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Two Ways To Play: Merrill, Korea Asset Talks Stall

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Strengthen your portfolio in good times and bad.

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According to Bloomberg Merrill Lynch (MER) discussed selling mortgages and other debt securities to Korea Asset Management for less than $200 million. But talks are breaking down because both parties cannot agree upon a price.

At issue are "scratch-and-dent mortgages," which include mortgages that are in default, unqualified to be packaged into other securities, or missing proper documentation. This is part of Merrill CEO John Thain's attempt to dump these assets to reduce risk and free up capital. To date Merrill has been hit with over $50 billion in writedowns. In July, the third-largest U.S. securities firm sold $31 billion of collateralized debt obligations for 22 cents on the dollar.

A breakdown in negotiations could mean Merrill and other banks like Lehman Brothers (LEH) would have to cut prices further. Korea Asset Management CEO Lee Chol Hwi also said his firm could be patient because the U.S. financial crisis will likely push prices lower.

From the Bull Pen: The most powerful rallies have occurred in the context of bear markets. Bulls can test the upside if the SPY successfully tests the July Low ($120). Sell stops can be set below that level.

From the Bear Cave: We've spoken on the Buzz today about how the credit markets remain stressed and that financials are in a worse position than before. But bears need to be cautious of another potentially powerful rally. A pullback on the Ultrashort financials (SKF) to the $100 mark could provide bulls with another opportunity.
No positions in stocks mentioned.

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