Analysts Continue Quarterly Brokerage Earnings Slashfest Ritual

Guy Moszkowski of Merrill Lynch downgraded Goldman and Lehman to "underperform" noting that "conditions have deteriorated significantly from July."  Meanwhile, Deutsche Bank analyst Mike Mayo cut his price target and estimates for Lehman Brothers.  He now expects Lehman to post a third-quarter loss of $2.68 a share, revised from a profit of 33 cents a share.  Why do I feel like I am experiencing deja vu?  Oh, that's right, because we go through this every single quarter.  How and why Mr. Mayo decided that today was the day that Lehman was going to go from a profit to a steep loss is only slightly mysterious.  After all, the market has been riddled with rumors of Lehman looking for buyers for its assets ("You need an asset management unit? Level 2?  Level 3?  We've got it all to go.  Just give us a bid.") for months.  If the company was cruising along making money, it wouldn't need more capital in addition to all the capital it has already raised.  Let's be honest, did conditions really deteriorate that much or are banks finally starting to face the music?  I know that spreads have widened back out again in the past month.  But the market price of the CDOs that Merrill Lynch puked for 22 cents did not drop from 40 cents at the end of the quarter to 22 cents two weeks later when Merrill sold them.  Merrill had these assets marked too high.  The same is probably true for some of the assets that Lehman holds in Level 3.  No market exists for these securities unless Lehman is willing to unload them at highly distressed levels and take a large loss.

In any event, I think it is a convenient coincidence that the brokerage analysts cut their estimates right after the SEC's naked short sale ban expired.  It was wise to wait until it was no longer a major inconvenience for hedge funds to short these stocks again.  That way, when various magazines are handing out analyst awards for great calls, analysts can say they had the timing right.  Maybe by then investors will conveniently forget that most analysts were estimating brokerage firm profits for the past three quarters before having to slash those estimates two weeks before the earnings announcements to avoid looking foolish.  The fact that investors still pay attention remains a mystery to me. 

Merrill Analyst Says Buy GM at $40 and Sell It At $11

A Merrill Lynch analyst put out some groundbreaking research on GM this morning claiming that bankruptcy was an option for the auto company.  He reversed his prior buy recommendation (issued in February 2007 when the stock was at $40) and cut the stock to an "underperform" now that it is trading below $11.  I'm not quite sure what caused the analyst to change his formerly bullish opinion.  Perhaps it was based on one of the following reasons?

• GM's debt is trading and has been trading at distressed levels for some time.
• GM's credit default swaps are already pricing in a 75% probability that the automaker will default on its debt within the next 5 years.
• Car sales have been in a steep decline and the auto industry just reported a roughly 20% decline in sales for the month of June.
• GMAC, the financing arm still 49% owned by GM, had to completely restructure its financing because its mortgage lending arm ResCap came dangerously close to declaring bankruptcy.
• GM's stock is down 56% year to date.
• The analyst needed to change his recommendation ASAP so he could tell everyone that he warned them of GM's bankruptcy, thus justifying his existence.

Since he didn't issue an apology with his downgrade to make up for being so incredibly ridiculously behind in following the GM headlines, I'm assuming he's not the least bit sorry for losing so much money for investors.  What I find even more absurd is that the stock actually sold off an additional 8% on the downgrade.  Who are the investors that use Merrill Lynch as their sole source of news?  How can anybody still be surprised by a report that claims that GM could go bankrupt?  Did someone actually receive this research report and then call every one of his brokers and scream "Sell all my GM!  All of it!  My analyst told me it might go bankrupt!"  It is price action like this that makes me a serious doubter of the "efficient market" hypothesis.  How on earth can all the negative news be priced into stocks when somebody actually thinks an analyst's opinion matters?     
 

Bank of America Slashes Estimates for Goldman, Lehman, Morgan

Analysts at Bank of America cut earnings estimates for Goldman, Lehman and Morgan Stanley today. In the event that you have been on a mission to the moon for the past three months and some delivery snafu has prevented you from receiving your copy of The Wall Street Journal, which has outlined in painstaking detail how terrible the environment has been for nearly every single line of business that the brokers rely on, day after day, you can depend on the trusty analysis from these jokers at Bank of America. Somehow, over Memorial Day weekend, it occurred to them that maybe, just maybe, they need to lower their unrealistic earnings targets so they don’t wind up looking like fools in front of the investment community when the brokers report their dismal earnings results next week. When Lehman reports a loss, instead of a profit as these guys were predicting before today, they can say “See, we predicted they would lose money!” I suppose that if analysts continue to lower earnings estimates a week before earnings every single quarter, than their overzealous earnings targets for these stocks may actually begin to resemble reality. Here’s a tip to all the brokerage analysts out there: you may wish to extend your ability to forecast earnings beyond the one week timeframe, or risk becoming a part of next week’s unemployment numbers.

Blackstone Posts Loss That Confounds Analysts

Blackstone Group, the publicly traded asset manager widely known for its buyout business, reported a loss of $66.5 million attributable to declining fees in every single one of its businesses. The first-quarter loss, which excluded some compensation costs, was $.06 a share, compared to average estimates of $.12 a share profit that analysts had been expecting. Profits? From a private equity firm? Did the analysts' Wall Street Journal subscriptions expire in December? Blackstone completed exactly one leveraged buyout in the quarter for $1.2 billion, compared to $42 billion in deals the previous year. Furthermore, revenues declined by 94% in its real estate business and its buyout funds. The hedge-fund unit was the real performer with a revenue drop of only 81%. Those guys should expect a big fat bonus. Speaking of compensation, Blackstone's net loss was actually $251 million including costs related to the vesting of executives' ownership stakes as part of the initial public offering in June. Let's see, really lousy asset management performance, yet really high compensation costs. I'm sure if performance turned around, compensation would increase even more. Very interesting negative and positive correlation between compensation and performance. The company expects to post net losses during the next FIVE YEARS due to vesting expenses. Anyone who still wants to buy the stock after reading the last sentence may be interested in investing in a partially completed condo project I'm working on in Las Vegas. Please call me.

Countrywide's Debt Lowered to Junk, Still Worth More Than Analyst's Opinion

S&P cut Countrywide's debt to junk after Bank of America hinted it may not back all of Countrywide's debt in an SEC filing on May 1st. Meanwhile, FBR's crack analyst Paul Miller said Bank of America should renegotiate its bid for Countrywide, and downgraded the stock to "underperform" from "market perform." Why this analyst's musings are reported as news, I will never understand. First of all, he upgraded Countrywide's stock to "market perform" on August 23, 2007, when the stock was trading around $22. During the entire time that the stock dropped to around $5 before Bank of America's bid, he said nothing. He must've been in hibernation for the credit crunch, and just woken up to realize that he must say something, anything, about a stock that has now lost 90% of its value. He did the same thing with Thornburg, which he downgraded from an "outperform" to "underperform" last week, a full month after the company narrowly avoided bankruptcy by raising a private placement that diluted its stock by 95%. When he issues research notes that have completely missed the boat and come months after the obvious has already been priced into the market, he should also issue an apology. In the meantime, I'm reaffirming my "underperform" rating on Paul Miller's research, and issuing a "junk" rating on his outlook.

Back From One-Month Vacation, Analyst Downgrades Thornburg

An analyst from Friedman Billings downgraded Thornburg Mortgage yesterday to Underperform from Outperform. He claimed that the recent capital raise and related transactions result in 95% dilution and questions how shares will trade when 2.9 billion restricted common shares are registered and start trading mid-May. I have to wonder if this guy just got back from a one month vacation and found Thornburg's one-month old 8-K in his inbox. I am not a professional analyst, and yet it took me about 15 minutes to read and dispense an opinion on Thornburg's private placement released on March 25th. The dilution problem was clearly outlined when the company was attempting to raise the money it needed to stay alive. Did it really take this guy a month of analysis to come to the conclusion that the stock just might "underperform" when an additional 2.9 BILLION shares are issued? Can his abacus not count that high?
What is truly astonishing about this downgrade is the number of opportunities the analyst chose to ignore to decide the company was in trouble. For example, when Thornburg's repo lenders issued margin calls that the company couldn't meet, was that not a clue that it might not be outperforming its peers? Or when the company attempted to raise a convertible with a 12% interest rate that investors wouldn't touch, did that not raise a red flag? Or perhaps it may have been appropriate to downgrade the stock when the actual announcement was made about the $1.35 billion private placement that paid an 18% coupon and came with detachable warrants of a gagillion shares of stock issued at a penny? Thornburg didn't even outperform the other high-profile near-bankruptcy of Bear Stearns. Given all of the people currently getting laid off on Wall Street, how does this clown still have a job?

Ambac Posts $1.66 Billion in Losses

Ambac reported a net loss of $1.66 billion, or $11.69 a share, thus outsmarting all of those analysts who were expecting losses of about a third of that number. This is quite a feat by Ambac, considering that ABK was a $6 stock yesterday. I'm sure many companies wish they knew the secret to losing twice their market capitalization in one quarter and remaining in business. Since Ambac insures about $524 billion in bonds, this news should not be greeted with exuberance by the credit markets, although I would guess the credit markets were not expecting uplifting news out of Ambac. But can all the equity bulls who think the worst in the financial morass is behind us continue to ignore news like this?

GE Drops the Bomb

GE shocked the market with a lousy earnings report, sending its shares down 10% and taking the rest of the market down with it. Analysts were shocked, absolutely shocked to discover that GE is really just a large financial company masquerading as an industrial titan. Earnings from GE's financial services arm were down 20%. According to CEO Immelt "The financial services environment was very difficult and became even more difficult late in the quarter." No surprise to anyone except for the Merrill analyst who upgraded this stock to a "buy" on March 20th. The stock actually rallied 5.3% on the upgrade, as the analyst claimed confidently that GE would not suffer from the difficulties in the credit markets. Maybe the cheery upgrade was in response to GE buying Merrill's consumer finance unit in December, helping Merrill free up some much needed capital? This is just pure speculation on my part as equity analysts don't have a history of conflicts of interest. The moral of this story is never take stock advice from a company who is about to post yet another $6 billion or so in further write-downs.

Richard Bove Saves The Financial Markets...

Crack analyst Richard Bove claimed that the financial crisis was over and it was safe to buy financials. That is a mighty bold prediction. The good news is that he is just an analyst, so if he is wrong, it won't cost him a penny. Traders, those who actually have money riding on the solvency of the financials, may have a difference of opinion. Although today's rally appeared to be a big relief, following yesterday's plunge, following the day before's rally, it's hard to believe all the bad news is behind us, and the financials are a screaming buy. Once again, I must emphasize that several of the businesses that the banks used to be involved in (securitization of CDO's, CLO's, CMO's, huge PE deals, CMBC issuance etc.) just do not exist anymore in the same capacity that they used to exist, and will take years, if ever to return to the same levels as before. The Fed's actions are obviously very helpful, but will they be enough? Some of the sources that I speak to are still terrified of the next shoe to drop, specifically some horrible news to come out of Merrill. The following article discusses the lawsuit that Merrill has initiated against SCA attempting to force it to honor its insurance contract on a portfolio of CDO's that SCA terminated. How this is bullish news, I cannot fathom. Furthermore, if all the bad news is over, why is implied option volatility in the brokers still freakishly high? Something to ponder over the long weekend...

Merrill/SCA

Richard, I have a Bove to pick with you!

Who is this guy Richard Bove from Punk Zeigel?  Better yet, who is Punk Zeigel?  I had never heard of this guy or his firm until a few months ago when he came out with an upgrade of Goldman Sachs claiming they had "superior technology" and therefore could never lose a penny in the market.  About a week later when it became clear that all the investment banks were getting the beatdown, he turned around and downgraded Goldman Sachs.  Both times he was on CNBC chirping about his analysis as if it was news.  He came out today with a downgrade of Bear Stearns, and revised downward his earnings estimates for Bear (note that Bear is down oh, about 60% from its highs).  First, let's just be clear about one thing, nobody and I mean nobody has any idea what the investment banks are going to report this quarter.  It is impossible to forecast.  Although a portion of their earnings comes from fee-based businesses, they are all in the business of proprietary trading.  Unless you know their trading positions, which banks would NEVER disclose to a two-bit analyst, you have no idea if they are going to lose $10 a share or break even.  You can't rely on their balance sheets from year end because all of their trading positions, liquidity needs, and hedges are totally different than they were 3 months ago.  In fact, given that most of the less liquid securities have ceased trading, the banks themselves really have no idea how much money they made.  But given all of the above, I'd like to throw my hat in the ring...I predict that Bear loses $6 a share, Lehman $3, MS breaks even, and GS loses $1.  These are all completely random predictions, but if I'm right then maybe, just maybe CNBC will call me for a comment the next time brokerage earnings are imminent.  I guarantee that what I have to say will be slightly less moronic than Mr. Bove's drivel from the past few months.

Tool of the Day, March 7

It might be a little early to designate the tool of the day considering the turmoil going on the market...but really, this guy takes the cake.  According to marketwatch.com, Donald Fandetti, a Citigroup analyst cut Carlyle Capital shares to a sell this morning AFTER they failed to meet margin calls and got a notice of default.  In case my buddy Don is not clear on the concept, you want to issue sell ratings on companies typically BEFORE a company defaults and gets liquidated.  Note to Vikram Pandit:  Giving this useless tool the axe may help with your overhead problem.