Blackrock (NYSE: BLK), an investment management firm, closed at $166.63 Monday. BLK is expected to announce Q2 EPS on July 17. Merrill Lynch (NYSE: MER) owns 52,395,082 shares of BLK as of March 21, 2008. BLK July 165 straddle is priced at $14. BLK August option implied volatility of 63 is above its 26-week average of 47 according to Track Data, suggesting larger price movement.
TheStreet.com's Jim Cramer says he has no confidence in these hated names, and neither should you.
The financials are flying -- there are finally bids for most of them underneath. Many, including Lehman (NYSE: LEH) (Cramer's Take), are running. What a great time to put the negative cards on the table and put the negatives in perspective. That's right, let's look at the financial Achilles' heels. What could go wrong? In other words, here's the companion piece to Doug Kass' positive conversion. Here's what I am worried about even as Doug thinks everyone's too worried and the bottom is being put in.
To get started, let's look at what's not causing the endless declines in the stocks -- don't worry, we will get to the financial dirty dozen when I finish this preamble.
First, it ain't earnings. Earnings aren't going to be that great. But that's why the S&P is at 14 times. It can go to 12 or 11, or most likely stays at 13-14, but the E goes down (earnings).
Second, it ain't oil. The stocks sensitive to the increase in oil have room to go down, but the price of oil is being factored in slowly but surely.
Third, it isn't inflation or recession. Those two are being baked in each day.
TheStreet.com's Jim Cramer says with few exceptions, the landscape is littered with corpses.
Sell everything. Nothing's working. Revisit when the prices are adjusted for a big recession, soaring inflation and a crushed consumer. Sell at 12,000 and come back at 10,000. Even better: short it.
Are you going to argue with any of that? Do you have a case against it? What's the counter? Takeovers? We've had a couple: Anheuser-Busch (NYSE: BUD) (Cramer's Take), Wrigley (NYSE: WWY) (Cramer's Take). Good if you owned them.
Lower rates? Can the Fed help? We assume the Fed is done. The odds favor higher rates. Bank turnarounds? How, with short-rates going up? With housing prices going down?
Can oil go down? Only with a worldwide crash, and with a worldwide crash, why would we come back at 10,000?
Can the consumer get more liquid? How? Unemployment's going higher. Wages won't go up in that environment.
That's the environment. It's pretty bulletproof when it comes to its logic.
It is hard to find a money management firm which has been more successful than Blackrock (NYSE: BLK). The firm has a market cap of $25 billion and is known for consistently providing good returns for its clients.
Investors had better hope that the firm is not as prescient as it is skilled at making money. According toReuters, "the money management firm is bracing for a 'much bigger' global economic slowdown." That means the pain will extend into next year. Blackrock puts most of the blame on continuing defaults in the mortgage markets.
Blackrock and other companies that have a great deal of money and skill will probably make hundreds of millions of dollars investing in distressed securities. The "haves" will increase the gulf between themselves and the "have nots."
Perhaps there is an ethical problem in making money off the misery of others. But, hey, it is Wall Street.
Douglas A. McIntyre is an editor at 247wallst.com.
I'm not sure how management at Lehman Brothers Holdings Inc. (NYSE: LEH) has time to run the business. What's more, with all the turbulence, I'm wondering if many of the employees are working mostly on parsing rumors and fine-tuning resumes.
Of course, this week Lehman got rid of its CFO, Erin Callan and president, Joseph Gregory. The company also raised $6 billion, which was quite dilutive. So from Monday to Friday, the stock price plunged from $33 to $25.81.
Yet, by Friday, things were perking up. The stock price shot up 13.7%. Maurice "Hank" Greenberg, the, who is the former CEO of AIG (NYSE: AIG), said he bought shares. This was also the case with BlackRock (NYSE: BLK) and Putnam Investments.
But there was something else: Wall Street was abuzz with buyout rumors.
In fact, according to a report from CNBC, it looks like the senior management team of Lehman is meeting this weekend (which is a rare thing). Are they talking to possible suitors? Or, is it to review the figures for Q2? Both?
Despite all this, the fact remains that Lehman's potential suitors are also distressed. So, even if there is a deal, the valuation is likely to be muted.
But there is an interesting scenario: Blackstone Group LLP (NYSE: BX) as a buyer or major investor. The firm is well capitalized and may want an investment banking platform. Moreover, the firm's cofounders -- Stephen Schwarzman (CEO) and Peter Peterson (Senior Chairman) -- were formerly with Lehman (back in the 1980s).
UBS (NYSE:UBS) is making a bid to increase the unemployment rate all on its own. The bank will lay-off 5,500 people, mostly investment bankers. It will also sell a package of $15 billion portfolio of subprime mortgages to Blackrock (NYSE:BLK). According toReuters,"UBS cautioned that conditions in financial markets were still tough and declined to offer any results forecast."
The UBS comments about what happens next are a coded message that layoffs at the firm may not be over. UBS has suffered as much or more from subprime write-downs as any bank in the US or abroad.
The news is especially bad for people employed at brokerages and big banks. A continuing spike in mortgage defaults could cause more difficulty in the pool of financial instruments created around the market. That, in turn, could cause more write-offs at large banks triggering the need to raise capital and cut costs.
Tens of thousands of people have been fired on Wall Street already. The news out of UBS shows that the process is far from over.
Douglas A. McIntyre is an editor at 247wallst.com.
MOST NOTEWORTHY: Hershey Foods, Genentech and Garmin were today's noteworthy downgrades:
Bernstein downgraded Hershey Foods (NYSE: HSY) to Market Perform from Outperform, citing commodity cost pressures & slowing volume growth.
Thomas Weisel downgraded Genentech (NYSE: DNA) to Market Weight from Overweight after the company reported Q1 results, due to Avastin growth concerns and a lack of meaningful drivers of long-term revenue growth until 2009.
Oppenheimer cut Garmin (NASDAQ: GRMN) to Perform from Outperform on concerns regarding PND pricing and the company's profitability dynamics.
OTHER DOWNGRADES:
Blackrock (NYSE: BLK) was downgraded at Goldman to Neutral from Buy and to Market Perform from Outperform at Wachovia.
A fantastic Barron's [subscription required] interview with Blackrock Inc. (NYSE: BLK) CEO Laurence Fink suggests that the collapse of The Bear Stearns Companies (NYSE: BSC) was aided by hedge funds. But my interview with an industry insider suggests that some hedge funds not only created the collapse, but profited from it through short selling.
Here's an excerpt from the Fink interview:
"The fall of Bear Stearns was a liquidity crisis. It has been rumored that there were hedge funds promoting hostile and negative comments, which accelerated the fear of doing business with Bear Stearns. I believe it would be prudent if the SEC investigated these rumors. Bear Stearns was a very fine institution destroyed by the profiting of a few. In a normalized market, Bear Stearns would have never fallen like this. The rating agencies caused the ultimate fall of Bear Stearns."
This is consistent with what I heard from a Wall Street insider who attended a March 14 speech by President Bush at the Economic Club of New York -- three days before the JPMorgan Chase & Co. (NYSE: JPM) deal to buy Bear at $2 a share. This insider sat at a table next to a New York hedge fund manager and asked him whether he was surprised by the collapse of Bear Stearns. What the hedge fund manager said came as a shock to me: "Bear's collapse didn't surprise me. We've been short Bear for five days. All the hedge funds have been pulling their prime brokerage business from Bear."
BlackRock (NYSE: BLK), which is a top global asset manager, is one of the few that has been relatively unscathed in the financial meltdown. The company avoided such things as subprime securities and was quite conservative with client portfolios.
As a result, BlackRock now has lots of flexibility. So, what to do? Well, the firm has put together an IPO filing for a fund of hedge funds (to raise about $500 million). The offering will be on the London Stock Exchange.
Basically, a fund of hedge funds is a platform where managers invest in various hedge funds. True, the fees can be high, but there are some key advantages, such as diversification and improved due diligence. Besides, BlackRock has proved to be a top-notch operator with understanding complex investments. After all, the firm is helping to deal with the management of a big part of the Bear Stearns (NYSE: BSC) portfolio.
Actually, BlackRock's fund of hedge funds is part of Quellos Group LLC, which the firm purchased last year. In other words, it looks like BlackRock may snag a nice return on this deal.
About a year ago, I had a chance to hear a presentation by Laurence Fink, who is the CEO of BlackRock (NYSE: BLK), which is a mega money manager. Simply put, he was a bit concerned about the markets. With the huge amounts of leverage, he thought that investors weren't getting enough premium for the potential risk.
Yes, it was a good call. And the upshot is that BlackRock has been a stellar performer.
Well, now Fink is more sanguine. In fact, in this week's Barron's [a paid publication], there is an interview with him.
What's his take? First of all, he think investors should dip into equities, such as the big caps that benefit from global growth. Some of his choices include: General Electric (NYSE: GE), Monsanto (NYSE: MON), United Technologies (NYSE: UTX) and Boeing (NYSE: BA).
He also likes high-grade mortgage debt. Basically, the spreads are attractive (and seem to account for the risk levels).
Finally, Fink is bullish on overseas markets, especially commodity-based counties like Brazil.
TheStreet.com's Jim Cramer says we'll finally get real pricing of the hard-to-mark paper.
After months of saying, "Why don't they bring in some pros, do a Resolution Trust and get on with things?" I can't believe that it is actually happening. With the anointing of BlackRock (NYSE: BLK) (Cramer's Take) -- nice short squeeze in that one, buddy -- to parse out or invest in the worst toxicity that is Bear's (NYSE: BSC) (Cramer's Take) portfolio, the Fed/Treasury -- and I reiterate that the Treasury is driving this -- is signaling the beginning of the end of the "hard to mark/hard to trade" component of this nasty bear market in fixed income.
Even as recently as two weeks ago I could not believe this stuff couldn't trade and remained 20 bid and 80 asked, meaning that the gulf between buyers and sellers was just too ridiculous.
Now, with BlackRock, empowered by the government, to dump stuff or parse it out, we are going to get real prices because "something has to happen." Some trades have to occur. All that had happened before this was that Bear inventoried all this bad stuff, having unwound it from funds of its own or taken junk from clients, and we had no idea how to value it.
If you can make money lending money to people who can't afford mortgages, why not make money buying them back. Several former Countrywide (NYSE: CFC) managers have linked up with Blackrock (NYSE: BLK) to set up a firm, Private National Mortgage Acceptance Company, to buy troubled mortgages. According toThe Wall Street Journal the new operation "seeks to raise more than $2 billion to buy distressed mortgages on the cheap, work with borrowers to restructure them, and then resell them as performing mortgages at a profit."
The new venture stinks a bit. The people running the venture learned the business at Countrywide, the source of so much of the pain in the current mortgage crisis and the project makes Blackrock appear to be a firm ready to profit from the misfortune of others. Beyond that, the new company seems like a real money-maker.
The Blackrock-supported mortgage-buying operation will have to be careful when it enters the market. If it buys big packages of home loans and the market keeps falling, the start-up could lose a lot of money. Let's hope so.
Douglas A. McIntyre is an editor at 247wallst.com.
With the price of Thanksgiving dinner up 11% this year over last, the Fed won't help consumers because it's confident that inflation -- as measured by Personal Consumption Expenditures (PCE) will range between 1% and 2%. Meanwhile, Washington is happy to create lucrative business deals for Wall Street -- in the form of arrangements to manage and keep records of its Structured Investment Vehicle (SIV) bailout.
What is the Fed smoking? I don't know any personal consumption expenditures that are growing at 1% to 2%. The price of oil has quadrupled since January 2001 to $99.29 a barrel, gasoline prices are up 40% since last year, airfares have more than doubled -- a flight from Boston to Florida that cost $300 last year is now $700 -- and the dollar has lost 61% of its value since January 2001. I guess the Fed has decided to define PCE in a way that conveniently confirms its pro-inflation interest rate policy.
Meanwhile, the Treasury Department has backed a Super-SIV plan to bail out banks, such as Citigroup Inc. (NYSE: C) which created the $320 billion SIVs industry and invested the proceeds of SIV-issued commercial paper in now-worthless mortgage backed securities (MBSs).
A ruling in Vodafone Group Plc's (NYSE: VOD) favor may cause Apple Inc (NASDAQ: AAPL) to rethink its business model for the iPhone device. The injunction against Deutsche Telekom AG (NYSE: DT)'s T-Mobile unit may force Apple to "unlock" its iPhones, the UK Times reported.
Struggling airline UAL Corporation (NASDAQ: UAUA), along with its unit United Airlines, is struggling, but finding a carrier willing to merge may be a problem, BusinessWeek speculated.
Microsoft (NASDAQ: MSFT) announced yesterday that it fired Chief Information Officer Stuart L. Scott on Friday for violating company policies, although the company did not specify an exact reason for the dismissal, reported the Associated Press.
Laurence Fink, the chairman and CEO of BlackRock (NYSE: BLK), has met with the executive search firm responsible for filling the CEO vacancy at Merrill Lynch (NYSE: MER). Fink is believed to be the leading candidate to become Merrill's CEO, according to the New York Times.
WEBSITES:
GigaOM reported that Google (NASDAQ: GOOG) is kicking off its game-focused advertising initiative later this month, according to inside sources.
Blackrock (NYSE: BLK), an investment management firm, closed at $166.63 Monday. BLK is expected to announce Q2 EPS on July 17. Merrill Lynch (NYSE: MER) owns 52,395,082 shares of BLK as of March 21, 2008. BLK July 165 straddle is priced at $14. BLK August option implied volatility of 63 is above its 26-week average of 47 according to Track Data, suggesting larger price movement.
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