First, and we cannot say this often enough, in light volume markets the short term action is more like a rugby scrum than a game of chess.
The funds are trying to 'paint the tape' into the end of month, and perhaps squeeze a few shorts along the way. Why? Because its fees and bonuses that drive Wall Street, the customers be damned, and don't ever forget it.
We are also in a period in which the cynicism and short term focus of professional traders is near all time highs thanks in large part to our government and regulatory environment. (See dollar chart below) This is the classic setup for a conflagration.
But in the short term, the market is what it is.
What Merrill shows is that the estimates of losses in the financials are substantially low, placing companies like Citigroup and Lehman and the other investment banks on the cliff edge of insolvency. Technical insolvency doesn't count, they are still a game until someone calls their hand, and Benny is trying to slip them a couple cards and some cash to help keep the game going.
Citigroup Markdowns May Rise $8 Billion, Analyst Says
By Adam Haigh
July 29 (Bloomberg) -- Citigroup Inc. will probably write down the value of collateralized debt obligations by $8 billion in the third quarter, Deutsche Bank AG analyst Mike Mayo said, after Merrill Lynch & Co. said it will sell the firm's CDO holdings for 22 cents on the dollar.
Citigroup values the securities, mortgage-related bonds at the heart of the credit crisis, at 53 cents, Mayo wrote in a report to clients today. Citigroup has $22.5 billion of CDOs and it may have another $7 billion in writedowns to come, Mayo said. That could force it to raise more money, as Merrill did today, he said.
''The decision about raising new capital may be closer than we previously thought,'' Mayo said in the report. He also expects the bank to write down an additional $1 billion because of its $2 billion in exposure to so-called monoline insurance companies.
The additional writedowns at Citigroup mean the bank probably will report a third-quarter loss of 59 cents a share and a full-year loss of 80 cents, said Mayo, who has a ''hold'' rating on the stock. He previously estimated the New York-based bank, the biggest in the U.S. by assets, would report a loss of 66 cents in 2008.
Citigroup fell 28 cents, or 1.6 percent, to $17.15 at 10:27 a.m. in New York Stock Exchange composite trading. They dropped 41 percent this year before today.
'Good News'
Merrill is taking a $4.4 billion loss on the sale of $11 billion of CDOs.
''The good news is that that the actual sales can give confidence that Merrill is finally selling assets rather than merely marking them to market,'' Mayo said. (Mayo is no Meredith by a long shot. Check out his revision just below on Merrill's full year losses. - Jesse)
Mayo estimates that Merrill, the third-largest U.S. securities firm, will report a full-year loss of $10.95 a share, compared with his earlier prediction of a $5.80 loss. Oppenheimer & Co. analyst Meredith Whitney estimates the company will report a loss of $10.50 in 2008.
UBS AG analyst Glenn Schorr estimates Merrill will report a full-year loss of $11.36 a share because of ''significant dilution'' from the plan to raise capital by selling about $8.5 billion of stock. Schorr has a ''neutral'' rating on Merrill.
''While we don't think Merrill's announcement necessarily implies a 40 percent writedown ($7.2 billion) for Citi, directionally we think investors should expect further incremental writedowns in coming quarters,'' Schorr wrote in a report to clients today.
Lehman Brothers Holdings Inc., the fourth-biggest U.S. securities firm, may have to sell ''significant assets'' to guard against further losses from its $65 billion of mortgage and real estate holdings, Schorr said.
