Just like our KLCI market. Despite bad news from Merril Lynch (see news below), DJIA is holding up with a doji.
Merrill Posts Loss on Mortgage Writedowns, Cuts Jobs (Update8)
By Bradley Keoun
April 17 (Bloomberg) -- Merrill Lynch & Co. posted its third straight quarterly loss and said it will cut about 3,000 more jobs after the credit-market seizure forced the investment bank to write down about $6.5 billion of debt.
The smaller-than-estimated charge helped push Merrill shares up as much as 4.7 percent. Analysts including Roger Freeman of Lehman Brothers Holdings Inc. had predicted markdowns of as much as $8 billion. The first-quarter net loss of $1.96 billion, or $2.19 a share, compared with earnings of $2.16 billion, or $2.26, a year earlier, Merrill said.
It's ``not really a disappointment even though they missed on the earnings line,'' said Jeffrey Kleintop, chief market strategist at LPL Financial Group in Boston. ``This is well within the range of expectations.''
Chief Executive Officer John Thain, who joined in December, said today he's ``optimistic'' about the firm's prospects for the year, following a ``more difficult next couple of months.'' His comments echo remarks by Jamie Dimon, his counterpart at JPMorgan Chase & Co., who said yesterday that the credit crisis is more than half over. Richard Fuld, CEO of Lehman Brothers, Goldman Sachs Group Inc. head Lloyd Blankfein and Morgan Stanley chief John Mack have offered similar assessments.
``We are probably not done with the writedowns and there's still concern about the overall economy, but most of the financials are giving an indication that they are getting a handle on it, and things seem to be easing up,'' Peter Dunay, chief investment strategist at Meridian Equity Partners in New York, said in a Bloomberg radio interview.
More Capital
Merrill, the third-biggest U.S. securities firm, gained $1.82, or 4.1 percent, to $46.71 in New York Stock Exchange composite trading.
Thain, 52, has sold more than $12 billion of equity to bolster capital and has overhauled risk-management since the company booked more than $20 billion of credit-market losses racked up by his predecessor, Stan O'Neal. Merrill's stock has fallen almost 50 percent in the past 12 months, trailing larger New York-based rivals Goldman Sachs and Morgan Stanley.
After repeatedly saying that Merrill didn't need to sell more equity to raise capital, Thain said on a conference call today with reporters that he's ``open'' to raising additional capital through a sale of preferred shares. He cited a $6 billion offering that JPMorgan completed yesterday.
Bond Insurance
The comments pleased investors who've been concerned that Thain and other financial-services executives underestimated their capital needs, said James Ellman, president of Seacliff Capital in San Francisco, California, which oversees about $150 million, including an undisclosed number of Merrill shares.
``You cannot have too much capital in the current environment,'' Ellman said. ``If he's saying they might consider, it means they have considered it.''
Merrill's first-quarter writedowns included $2.6 billion to account for the plummeting value of mortgage-related bonds including collateralized debt obligations. The firm also reduced the value of bond insurance contracts by $3 billion, and lowered the value of leveraged loans by $925 million.
The markdowns reflected in Merrill's net loss exclude a $3.1 billion drop in the value of securities held in the firm's U.S. banks. Those declines were classified as ``other comprehensive income,'' an accounting category for securities that Merrill expects to keep until they pay off at maturity.
Revenue Declines
Moody's Investors Service today said it may cut Merrill's credit rating for the second time in six months, citing ``deteriorating conditions in the mortgage market'' and the potential for $6 billion of writedowns in addition to those announced in the past three quarters. Last October, Merrill's rating was lowered one level to A1, the fifth-highest of 10 investment-grade ratings.
Merrill's credit-default swaps have climbed to 166 basis points from 131 basis points at the end of November, according to prices from Phoenix Partners Group and CMA Datavision. The swaps were trading as if the firm had a Moody's credit ranking of Baa3, the lowest investment-grade rating, according to the ratings firm's credit strategy group.
Credit-default swaps, contracts to protect against or speculate on default, pay the buyer face value if a company fails to adhere to its debt agreements.
Merrill's total revenue fell 69 percent to $2.9 billion in the first three months of 2008 from a year earlier. That included a 40 percent drop in investment-banking fees. The company's brokerage, the world's biggest with a network of 16,660 financial advisers, was the only major division to post a gain. Revenue in the unit increased 7 percent to $3.3 billion.
Investor Demands
Fixed-income trading revenue was negative $3.38 billion and equity-trading revenue was $1.88 billion, down from $2.39 billion a year earlier. Debt underwriting generated $231 million in revenue, down 61 percent, while stock underwriting revenue dropped 45 percent to $199 million.
``Merrill Lynch has to show profitability,'' said Ken Crawford, senior portfolio manager at Argent Capital Management in St. Louis, which owns about 160,000 Merrill shares. ``They can't have negative return-on-equity quarters and expect to make investors happy.''
Merrill's first-quarter loss contrasts with earnings at Goldman, Morgan Stanley and Lehman Brothers Holdings Inc. Even Bear Stearns Cos. eked out a profit of $115 million. A cash shortage forced Bear Stearns to sell itself last month to JPMorgan Chase & Co. for $10 a share. Bear Stearns traded at $158 as recently as last April.
Job Cuts
The investment-banking business is grappling with a plunge in fees from advising companies on mergers and stock and bond sales, as CEOs and corporate treasurers hunker down for a recession. Thain also has had to weather the departures of more than a dozen senior executives and traders.
The job cuts announced today are in addition to about 1,000 previously announced. The company eliminated about 650 positions at its San Jose, California-based subprime mortgage lender, First Franklin, and shed others by selling Merrill Lynch Capital, a lender to medium-size companies.
Merrill will record a $350 million charge in the second quarter related to the reductions, which will save an estimated $800 million a year, the firm said.
Under former CEO O'Neal, Merrill paid $1.3 billion for First Franklin in late 2006, just as the U.S. housing market peaked. First Franklin's workforce has been cut to 80 from 2,300.
The company's stock has fallen 17 percent since Thain became CEO Dec. 1, and yields on its 6.4 percent bonds due in August 2017 have widened to 2.8 percentage points over market benchmarks from 2.2 percentage points.
No Buyers
He's been stymied in his plan to liquidate the firm's inventory of collateralized debt obligations, which are securities formed by pooling mortgage bonds and other forms of debt. In January, he said the firm had marked the CDOs down to prices that ``are either saleable or represent good value.''
Today, he said very few of the CDOs have traded.
``There have been some funds put together to buy distressed-type assets, including these, but really none have traded,'' Thain said on the conference call with reporters. ``The buyers are probably waiting to see when is the right time to buy.''
Merrill's CDO holdings dropped to $26.3 billion at the end of March from $30.4 billion at the end of last year, according to the firm's statement, mostly because of writedowns.
Merrill is a passive, minority investor in Bloomberg LP, the parent of Bloomberg News.
To contact the reporter on this story: Bradley Keoun in New York at bkeoun@bloomberg.net.
By Bradley Keoun
April 17 (Bloomberg) -- Merrill Lynch & Co. posted its third straight quarterly loss and said it will cut about 3,000 more jobs after the credit-market seizure forced the investment bank to write down about $6.5 billion of debt.
The smaller-than-estimated charge helped push Merrill shares up as much as 4.7 percent. Analysts including Roger Freeman of Lehman Brothers Holdings Inc. had predicted markdowns of as much as $8 billion. The first-quarter net loss of $1.96 billion, or $2.19 a share, compared with earnings of $2.16 billion, or $2.26, a year earlier, Merrill said.
It's ``not really a disappointment even though they missed on the earnings line,'' said Jeffrey Kleintop, chief market strategist at LPL Financial Group in Boston. ``This is well within the range of expectations.''
Chief Executive Officer John Thain, who joined in December, said today he's ``optimistic'' about the firm's prospects for the year, following a ``more difficult next couple of months.'' His comments echo remarks by Jamie Dimon, his counterpart at JPMorgan Chase & Co., who said yesterday that the credit crisis is more than half over. Richard Fuld, CEO of Lehman Brothers, Goldman Sachs Group Inc. head Lloyd Blankfein and Morgan Stanley chief John Mack have offered similar assessments.
``We are probably not done with the writedowns and there's still concern about the overall economy, but most of the financials are giving an indication that they are getting a handle on it, and things seem to be easing up,'' Peter Dunay, chief investment strategist at Meridian Equity Partners in New York, said in a Bloomberg radio interview.
More Capital
Merrill, the third-biggest U.S. securities firm, gained $1.82, or 4.1 percent, to $46.71 in New York Stock Exchange composite trading.
Thain, 52, has sold more than $12 billion of equity to bolster capital and has overhauled risk-management since the company booked more than $20 billion of credit-market losses racked up by his predecessor, Stan O'Neal. Merrill's stock has fallen almost 50 percent in the past 12 months, trailing larger New York-based rivals Goldman Sachs and Morgan Stanley.
After repeatedly saying that Merrill didn't need to sell more equity to raise capital, Thain said on a conference call today with reporters that he's ``open'' to raising additional capital through a sale of preferred shares. He cited a $6 billion offering that JPMorgan completed yesterday.
Bond Insurance
The comments pleased investors who've been concerned that Thain and other financial-services executives underestimated their capital needs, said James Ellman, president of Seacliff Capital in San Francisco, California, which oversees about $150 million, including an undisclosed number of Merrill shares.
``You cannot have too much capital in the current environment,'' Ellman said. ``If he's saying they might consider, it means they have considered it.''
Merrill's first-quarter writedowns included $2.6 billion to account for the plummeting value of mortgage-related bonds including collateralized debt obligations. The firm also reduced the value of bond insurance contracts by $3 billion, and lowered the value of leveraged loans by $925 million.
The markdowns reflected in Merrill's net loss exclude a $3.1 billion drop in the value of securities held in the firm's U.S. banks. Those declines were classified as ``other comprehensive income,'' an accounting category for securities that Merrill expects to keep until they pay off at maturity.
Revenue Declines
Moody's Investors Service today said it may cut Merrill's credit rating for the second time in six months, citing ``deteriorating conditions in the mortgage market'' and the potential for $6 billion of writedowns in addition to those announced in the past three quarters. Last October, Merrill's rating was lowered one level to A1, the fifth-highest of 10 investment-grade ratings.
Merrill's credit-default swaps have climbed to 166 basis points from 131 basis points at the end of November, according to prices from Phoenix Partners Group and CMA Datavision. The swaps were trading as if the firm had a Moody's credit ranking of Baa3, the lowest investment-grade rating, according to the ratings firm's credit strategy group.
Credit-default swaps, contracts to protect against or speculate on default, pay the buyer face value if a company fails to adhere to its debt agreements.
Merrill's total revenue fell 69 percent to $2.9 billion in the first three months of 2008 from a year earlier. That included a 40 percent drop in investment-banking fees. The company's brokerage, the world's biggest with a network of 16,660 financial advisers, was the only major division to post a gain. Revenue in the unit increased 7 percent to $3.3 billion.
Investor Demands
Fixed-income trading revenue was negative $3.38 billion and equity-trading revenue was $1.88 billion, down from $2.39 billion a year earlier. Debt underwriting generated $231 million in revenue, down 61 percent, while stock underwriting revenue dropped 45 percent to $199 million.
``Merrill Lynch has to show profitability,'' said Ken Crawford, senior portfolio manager at Argent Capital Management in St. Louis, which owns about 160,000 Merrill shares. ``They can't have negative return-on-equity quarters and expect to make investors happy.''
Merrill's first-quarter loss contrasts with earnings at Goldman, Morgan Stanley and Lehman Brothers Holdings Inc. Even Bear Stearns Cos. eked out a profit of $115 million. A cash shortage forced Bear Stearns to sell itself last month to JPMorgan Chase & Co. for $10 a share. Bear Stearns traded at $158 as recently as last April.
Job Cuts
The investment-banking business is grappling with a plunge in fees from advising companies on mergers and stock and bond sales, as CEOs and corporate treasurers hunker down for a recession. Thain also has had to weather the departures of more than a dozen senior executives and traders.
The job cuts announced today are in addition to about 1,000 previously announced. The company eliminated about 650 positions at its San Jose, California-based subprime mortgage lender, First Franklin, and shed others by selling Merrill Lynch Capital, a lender to medium-size companies.
Merrill will record a $350 million charge in the second quarter related to the reductions, which will save an estimated $800 million a year, the firm said.
Under former CEO O'Neal, Merrill paid $1.3 billion for First Franklin in late 2006, just as the U.S. housing market peaked. First Franklin's workforce has been cut to 80 from 2,300.
The company's stock has fallen 17 percent since Thain became CEO Dec. 1, and yields on its 6.4 percent bonds due in August 2017 have widened to 2.8 percentage points over market benchmarks from 2.2 percentage points.
No Buyers
He's been stymied in his plan to liquidate the firm's inventory of collateralized debt obligations, which are securities formed by pooling mortgage bonds and other forms of debt. In January, he said the firm had marked the CDOs down to prices that ``are either saleable or represent good value.''
Today, he said very few of the CDOs have traded.
``There have been some funds put together to buy distressed-type assets, including these, but really none have traded,'' Thain said on the conference call with reporters. ``The buyers are probably waiting to see when is the right time to buy.''
Merrill's CDO holdings dropped to $26.3 billion at the end of March from $30.4 billion at the end of last year, according to the firm's statement, mostly because of writedowns.
Merrill is a passive, minority investor in Bloomberg LP, the parent of Bloomberg News.
To contact the reporter on this story: Bradley Keoun in New York at bkeoun@bloomberg.net.
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