Friday, July 18, 2008
Macro Man rarely writes about single name stocks, because that's not his area of relative expertise. He's not called "Micro Man" for a reason. On occasion, however, developments in a single name can have broader macro repercussions- Fannie and Freddie, or Northern Rock, for example.
Such is the case today for punters of equity indices, which have seen recent upside momentum wane considerably since 9.05 London time last night. The reason, of course, was the appalling "earnings" report from Merrill Lynch. Sure, Google and MSFT also missed, but the real story was MER, which lost $4.66 per share, nearly three bucks worse than consensus.
Now, as he's already explained, Macro Man is no equity analyst, so perhaps readers who are more comfortable breaking down corporates can help him. But one of the things in the announcement was particularly striking to Macro Man. Merrill is selling its stake in Bloomberg back to the company, and is also looking to flog its stake in Financial Data Services. That's all well and good; we know that the bank needs to raise cash and capital, and this is as good a way as any do to so in the absence of benevolent investors. But in this case, Merrill itself is loaning the money to finance the sale!
Think about that for a second. In practical terms, Merrill is not receiving any new cash, since they're just giving some of their money to Bloomberg, who's giving it back. Sure, they'll get interest and, eventually, the principal, but after a year that's seen them lose more than $22/share, surely they need the cash now?
Put it this way. We're now living in a world where LIBOR spreads are wide because unsecured lending is unattractive compared to secured lending. But in this case, Merrill is both making a loan and forking over an asset! Is it any wonder that the bank hasn't made a bean since Q4 2003? Now, allow Macro Man to say that the people with whom he personally deals at Merrill are first-class. So in a very real sense, it pains him to see his friends there get buggered by things out of their control. Given that a number of structured credit turds remain on the balance sheet, what odds that we go through the same painful exercise three months from now? In a
whole host of ways, "Mother Merrill" has turned into another phrase that also beings with "mother".
From Macro Man's perch, the only thing that can save the market from a potentially ugly day is Citigroup earnings, due out at 11.30 London time this morning. In many ways, that's like asking Robin to defeat the Joker, the Penguin, and the Riddler all at once after Batman's already been vanquished. Perhaps the Boy Wonder can pull a rabbit out of the hat....but on recent form, the odds don't look good.
For a bit of levity in a trying time for those readers whose deferred comp portfolio has plummeted this year, Macro Man is proud to introduce the first annual Banking Dead Pool. Vote in the poll on the right for the first institution that will go bust/get taken over...and hope it's not yours. Let's see how astute you are....and at least it will give you something to watch over the summer!
Elsewhere, the worm is turning yet again in Asia. Pain has started to rebound back on itself,as evidenced by, for example, the Philippines. Long PHP was a highly popular trade for most of the last couple years, but it went badly wrong earlier this year. More recently, a number of banks and punters have hopped on the long USD/PHP bandwagon. Doh!
Yesterday, the BSP hiked rates by a greater-than-expected 50 bps after the market had closed, leading to a nasty gap lower in USD/PHP with no trading. Macro Man had been long USD/PHP for the past three months, but is now out, thankfully at a tasty profit.
For the first time since late March, Macro Man has no position in anything related to EM Asia. The scuttlebutt from China suggests that both the economy and policy may be at a turning point. For the time being, therefore, he's happy to wait, watch, and collect more data before deciding on his next trade.
In the meantime, at least he has the Banking Dead Pool to keep his interest over the summer!