Wall Street firm to opt for a post-market call was…wait for it…Bear Stearns.
So what’s the real story? Is this a sinister development portending dire earnings news or does Merrill just hate its analysts and wants them to burn the midnight oil? After jump, BreakingViews.com‘s gets to the bottom of Merrill’s time slot switcheroo.

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  • 27 Nov 2007 at 10:51 AM
  • Barclays

Is Barclays Lowballing Itself On Purpose?

Barclays said today that in spite of writedowns due to subprime, etc., it predicts that 2007 will exceed last year’s profit, though just barely. Everyone (traders especially) thinks this is good news, and if we were talking about Citi it definitely would be, but making a pound more that least year means that Barclays earnings will have moved an insignificant 4 percent, compared to the gigantic growth seen in the last four years. Barclays’s estimate is “broadly in line with” analysts’ average estimate of about $14.7 billion (7.1 billion pounds), news which move the stock as much as 6.2 percent in London trading. Interesting. What I’m getting at is that Barclays is trying to cover up a record 75 percent increase in profit for 2007, so that whenever that actual numbers come out, they can say they “beat” analysts’ expectations, and continue to recover from a 7-week losing streak. That or they’re just trying to cushion the blow for the inevitable admission that those rumors about a $10 billion writedown were true. I can’t decide which.
Barclays says on track for 4 pct 2007 profit rise [Reuters]
Barclays May Match 2006 Profit This Year [Bloomberg]

mozilo.jpgDespite a quarterly loss of $1.2 billion, compared to a profit of $647.6 million last year, Countrywide’s shares rose the most since May 2000 on the wishful thinking that the company will be profitable in the fourth quarter. Morgan Stanley’s Kenneth Posner said that his team feels “substantially more confident in the company’s liquidity after [their] first glance at the results.” Peter Plaut, an analyst at Sanno Point Capital Management even went so far as to call the mortgage lender “a survivor,” and congratulated it for turning results that “were not as bad as market participants anticipated.” President David Sambol characterized the Q3 loss as an “earnings trough,” and predicted that fourth-quarter profits could be anywhere from 25 to 75 cents per diluted share.
Countrywide Posts Loss, Shares Advance on Forecast [Bloomberg]
Countrywide Gets Off the Mat [MarketBeat]

JP Morgan’s Commodities Trading Troubles

Almost lost among the widespread relief that JP Morgan Chase didn’t suffer a Citigroup or Bank of America like third quarter was the poor performance of the bank’s commodities trading operations.
It’s hard to believe, but it was just last year that Jamie Dimon was telling analysts that bulking up its commodities and asset-backed securities trading would diversify the banks trading business and smooth out volatility. In March of this year, JP Morgan’s co-head of investment banking, William Winters, was telling investors that the bank expected energy trading to add somewhere between $100 million and $160 million in annual earnings in 2007. As late as June, JP Morgan was announcing plans the expand its commodity-trading staff by more than 30 percent, or 40 more people.
The plan hasn’t quite worked out, and now might be a good time to ask what happened. Last year, the plan seemed to be working. The bank scored a windfall by scooping up the assets of Amaranth and then flipping them to Citadel. But shortly afterwards it lost several top commodities traders.
Parker Drew, who was recruited in 2005 to run the gas trading business after his own hedge fund folded, left the bank at the end of 2006. George Taylor, who ran the bank’s energy business, left in May 2007, and shortly after words Trevor Woods, who had replaced Drew, left. Three others also followed Taylor out the door.
At the time of these high level departures, there was a lot of speculation that they were connected to the bank’s role in the collapse of Amaranth. JP Morgan’s was the clearing firm for energy traders at Amaranth, and it’s margin calls reportedly helped bring the hedge fund down. When the bank then bought Amaranth’s positions as it struggled to meet margin calls and return money to investors, many raised an eyebrow at how the bank seemed to be profiting from the troubles of its client. There was speculation that the bank may have decided that some of its traders were on too many sides of Amaranth’s collapse.
This was hardly an undisputed position, however. The bank said the departures had nothing to do with Amaranth. Others say the traders left because they were unhappy with their compensation following the massive profits the desk made for the bank in 2006.
In June, the bank hired Foster Smith from Deutsche Bank to head U.S. power and natural-gas trading. Deutsche was tied with JP Morgan as the fifth largest energy trading bank in 2006. It’s clear that the energy trading operation’s performance has been a huge disappointment for the bank, and that Smith seems to have stepped into a mess. We haven’t found solid numbers on the energy trading performance, but JP Morgan describes it’s commodities trading performance—a broader category—as “weak.” That’s still not much solid guidance about what went wrong but it’s a starting place.

How Bank of America Got Credit Crunched

As we expected, Bank of America isn’t taking a huge hit this morning from its earnings disappointment. It’s down about 3.5% right now but still holding above the lows it hit in early August. Lots of people seem happy to concentrate on the positive signs and to write-off the losses as a function of “this summer’s credit crunch.”
Well, we’re not going to spend all day on this but we thought we’d spend a bit more time dwelling on the negative. In particular, we’re fascinated by how B or A’s corporate lending business and credit market related sales and trading illustrate just how bad the credit crunch hit the banks in the third quarter. After quickly flicking through the supplemental financial slides, here are a few points that stuck out.
Lower lending revenues and growth in risky and non-performing corporate loans. Revenue from corporate lending shrank from $179 million for the third quarter of 2006 to $175 million in this quarter. Risky, so-called “criticized” corporate loans grew from $1.4 billion to $1.5 billion. As a percentage of all corporate loans, however, this actually represents a slight improvement from 2006’s third quarter, from 2.12% to 1.98%. They can’t say the same for non-performing corporate loans, which grew in absolute terms—from $145 million to $269 million—and as a percentage—from 0.44% to 0.62%.
A Third Quarter Reversal. B of A’s lending balance sheet was steadily improving through the first half of 2007 but made a sharp reversal in the third quarter. To really get a sense of how the credit crunch hit the bank, it helps to look not just at the third-quarter to third-quarter comprables, but to see what happened from the second to the third quarter of this year. Non-performing corporate loans, for instance, grew ten-fold, from $21 million in the third quarter of last year to $269 million.
Sales and Trading Revenue Falls Off A Cliff. Revenues from sales and trading in structured products and credit products made a sharp reversal in the third quarter, creating huge losses. B of A made $521 million from structured products sales and trading in the second quarter of this year, and lost $569 million in the third quarter. Losses in credit products sales and trading were so severe that they wiped out all the year-to-date gains from this business for B or A. To look at it another way, in the third quarter of this year B of A lost more than 3.5 times what it made in the third quarter of last year from trading and sales in credit products. Even if it recovers to last year’s revenue levels in the fourth quarter, it will barely have made any money from this business in 2007.
93% Decline in Profits for Investment Banking. Profits at the corporate and investment-banking division were decimated. In the third quarter, they shrunk to $100 million from $1.43 billion a year earlier. That’s a 93% drop. We’d ask why they are even in this business but it might be too late for that. On a revenue basis, they almost aren’t. Wonder how much they’ll pay out in bonuses to their investment bankers?
Smaller Than Expected LBO Mark Down. It would be nice to know more about how the investment banking unit calculated the mark down on the value of its LBO financing. They’re reporting a mark down of just $247 million. They are the number 2 lender for leveraged loans, so it’s surprising that they haven’t taken more of a hit in this area. Analysts at Citigroup had predicted a writedown of as much as $700 million. It’s hard not to wonder whether there might be some rosy assumptions in their mark downs. But then again, with TXU loans pricing close to par, maybe this business isn’t in for the hit many predicted.

Bank of America posted terrible quarterly results this morning, managing to achieve even worse results than most analysts had expected.
Perhaps even more distressing than the actual results is the vagueness about what caused the losses. Lots of blather about “dislocations.” We should probably be grateful they didn’t actually say that the markets were “misbehaving” or mention a “28 sigma event.” Still when talking about this stuff Bank of America sounds like a quant fund manager in mid-August begging investors not to send in redemption notices.
The bank says it took a $607 million loss in trading revenue “due principally to the breakdowns in traditional pricing relationships, which made hedges ineffective, and the widening of credit spreads.” Which we take to mean that they were massively short volatility. You can call that a hedge, we guess. But keep in mind that when you ask a whore in Beijing what her name is, she almost always replies, “I make a name for you. What you want to call me?”
The results also imply that financial engineering may have passed the point of human comprehension. Does anyone understand how to trade CDOs? If so, they don’t work at Bank of America, which took a $527 million hit.
Just about the only bright(ish) spots on the earnings report was that Bank of America didn’t take too large a hit from losses in buyout loans. And, of course, they aren’t run by Chuck Prince. (As a side note, however, if B of A takes a large hit from the earnings report, which is might not since already people are saying trading revenues are unpredictable and might go up next quarter, it could lose it’s place just ahead of Citigroup in the race for who has the bigger market cap.)
And, hey, who knows. Maybe The Entity will make everything okay.

Bank of America Third Quarter Earnings Per Share Decline 31% to 82 Cents
[PR Newswire]

Business As Usual At Bear Stearns

bearstearns.jpgBoth Goldman Sachs and Bear Stearns beat analyst expectations today: the former, in its unfailing ability to emerge from a building on fire while everyone else burned to a crisp, the latter, in its unfailing ability to push the bounds of failure. BS posted its biggest decline in over a decade, with third-quarter net income dropping 61 percent to $171 million ($1.16/share), from $438 million ($3.02/share) last year (total net revenue fell 38% to 1.3 billion, from $2.1 billion quarter on quarter).
In a press release, Jimmy Cayne made mention of “difficult securitization markets” and “high volatility,” though chose not to name check the pair of pink elephants (Bear Stearns High-Grade Structured Credit Strategies Master Fund Ltd., Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage Master Fund Ltd.) that gifted the firm with $200 million in losses.
Taking a cue from the CEO’s precipitously falling bridge scores, shares of BSC dropped 29% this year (though the stock was up 2.31% ($2.67) to $118.31 by noon today, after the company announced that it would be smooth sailing from here on out).
Matt Albrecht, an analyst at Standard & Poor’s recommended a sell, but ever the glass half full kind of guy, spun a silk purse from a sow’s ear, noting: “If there’s a market turn, Bear Stearns has the most upside to go because its share price has dropped so much.” (Don’t even act like you’d pass up the chance to use such a fantastically old-timey proverb, given the opportunity.)
Bear Stearns Net Drops Most in Decade on Credit Rout [Bloomberg]
Press Release [Bear Stearns]

Is it even possible for an analyst to correctly estimate the earnings of a secretive investment bank like Goldman Sachs? If so, someone should tell the analysts how to do it.
Goldman blew them away again this morning. It not only beat expectations. It reported Wall Street’s only profit gain, as Bloomberg reported this morning. A good piece of that profit gain was thanks to the sale of Horizon Wind Energy LLC, a Houston based alternative energy company that Goldman bought five years ago for $150 million and recently sold to a Portuguese power company for $2.1 billion.
Ironically, the man behind that purchase was Mark McGoldrick, who headed Goldman’s special opportunities group. Earlier this year, McGoldrick left Goldman after becoming convinced that the firm wouldn’t adequately compensate him or his group for the outsized gains they were earning.
This morning’s earnings report is a nice little birthday present for Goldman topdog Lloyd Blankfein. As he blows out his candles on his ice-cream cake this afternoon, Blankfein should at least make a wish for McGoldrick, the man who helped make this birthday exta-special. Oh, and maybe wish a little something for whoever it was who shorted mortgages at Goldman and turned this summer’s subprime-led credit crisis into a profit opportunity.
Goldman Profit Rises 79 Percent as Gain Boosts Trading Revenue [Bloomberg]
Goldman Sachs 8-K [SEC]