Today’s Topics: Stock Market Volatility, Merrill Lynch, GSE’s, Corporate Governance
…”got a whale of a tale to tell you lads…whale of a tale or two…about the whopping fish on a night like this…and it’s all true…I swear by my tattoo.” Sung by Kirk Douglas in 20,000 Leagues Under the Sea. If that doesn’t accurately describe this market TB has no idea what does. You cannot believe anything you hear…or see…it is all smoke and mirrors and the worst part is people holding themselves out as experts making the stupidest of statements! It would be far better for us to have sustained double digit rallies than to be down 200 on Wednesday and up 300 on Friday. All of this on the lowest prolonged volume of the year (averaging just 1.3B shares since July 25th. Barron’s Alan Abelson cites Merrill’s David Rosenberg who noted:
“…since the current bear market began a year ago, there have been half a dozen of these muti-hundred point bursts upward, but interestingly, there were none – zip – during the 2002-2007 advance that preceded it. Be aware, too, in case you’re not the counting kind, that there have been 10 days in the current down cycle in which the Dow closed down 300 points or more and, in the bear market of 2000-2002, there were nearly twice ass many 300-point up sessions as 300-point down sessions.”
Abelson then goes on to report that Merrill’s asset sales are not all they are hyped up to be and were actually aimed at sanitizing the balance sheet with little shareholder value: the sale of their 20% interest in Bloomberg PLC to the company for $4.3 billion was for just $110 million in cash (TB adds it is about 25% of its quarterly dividend), and the rest in notes with maturities of 10 to 15 years.
But wait, it gets better, the sale of the $20.6 billion in paper of dubious quality was billed at 22 cents on the dollar, BUT Merrill is financing 75% of the purchase price with the only recourse being the paper itself! Barry Ritholtz estimates the actual sales price works out to 5.5 cents on the dollar…wouldn’t they have been just as well off to hold it? (TB learned long ago to be leery of companies whose sales are suddenly boosted but the receivables jump up accordingly as in that case the recourse is the receivables too.
This comes at a bad time for Merrill…along with Citi and UBS and soon probably Wachovia who are being forced to buyback their auction rate securities…which are tax-exempt and given their tax loss carry forwards those rates…some at 2% or less and some at zero…are a bad utilization of capital (but better than issuing stock and continuing to pay the dividend which by TB’s calculation is $540 million a quarter as Merrill is doing). TB can’t get off Merrill’s case as not only the asset sales which we were told by CEO John Thane (who is no Jamie Diman), their capital needs were met yet within a week they were back at the well for $8.5 billion…so? they raised it but not without triggering the clause in the prior sale that said if stock was sold within one year at a lower price the stock price would be adjusted to it thus they received a payback of hundreds of millions (and they are receiving the aforementioned dividend which when you are losing money is actually a taxable return of capital isn’t it?), they gratuitously plowed that money back into Mother Merrill which further dilutes shareholder equity…you have to wonder!
One has to wonder about all that credibility Thane was supposed to bring to the table…being squeaky clean is not enough and he never had the financial background (although he came from Goldman to the NYSE…his expertise was in operations and computers).
Meanwhile FNM slashed its dividend 86% from 35 cents a share and FRE cut theirs 80% earlier in the week (TB missed this as he was out of town and it didn’t show up because the board has not yet declared the dividend for the quarter). TB does not like coincidences and one has to observe there was a slight (?) nudge from the regulators to cut the dividend? One would think…and hope! Note that their preferreds have clauses that they may be forced to withhold the dividend by regulators.
We are on a learning curve of epic proportions…one we have placed ourselves in, or more accurately have been placed in by the very people who were supposed to protect us: regulators and boards of directors. A little less backslapping and more attention to business at those board meetings would have prevented this grief.
A friend in London sent a piece by ousted CEO Phillip Purcell who was replaced by John Mack…TB believes that what Purcell says is of importance to us all and confirms what TB has said all along: that the problems began with investment banks when they shifted from partnerships to publicly held corporations…as in other peoples money! One of the very first of these was Merrill Lynch. Another area is compensation…based on current performance and thus revenues, not on long term profitability. Three other areas cited are: leverage…what adds to the bottom line in an up markets detracts even more on the way down; recurring profits…in other words should capital be allocated to an area just because it is ‘hot’ and profitable at the moment?; board responsibility to assess the options rather than leave strategy up merely to the CEO who has a much shorter time horizon.
TB believes Morgan Stanley may have replaced the wrong man…although it didn’t appear that way at the time…also as it turned out MS was the canary in the coal mine. Purcell’s main problem is he came from the Dean Witter side of the firm whereas Mack was from the MS institutional side. Lastly, while Purcell directed his comments to the investment banks, it applies even more so to the commercial banks who without Glass-Steagall or any meaningful regulatory restraint since 1999 have used the assets and standing of the commercial side of the bank to leverage into areas that have destroyed confidence in their financial condition. A Bloomberg top story today cites how high wealth investors are exiting UBS in droves…due to mounting losses (but also TB believes to fears of being swept into IRS audits due to the parents concealing assets).
If you are like TB, you are not amused by the Olympics…from China or otherwise…it is nothing but big corporate hype sprinkled with athletic events. Surprisingly, Meet the Press took time from its Sunday political banter to interview Treasury Secretary Paulson who agreed with Dubya’s assessment of the condition of the financial sector at that fundraiser where he asked the cameras be turned off…hasn’t everyone learned by now nothing is off the record? Poor John Edwards knows this and finally admitted it…he pulled a Gary Hart and thankfully for the Dems he is not a contender…and right before the convention too! One thing about the Olympics however….nobody…ever…will be able to recreate those opening ceremonies…unless it comes to China again. All TB could think of was poor Greece who is hosting the next one. TB’s advice: don’t even try…go back to basics as the Olympics were originally intended…of course the sponsors won’t go for this…by the way they are exiting in droves…say they will not sponsor the next ones…the big winner? NBC, the GE sub who also owns CNBC sadly. Someone please tell those reporters that that is what they are…not like Erin Burnett who on Chris Matthews referred to the Treasury Secretary as Hank Paulson…are they equals?…apparently in their eyes.Have a terrific day!
TB
Sparky said
Very Well Said TB!!
It is quite obvious that you are not only very up to speed on current events, but also well aware of the connections between all these events.
Boy, is the US economy a mess!
Sparky