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Wednesday, October 24, 2007

Merril Lynch Get Pwned!

Merril Lynch gets pwned!
The rumors about Merril Lynch turned out to be true.

Merrill Lynch Reports Loss on $7.9 Billion Writedown (Update2): “Merrill Lynch & Co. reported its first quarterly loss in six years after a larger-than-forecast $7.9 billion of writedowns for subprime mortgages and asset- backed bonds, the most by any Wall Street firm.

The third-quarter loss of $2.24 billion, or $2.82 a share, compared with net income of $3.05 billion, or $3.17, a year earlier, the New York-based firm said in a statement. Merrill said Oct. 5 that it would report a loss of as much as 50 cents a share.

Merrill's failure to meet its own projection shows how Chief Executive Officer Stanley O'Neal misjudged the severity of the decline in the credit markets since July, after late mortgage payments from borrowers with poor credit histories surged. The charge is the biggest in the firm's 93-year history and the first major setback in O'Neal's five-year tenure.”

Two weeks ago Merril Lynch gave guidance on its earnings… and then missed terribly.

“If you can't guide toward a reasonable expectation over two weeks, clearly you've got bigger problems.”

With such large and sudden writedowns, the message is clear: Merril Lynch doesn’t have a good handle and understanding of their risk.

“It sends a very poor message to the marketplace that Merrill doesn't have a good handle on their risk.”

For those of you who still think this will be over quickly…

““We've got more skeletons to find out about, because the credit cycle has yet to play out,” said Jon Fisher, who helps oversee $22 billion at Fifth Third Asset Management and doesn't own Merrill shares. “This isn't over in just a year.””

Futures are diving deep into the red pre-market. Oh and don’t forget about housing @ 10:00 AM this morning…

Ambac Posts First Loss as Subprime Bond Prices Drop (Update1): “Ambac Financial Group Inc., the world's second-largest bond insurer, reported its first quarterly loss after reducing the value of subprime mortgage-linked securities the company guarantees by $743 million.

The third-quarter net loss of $360.6 million, or $3.51 a share, compared with net income of $213 million, or $1.98, a year earlier, Ambac said in a statement issued on Business Wire. Profit excluding investment and so-called mark-to-market gains and losses was $1.88 a share, the New York-based company said. The average analyst estimate was for $1.88, according to a Bloomberg survey.

Ambac and other bond insurers have guaranteed the payments on collateralized debt obligations through derivative contracts promising to pay CDO holders in the event of a default. The value of CDOs backed by residential mortgage securities has fallen in the past three months as subprime loan delinquencies rose. Ambac said Oct. 10 that it would take an unrealized mark-to-market loss.”

So, Moodys and S&P used rating models that are no widely ridiculed. What are the odds that Ambac’s own models for pricing the insurance of these derivatives…

Buffett Says Investors Should Be `Cautious' on China (Update3): “Billionaire Warren Buffett said investors should be “cautious” about China's stocks after the country's benchmark index more than doubled this year.

“We never buy stocks when we see prices soaring,” Buffett told reporters today in Dalian, northeastern China, where he's visiting a subsidiary of his Berkshire Hathaway Inc. “We buy stocks because we're confident of the company's growth. People should be cautious when they see prices rising.””

Buffett always chooses his words carefully and he does not tend to speak out of turn.

“Buffett this month said Berkshire had sold its stake in PetroChina Co., which has risen 76 percent this year to become the world's second-biggest company by market value. China's CSI 300 stock index has climbed 48 percent since May 17, when Li Ka- shing, Asia's richest man, said there “must be a bubble.””

Li Ka-shing is another investing legend that has called China a ‘bubble’. When the likes of Buffett and Li Ka-shing start taking profits, you should as well. They are the deal makers with the serious capital. When they can’t find value, nobody can.

Turkey Bombs PKK in Iraq, Sends Soldiers Over Border (Update5): “Turkey bombed units of the Kurdistan Workers' Party, or PKK, in northern Iraq and ordered troops across the border in pursuit of the militants, a lawmaker of Turkey's governing party said today.

Turkish F-16 jets and artillery pounded at least 63 suspected rebel positions inside the Kurdish-controlled region from Oct. 21 until yesterday, said the lawmaker, who attended a briefing by government spokesman Cemil Cicek to a group of government deputies late yesterday in Ankara.”

What a mess.


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