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In going through the financial news stories on various sites tonight, this one from the NY Times struck me as particularly insightful.  Lets see what they have to say about the state of the financial institutions….

The story starts with this: Somehow, $4.4 billion just evaporated at Merrill Lynch. Less than two weeks ago, Merrill Lynch valued the toxic mortgage investments on its books at $11.1 billion. Now, it is selling those investments for $6.7 billion — and financing most of the purchase to boot.

So two weeks ago, Merrill Lynch claimed that the value of their mortgage holdings (the bad ones anyway - they haven’t disclosed all of them) were worth $11 billion.  Today they’re supposedly worth only $6.7 billion.  That’s $4.4 billion utterly gone, destroyed by the decrease in value of the underlying assets.

I say “supposedly” because you haven’t heard the best part yet - Merrill is financing $5 billion of the sale of these assets (which are worth 40% less than two weeks ago) to Lone Star Funds.   I can’t find where I read it right now, but I think Merrill owns a big part of Lone Star Funds.  If this is true, they’re selling these toxic CDO’s to themselves in order to get them off the books.  Not good.

Here’s something from FoxNews on the story:  Lone Star Funds, a Dallas-based distressed-debt investors based run by John Grayken, will acquire asset-backed securities with a nominal value of $30.6 billion for $6.7 billion. The sale will help cut Merrill’s exposure by $11.1 billion from its level on June 27, leaving $8.8 billion of these securities on its books.

That’s 22 cents on the dollar.  The NY Times story linked above puts it into perspective: Executives at Citigroup, JPMorgan Chase and Bank of America began reviewing the bundles of mortgages, known as collateralized debt obligations, or C.D.O.’s, that their companies hold on their books. Those companies may have to lower their valuations, and take additional charges, if their assets are similar to those sold by Merrill.

Of the companies they mentioned, I personally think Citigroup is the one most likely to pull a Bear Stearns and disappear.

The NY Times story also said: Still, financial stocks rallied on Tuesday, as investors hoped the deal at Merrill signaled the troubles plaguing banks’ balance sheets might be coming to an end.

Anyone want to bet on that?  How many times are these analysts going to say that the troubles are over, that this is the kitchen sink quarter, that this must be the bottom?  I can find dozens of examples over the past 10 months.

In just one month, Merrill had to drop the value of some of their CDO’s from $30.6 billion to $6.7 billion.  What does that say about the honesty of their accounting?  Damn near everyone knew they’d have to write these assets down last year - but Merrill tried to delay their day of reckoning.

Regardless of the way the market reacted today, there’s no way Merrill is worth more today than last week.  But that’s what the stock price says.

I am forced to conclude that many investors are stupid, that they are betting on a short term gain, or that they are smoking crack - because the numbers just don’t add up.

If I’m right Merrill (which closed today at $26.25) will be lower a week from now after investors have had time to understand what this really means for Merrill.  Bank of America ($32.22) and Citigroup ($18.46).

One of these days I’ll have the guts to short individual stocks and make some money off of these things that should be obvious to everyone, but I’m chicken.  I have no position in any of the stocks mentioned in this post.

There’s a lot more to say regarding the market and financial stocks, but I’m calling it a night.  Stay tuned.

gk

I read an article on Business Week saying that the dollar may be at a bottom.  Huh? 

I read the entire article, but I don’t see anything that suggests we’re going to quit borrowing $1.45 billion per day - and that’s at the national level alone.  Coupled with the American consumers’ ability to live beyond their means, and we continue to spend more than we produce.  Individually, and at the city, county, state, and national levels.

 Why’s that bad?  Because someone is forking over money when you charge something on your Visa card, someone is paying when you take out a second mortgage, someone is paying when you do a no money down deal on a new car….  Where is the money coming from?

Overseas.  We (Americans) are flooding the world markets with debt instruments.  It doesn’t matter if it’s  bonds sold by the US Government, or bonds sold by Citigroup, or bonds sold by AMBAC, someone has to have the money to lend - and that someone is overseas investors.

As long as “helicopter Ben” keeps printing money, and as long as Americans overall refuse to live within their means, the dollar will continue a downward spiral.  There will be days and weeks (like the last couple of weeks) in which the dollar rises, but nothing has changed regarding the long term fundamentals.

These articles where pundits are calling a bottom in the dollar remind me of the financials since last fall.  How many times have we heard that “this is a kitchen sink” quarter?  “All the bad news is out there now” and “this is the end of the writedowns” has been said countless times by the financial press.

Here’s the bottom line:  The financials ain’t done writing off losses, and the dollar ain’t done falling. 

gk

It’s been done to death today, but a quick scan of the headlines tonight will make you think everyone is in on a huge April Fool prank.  UBS wrote down $19 billion and Deutsche Bank wrote down $4 bilion, so investors bought everything in sight, sending the market up almost 400 points to close at 12,654.

Everyone is once again saying that the worst is over, that they’ve finally accounted for all the losses, and that things are going up from here.  I hate to be the bearer of bad news, but they’re wrong - and it’s not the first time.

Most people probably remember the Bear Stearns meltdown, the AMBAC and MBIA fiasco’s, the comments from Standard and Poors about the worst of the writedowns being over - and the subsequent surges in the markets after each of them.  But you may not remember that this started last year.  A quick refresher….

Here’s a NY Times story from October 2nd, 2007 

The country’s biggest bank, Citigroup, will write off $5.9 billion in the third quarter, causing its profit to drop 60 percent from a year earlier. Europe’s biggest bank, UBS, said it had written down $3.4 billion in the value of mortgage-backed securities and would suffer a loss in the quarter. Other banks, including Merrill Lynchand Bank of America, have issued similar warnings.

Investors took the disclosures as a sign that the worst may be over for the banks and that any losses may be contained. 

The Dow closed at 14,087, and the S&P 500 closed at 1546 on October 2nd.  The Dow close was a record high.

Here’s another NY Times story from November 14th, 2007.  According to the story:

Investors were buoyed by comforting words from top executives at Goldman Sachsand JPMorgan Chase, who said they were confident their companies would emerge relatively unscathed from the subprime mess. Lloyd C. Blankfein, Goldman’s president, said his bank would not take more write-downs on mortgage-backed securities, sending the bank’s stock up 8.5 percent to $233.04 a share.Shares in JPMorgan rose 6.3 percent.

The Dow closed at 13,231, and the S&P 500 closed at 1470 on November 14th.

Now comes todays’ news.  Stocks Surge on Hopes Financial Woes Are Easing is the NY Times headline today.  Another big surge in stocks with everyone thinking that the worst is over….

It’s not over.  I don’t think it’s even halfway over.  All those ARM’s and Option ARM’s that were taken out in 2005 through 2007 have yet to reset from their teaser rates. 

When they do (throughout the next 2-1/2 years)  there will be more losses.  Many more losses.  Much bigger losses.  And stocks will need to fall to reflect those losses.

gk