Once again, the analysts are trailing the market. Merrill Lynch has upgraded Morgan Stanley to “buy” from neutral:
13 Oct 2008 14:12 EDT *DJ Morgan Stanley Raised To Buy From Neutral By Merrill Lynch
It’s just a matter of time before the others now follow. Meanwhile, we hear that Trump Entertainment has been downgraded. That’s probably another of those “just a matter of time” scenarios too.
As we predicted last night, shares of Bank of America are falling today after it announced that it was acquiring Merrill Lynch. The stock is off around 15 percent this morning. Because the acquisition of Merrill is an all stock transaction, with Merrill shareholders receiving 0.8595 shares of Bank of America for each share of Merrill, the stock movements mean that the market is now pricing the shares of Merrill significantly below the $29 per share first announced. Bank of America is now paying $24.63 for a share of Merrill.
Merrill shares continue to trade at a discount from Bank of America’s, although you have to be cautious about reading too much into merger spreads in all stock deals. This could be a bet on further declines of bank of America stock, or a pricing of risk that the deal will not actually close. Alternatively, it could simply reflect the presence of speculative arbitrage in the market.
That’s the claim of a Merrill Lynch banker who has written to Here Is The City, a financial news and gossip site based in Britain.
“I wonder what the implications really are, and am concerned that the freeze itself is just a marker which firm executives are putting down to signal that there are much tougher times ahead,” the banker writes.
The banker emphasizes that he has not “got it in for my firm” but speculates that the hiring phrase will last much longer than the anticipated 20 weeks. “[I]t will remain difficult to obtain additional headcount throughout 2009,” he writes.
The entire letter, including the requisite Stan O’Neal bashing, is on Here Is The City. (Thanks to Hilary Lewis at the Business Sheet, who brought this story to our attention.)
The euphoria in financial stocks yesterday seems to have been largely built on the idea of that “cathartic vomit.” The idea was that by writing down assets once again and selling off CDOs to Lone Star for 22 percent of their original value, Merrill Lynch had finally purged itself of the junk on its books. Never mind that we’ve heard that particular tune three times before. Everyone wanted to dance to it again.
But the morning after lots of people are having second thoughts. For starters, Merrill Lynch’s financing for the deal is troubling. They put up 75% of the money used to buy the assets, and the loan is apparently non-recourse. This means that if the CDOs drop too much in value, Lone Star can basically put them back to Merrill rather than pay off the financing.
In a report entitled “On Second Thought … ” Bank of America analyst Jeffrey Rosenberg explained that “Merrill now finds itself effectively in the position of having sold off its upside but retaining its downside.”
In other words, this alleged sale seems like yet another sleight of hand by Merrill’s management, a way to move the CDOs from one column on the balance sheet to another while no one is looking.
Merrill CDO sale not as good as it looks: analyst [Reuters]
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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We’re snacking this morning on the delicious irony that Merrill Lynch’s stock is getting hammered by rumors that it will announce new losses from Alt-A mortgages on the same day that analysts at Merrill Lynch cut their earnings outlooks for several large regional banks, and predicted dividend cuts from Bank of American and Wachovia. It’s credit crunch for breakfast!
Tags: Excel, Microsoft, Oopps
While many on Wall Street focused on the second quarter earnings of Lehman Brothers, they may have overlooked something odd that occurred behind the scenes. In connection with this morning’s earnings report, Lehman issued a detailed financial appendix breaking down its balance sheet by various asset groups. But behind the numbers there was another story–the story of a persistent bit of data that no one caught until it was too late.
More after the jump.
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One thing we’ve noticed recently is that the chorus of dissenting voices inside of Merrill Lynch has quieted in recent months. In the weeks after John Thain replaced Stan O’Neal as chief of Merrill, the securities firm was bitterly riven as executives scrambled for authority (and, of course, money…always money) under the new regime. But by all accounts Merrill is a quieter, happier place these days.
This is a testament to the effectiveness of Thain’s leadership. But we wanted to know: how did he do it? After the jump, we explain why we think something Thain said on Wednesday indicates what happened.
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