Tuesday, March 25, 2008

Banks in a Merrill Downgrading Frenzy...

UBS cuts estimates for Merrill. JP Morgan cuts estimates for Merrill. As I've mentioned before in my discussions of analysts estimates of investment bank earnings, I believe they are poppycock. It is impossible to predict how much money any investment bank will make in any quarter because it is dependent on their trading positions. Furthermore, many of these trading positions currently have no markets, so dealers are forced to "estimate" values for illiquid securities. So really, although I believe that Merrill is going to have a lousy quarter, and possibly year, I think these downgrades are more indicative of how the downgraders are doing rather than the downgradee. Because no bank will give out their trading positions to competitors, my guess is that the analysts from UBS and JP went over to their own trading desks and said "how much are you guys losing this quarter?" Then they made minor adjustments and Presto! We have some earnings estimates!

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