Friday, July 18, 2008

Oh Mama!

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!

16 comments:

Anonymous said...

Maybe Merrill is just being more frank. Do we trust the veracity of JPM and Wells Fargo earnings?

Macro Man said...

In a word, "no."

madtyrolean said...

looks like citi spoiled the fun, 1285 or 1315 a given now, besides the 60min model has plenty of room to run before entering overbought land....prolly next weds or so i'd look for a pullback

Ryan said...

If only the muppets could have saved us.

Corey said...

after short gold/crude and long market since monday/last friday, i'm now flat as well. gold not as weak as i thought it would be, and a market rally on C is just silly...but will wait for more market action to make next trade. (although i've started to dabble again in my favorite turd of a trade - short USD/YEN).

Macro Man said...

Corey....in the last 72 hours I have radically altered my trading style. Still have a few cherished macro trades, but I have started daytrading to pay the bills for my negative carry and option gap risk.

Anonymous said...

http://bespokeinvest.typepad.com/bespoke/
2008/07/sp-500-earnings.html

A nice corollary for the earnings thread. I love that bank analysts are soft on other banks, apparently citi is off the sell list at a number of houses now. Should have listened when MM was wary about carrying his short equity plays over reporting season.
Re crude heard chatter that Soros is short at 137 and now long gold too.
Silly markets. Have a good w/e all.
JL

Corey said...

MM

Big Ideas & Short Time Frames! I've often felt that is the best way to trade (and have had much success). Big Ideas have the conviction to hold for a profit, but Short Time Frames is the discipline to take any profits and not care that you are "right" directionally. Add that trading style to having patience to stay on the sidelines and you've got a superior trading style...I mean, nobody really talks about being a Macro Daytrader!

RichL said...

The Merrill- Bloomberg trade is simply- "I'll trade you two cats for a dog." No cash means no real trade.
The marks are nice though!

Anonymous said...

'nice marks tho!'

So that's it then? A farcical ploy to boost accounting earnings? Why else have a non cash flow trade.

Anonymous said...

Hi, can you explain how MER's loaning itself the money for the asset sale to BBG please?
Thanks!

Macro Man said...

It's loaning the money to Bloomberg.

Corey, my best best trades tend to to not be touched for a while once I've scaled in. Funny enough, I think I've had more success day-trading equity indices the last couple of days than I have in any spell of trying to short-term trade currencies in the last fifteen years!

Viraf "Willy" Reporter said...

As a bear on many fronts - including the dollar - for over a year, I get the sense that it's time to hibernate. That may even include MER for a good trade!

Crude is pointing back below $100 and both NZD/USD and AUD/USD (CAD less so) are in trouble. This would tell me that the equities rally is going to result from a huge "commodities" correction; this week's fall in the sector being just the tip of the iceberg, and that is probably going to catch a lot of the new players in the sector index game.

Financials and homebuilders would have to be the contrarian's bet for any such equities rally.

I enjoy your blog. You smell of FX! Not a bad place to get a macro instinct...
/wr

Quarrel said...

MM,

Re ML's BB transaction:

Could it be that BB debt is a more liquid position than BB equity (which probably only had the one potential buyer, who obviously needed to be lent the money to make it happen)?

While it may not be off the balance sheet properly yet, it may now be in a position to get moved.

Anyone know?


--Q

Anonymous said...

I'm sure the MER Bloomberg sale is related to capital - debt to Bloomberg will carry a lower risk weighting in the capital calcs than equity in same.

LFY

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