One of the themes I have mentioned lately is the mainstream press clamor for how this must be the bottom for the financials because the 'smart money' is in 'X.' By 'smart money,' they really mean people sitting on eons of dead dinosaurs. I actually make the argument that the more money you have the more risk you can take, because heck, if you blow a few billion here or there - well there are more dead dinosaurs producing petrodollars tomorrow, and the next day, and the next. As for China, well that trade surplus is not going anywhere soon, so if you blow a few billion, U.S. consumers will send you a few more billion next week. So in fact, 'smart money' doesn't have to nail bottoms or tops very accurately. It really is people with limited capital that actually have to be a lot more careful.
Just because you have a lot of money from one arena doesn't mean you are a smart investor, especially if your money was acquired through no work of your own. We've seen many people (think Paul Allen of Microsoft (NASDAQ:MSFT) fame) who took huge sums and proceeded to destroy much of their wealth in their future investments. Is that 'smart money?' Are heirs of family fortunes 'smart money?' Do you think Paris Hilton's investing prowess is something to be excited about? Are people who just happen to be sitting on huge amounts of long dead dinosaurs suddenly 'shrewd?' These are the talking points that we are handed by the financial media. I'd rather listen to Buffet. Remember, when you print billions of dollars each day due to your dead dinosaurs you can afford to be 'early' or 'buy high' for the 'very, very, long term.' For the rest of us, we don't have those benefits, so we need to invest accordingly.
But anyhow, 'smart money' is at it again. And again the media will tell you, oh forget about the last round of infusions when we told you about, that was the bottom, in fact we meant THIS time it's the bottom. Because they are smart investors. Because they have huge trade surpluses due to petrodollars or massive U.S. overconsumption.
The other thesis I have been pointing out is this first infusion of cash is not 'the bottom,' just like the first disclosures back in August were not the 'kitchen sink' as the financial media would tell us. There are a lot more sinks to come, just as there are still many more capital infusions to come. Merrill Lynch is going for the triple play - Middle East, China, and Singapore. Talk about a marriage of convenience, desperate banks and countries flush with capital, and much of it from U.S. consumers. This 'reverse colonization' (please note I lifted this great term from another website) is in full effect. If this is good or bad is an indifferent arguement - the reality is this is a forced transaction from the point of view these banks are desperate for capital. And I'd argue the investment banks are in far greater shape than some of the money center banks i.e. Citigroup (NYSE:C), or Washington Mutual (NYSE:WM), among other. And this is in a 'roaring economy' with 'nearly 5% GDP growth' with almost 'no inflation.' Just imagine a world where the economy slows and inflation appears - wait, don't imagine it - just imagine a world without faulty government reports that tell us everything is okay.
Over the weekend, John Thain, the new chief executive of Merrill Lynch, was in talks with Chinese and Middle Eastern sovereign wealth funds that could lead to the sale of another big stake in the U.S. bank in a desperate bid to raise capital, according to sources in London and New York. The discussions come just days after Thain was forced, on Christmas Eve, to sell $4.4bn (£2.2bn) of stock to Singapore investment firm Temasek as part of a wider plan to raise some $7.5bn. Merrill Lynch has already taken an $8bn hit related to sub-prime investments, but Wall Street fears that the bank's problems could go far deeper. "Thain is desperately seeking an additional infusion of foreign capital to bolster Merrill's balance sheet," said one source. "It could be done by selling shares or other assets to raise cash." A U.S. observer said:The multi-billion cash injection from Temasek was not enough and Thain is taking calls from a host of other potential saviors, which are understood to include sovereign fund investors from the Gulf and China. Analysts believe that Thain needs funds urgently in a bid to thwart future liquidity problems. The bank has already announced plans to lay off 1,600 staff. "Thain is raising capital in anticipation of a large fourth quarter write-down," said Sanford Bernstein analyst Brad Hintz. (More layoffs are to come after the holidays.) Sources close to Merrill Lynch say that Thain has cancelled New Year's leaves among his top lieutenants, and that his team is working around the clock on various 'scenarios' that could be employed to save the bank if problems related to the credit crunch continue to worsen. "It is all hands to the pumps here," the source said, adding that the possibility of exploring a merger with another banking group had not been ruled out but was considered 'an extreme scenario.' "Everything is on the table," he said. (This would not surprise me - Bear Merrill - because as we all know, when you combine two desperate companies that solves all the problems.) Analysts have so far predicted that the bank will be forced to write down between $10bn and $11.5bn, but the value of the assets affected by the credit crunch is falling in value by the day as the market continues to seek a way out of one of the worst liquidity crises in history. (And this my friends, is the hell of it all.)
In short, "the bottom is in because 'smart money' is coming."