As Merrill Reports, Short Squeeze in Financials Continues

MarketWatch is reporting Merrill reports $4.65 billion quarterly net loss.

The firm also said it agreed to sell its 20% stake in Bloomberg LP back to the media company for $4.425 billion. It also plans to sell a controlling interest in its Financial Data Services unit, which has an enterprise value of more than $3.5 billion.

Moody's Investors Service downgraded Merrill to A2 from A1 after the results. The sale of the Bloomberg stake and plans to sell Financial Data Services will cushion the impact of Merrill's second-quarter loss on their firm's capital ratios, the ratings agency said. But it also warned that Merrill has lost some financial flexibility.

Merrill reported $3.5 billion of net losses from its exposure to so-called super senior CDOs. The firm took another $2.9 billion hit from the falling value of hedges it bought from bond insurers. Merrill took another $1.7 billion in net losses from the investment portfolio of its U.S. banks and $1.3 billion in write-downs on residential mortgage exposures.

Citigroup Posts $2.5 Billion Loss

Citigroup shares are up 10% in the third better-than-expected financial report this week.

It was the third better-than-expected financial report from a major bank this week, and Citi's 9.4% rise to $19.56 set up the sector for its third straight day of strong gains.

Citi, the largest U.S. bank by assets, said on Friday that it lost money for the third consecutive quarter after writing down $7.2 billion of investments related to fixed-income weakness and consumer credit woes. The results were a bit better than expected, as some analysts had expected the firm to report write-downs of up to $9 billion.

The U.S. giant is planning to slash around a fifth of the assets on its balance sheet -- as much as $500 billion -- to help it recover from its massive losses in the credit crisis.

Short Squeeze Continues

 

The financials continue to bleed but the short squeeze continues. Fannie Mae (FNM) is up another 25% today to $13.66 in the wake of Selective Enforcement of Regulation SHOand Bernanke's statement: "It's important for Fannie Mae and Freddie Mac bonds and stocks to rise so they can keep raising capital and aid the mortgage market." 

This move in financials is going to fail spectacularly once the panic buying ends, but for now the bulls are having a bit of fun.

Comments

[Arohan:]

Regarding your last observation on the panic buying failing spectacularly, you may be right. I would also like to add to this: Financials today offer spectacular values to long term investors.

It always boils down to whether you are a short term oriented trader or a long term oriented investor

2008 Jul 18 12:05 PM

[Barry Robbins:]

Even if you are a long-term investor, the financials are seeing enormous losses and enormous share-dilution. A long-term investor in Citi would be down over the past 10 years. I would think a long-term investor should be focused on a company with solid earnings, solid return-on-capital, and a low PE. The financials just don't fit this model.

2008 Jul 18 12:10 PM

[simjos04:]

The writer knows what, based on this article prefers to quote yahoo blog posts. The writer is not a real writer and Seekingalpha is a glorified blog. Do you take any credence in what he says, no. I think bankers understand the market has changed and are mitigating the situation as has the SEC, the Fed, the government and the treasury. Writedowns will continue and the banks will improve their books as well.

2008 Jul 18 12:44 PM

[debtacid:]

“Financials today offer spectacular values to long term investors”

Unless we admit that we may be in the midst of a historic collapse. Debt, politics, war, greed, and corruption have combined like no other time in U.S. history. In addition, the fiat dollar is approaching it’s inevitable collapse. This is not just a matter of tweeking market psychology. Stark reality has caused the entire “Long” paradigm to evaporate.

2008 Jul 18 12:56 PM

[energycomments:]

Historic or hostile this is the big firms and hedges selling inlimited amounts until its too late.. and then keep everything.. its happens so much and the SEC doesn't give hoot. this time its loud and clear. and they aren't allowing it.

2008 Jul 18 04:22 PM

[noni1:]

To my knowledge, shortselling is illegal in Europe. If the European markets can do without shortselling, so can we.

We need to permanently ban all shortselling of any kind, forever. If people want to profit from the decline in the value of a stock, but a put option like they do in Europe.

Market Makers have provided ENOUGH liquidity. Shortsellers now and always have diabolically caused fear, uncertainty and doubt along with an erosion of confidence in investing in stocks at all. If they had their way, all stocks of all companies would be worth zero.

2008 Jul 19 12:32 AM

[blackbody:]

noni1, good example of one sided market crashing is China. It is not the shorts who drive the market lower. In the end it is fear and greed that drive the market to irrationality. In irrational market you find opportunity betting on reversion to mean. If that means shorting then that's what it takes.

2008 Jul 19 08:16 AM

[Ames Tiedeman:]

How much stock is MER going to issue to raise cash? How much share dilution is coming?

2008 Jul 19 01:22 PM