Merrill Lynch: Black Hole or Amazing Opportunity?

We already know that Merrill Lynch (MER) has been in a free fall for months now. Adding to their losses for the year is Friday’s major decline, over 10%, on fears that its already troubled mortgage business losses might have actually be worse than worse. Deutsche Bank (DB) estimated Friday morning that the brokerage may write down total of $10 billion for losses on their subprime mess holdings.

But hey, to add to the trouble, a Wall Street Journal article Friday morning speculated that Merrill arranged sales of its tumbling mortgage securities to hedge funds, and guaranteed to buy them back later at the guaranteed minimum price, in order to avoid marking down their values even further to fix their earnings report, hoping that prices will come back. That, obviously, leads to speculation that SEC will probe this matter. "We have increasingly lost confidence in the financials of Merrill,'' Mayo from Deutsche Bank stated Friday morning. "If there are much higher CDO writedowns, Merrill may have additional credit rating downgrades."

Merrill is down more than 40% this year. That is more than any other investment bank. The question is: is Merrill falling through a bottomless pit, or is there a light at the end of the tunnel? It remains to be seen. I would hate to recommend a stock that might turn into another Enron. I mean free fall, SEC investigation, no end in sight? Personally however, I don’t think Merrill is going away, but hey, you never know. Still, there might be some coming to rescue, and one could expect that for the upcoming weeks. So, it’s either the free fall to oblivion, or an amazing opportunity to enter a discounted house.

No matter what the outcome, one should pay particular attention to the volume. Friday’s sell off was enormous- just look at the big, fat, red candle. Now, that is something that is not seen anywhere else on the chart. This is the largest Merrill sell off volume in more than 5 years. One should look for capitulation - the moment the volume to the downside dries up. That could happen around $53 level, I’d estimate. At that time, perhaps by this week, we might know more how safe would this opportunity even be. But, if it does bounce back off the $53 level, we may see it rising back up to $63 in a heart bit. Just one piece of positive news, any at this point, would catapult Merrill above $60 in a heart beat. It already bounced off $54, but I believe that we may see $53, purely because of enormous selling pressure today. If not, if $54 was it, than the bounce might have already started.

And as you can see below on a weekly chart, it has finally entered the oversold territory. All this sell off, and it was never oversold. Hmm, no wonder that it kept sliding. But soon, it might be turning. Soon, but I don't think yet. In any way, I just might initiate my first long entry by selling some puts either later today or sometime next week. Who knows, I might need to even add more or get fast out. It will be risky, but we'll see.

Disclosure: none

Comments

[Sr. Pessimist:]

A black hole is not good. Some holes are good, but not black ones. Merril Lynch is just a big corp. Financial health is irrelevant. I don't see this one popping off the map onto another 3rd dimensional state in the fourth dimension. What does it take to kill a big corp? If all these corps split up into tiny smaller ones, then America will become more resilient at the expense of the powers of the capitalist heirs to the US Dollar. I don't care if Merril Lynch fails to profitably rob every slave in the US- as well as in the world- it owns the interests of. It's just too big to die in the world of US Dollars. However, there are much larger powers in this world than US Dollars and the guns that provide any value at all to them.

2007 Nov 06 09:24 PM

[Sr. Pessimist:]

Just clarifying, this was not a racist remark. I like chocolate, and chocolate tastes real good to my lips. Plus, there's really no hole that I like that's black anyway. Pink is a warm color to me. Pink holes are advisable to anything else. Merril Lynch is not a pink hole. If anything, a black hole, a capitalist vacuum ensuring the death of the interest holders, who will lose everything including their appeal to any quality non-black holes. But that is more of an attachment to the entire US Dollar capitalist system itself, under which Merril Lynch is a stronghold. And the death of the US Dollar isn't all that far away anyway. The deader the US, the more advisably-colored holes hoping for a truly valuable guy like me.

2007 Nov 06 09:30 PM

[Beris:]

Well, I honestly don't know how to respond to this... a bit of laugh, a bit of thinking, and a bit of worrying how far can you go by posting on a fine line...

But yes, Merrill is big, it's huge, and it's not going away. Just as dollar isn't, contrary to your opinion. So, either it breaks up and each part rises stronger, or it bounces back and waits for a better time to rally, don 't you think?

2007 Nov 06 11:08 PM