ThePanelist.com - Rethinking Merrill Lynch and Thain After Yesterday's Announcement

Rethinking Merrill Lynch and Thain After Yesterday's Announcement

Written by David Neubert

Friday, 16 November 2007

On Wednesday, I was positive on John Thain as the new CEO at Merrill Lynch (MER - $56.11). I was also a buyer - so I bought a little. But now I'm holding off a bit.

I still think the fact that John Thain got to look at the firm's books and still wanted the job means that there is probably no huge surprise write down coming. Remember, this guy grew up at Goldman as a mortgage trader and knows all the trader tricks for hiding losses in a mortgage/CDO trading book.

However the market is still pricing in more negative surprises, so that means MER cheap here. I've decided it will likely get cheaper so I'll be greedy. After putting my toe in the water and buying the first part of building a position on his announcement I've decided to hold off on adding more.

Why hold off?
I don't believe this market rally and I think my next buy in Merrill will be lower. Trading, in the whole U.S. market and financials in particular, looked too much like short covering on Wednesday and it still does. I only seem to make money with a few technical indicators but one that is pretty reliable is the bear flag . It usually indicates that a down trend will continue. That's what the popular financials exchange traded fund (XLF - $30.51) looks like. Why does the bear flag work? It's pretty simple, it just indicates a short covering rally in a longer term down market.

For a fun and feisty FAQ on Thain check out Felix Salmon's blog at Portfolio.com

Disclosures:
I own MER (bought it at $58.10 ouch). Right now I'm hoping the price falls more so I can buy more but I'm not sure when that will be. What did I sell today to make room for MER? I sold (AIG - $56.11) and bought some out of the money calls just in case it goes back up. But I haven't heard enough bad news from AIG and that makes me nervous. I do not own XLF but am short Jan 2009 $25 strike puts (VKPMY - $2.28). This means I might be forced to buy XLF at $25 if the bottom really falls out of the US financial sector in the next year (see my don't try this at home warning next).

Don't try this at home warning:
I discuss shorting options here. Actually, the term is "naked shorting." Don't do this unless you are an expert. I am a trained professional with years of experience and losses to teach me how to do this. Please don't try this. If you have no experience at naked shorting of options and your broker lets you, fire that broker.

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Comments (3)

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written by alphuris , November 16, 2007

Dave,

Are there any specific price targets you're looking at for triggers to buy? I've been watching GS myself and it seems to be holding well, so I figure MER is a solid alternative to play on the weakness you're talking about. Thanks.

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written by Adam Waitt , November 17, 2007

Great post! I love the detailed insight. I look for more posts like this!!

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written by David Neubert , November 17, 2007

I'd buy the stock here but not in big size. In terms of a price target I'd use these indicators.

1. Book Value (since I'm assuming no more write-downs) - brokers often trade based premium to tangible book value. At Merrill this number is just under $40 a share but I don't think we'll get there.

2. If you want to talk technicals: 50ish was a support level back in 2004. That will likely be a place the stock will find support again and any further panic selling may stop there.

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