Five Things You Need to Know: Merrill's O'Neal Sacrificed at the Subprime Altar; Companies Lose Taste for Risk; JC Flowers Now Pretending to Buy Northern Rock; More Home Prices; 2007 Breeders' Cup
What you need to know (and what it means)!
Minyanville's daily Five Things You Need to Know to stay ahead of the pack on Wall Street:
1. Merrill's O'Neal Sacrificed at the Subprime Altar
MERRILL SHARES RISE ON SPECULATION CEO O'NEAL WILL BE OUSTED, screamed the Bloomberg headline on my screen just a bit ago. It's hard not to appreciate the unbridled enthusiasm of the sentiment; Stan O'Neal, the human stock anchor. If O'Neal's ouster could be coupled with another 50 basis point cut in the Fed Funds and Discount rates, well, then we might have something.
To be clear, O'Neil's tenure at Merrill (MER) has been no picnic... for investors. He reportedly angered some of the firm's directors recently by reaching out to Wachovia (WB) about a possible merger without consulting the board. And among peers the stock performance has been abysmal this year, down 34%. That alone would be enough to send quite a few CEOs packing. But Merrill's problems are much deeper than O'Neal, and actually have very little to do with him.
After disclosing losses of $7.9 billion a few days ago, it appears likely Merrill may be forced to write off an additional $4.5 billion of losses on its remaining $20.9 billion portfolio of collateralized debt obligations and subprime mortgages. Like the rest of the banks on Wall Street, Merrill investors were perfectly happy with these investments (and O'Neal) when they were performing. Not that they aren't? Not so much. As Bloomberg noted, "The loss is O'Neal's biggest misstep since he became CEO in 2002."
Look, we're not crying for O'Neal, the guy walked away with $19.2 million in compensation last year. We'd just hate for anyone to operate under the assumption that cleaning the executive house at Merrill has anything to do with multi-billion dollar write offs due to subprime mortgage and CDO investments. That's like firing the captain of the Titanic after he steers the ship into an iceberg.
This is not a Merrill story, or an O'Neal story. This is a story about excessive risk-taking, easy money, Fed-juiced credit appetites and what happens when those things combine to create the illusion of mastery. Bull markets create geniuses only for bear markets to tear them down. And to think, stock markets are still within a hair of all time highs. As we are seeing in the early stages with "the subprime problem," all it takes are a couple of billion dollars in losses for Congress to get involved. O'Neal would actually very lucky to be forced out here and now. It means he may be able to watch the inevitable Congressional testimony that occurs when anyone loses money from the comfort and privacy of home.
2. Companies Lose Taste for Risk
As if on cue, the Financial Times reports that US companies are becoming increasingly risk-averse with their investments, holding on to record levels of cash as a buffer against turmoil in financial markets.
- A survey of more than 100 corporate treasurers by Treasury Strategies, the consultancy, found that more than half had become more risk averse in their investments since the credit squeeze began, the FT reported.
- This has driven cash in corporate portfolios to a record $5,600 billion, up from $5,400 billion at the start of the year, according to the FT.
- The news is also a grim reminder that the Asset -Backed Commercial Paper (ABCP) issues are still not behind us.
- The survey found that Treasurers had sold out of investments in ABCP and eliminated exposures to money market funds that include ABCP.
- They also reported shortening investment maturities and investing in higher-quality securities such as government bonds.
- So companies are apparently losing their taste for risk.
- This raises the question, what exactly does risk taste like?
What Risk Tastes Like
Click here to play.
3. JC Flowers Now Pretending to Buy Northern Rock
Private-equity firm J.C. Flowers & Co., barely weeks after backing out of its $60-a-share offer for Sallie Mae (SLM), confirmed late last night that it is in talks with Northern Rock and is considering launching a fake bid for the troubled British mortgage lender.
Though the firm reportedly said there was "no certainty" a pretend offer would be made, it said it had already settled on a pretend management team should it pretend to go ahead.
According to the Associated Press, other possible bidders for Northern Rock include Apollo Management, Blackstone Group (BX), Lone Star and Cerberus Capital Management, but some analysts fear that those bids could actually prove to be real. "Unlike JC Flowers, one of those firms might actually try to go through with the offer," an analyst told Minyanville.
4. More Home Prices
Yesterday we took a quick look at home prices and received some excellent feedback from Richard Moody that provides a deeper analysis that is worth passing along:
Regarding your comments on housing inventories and median prices – the national median price number is not very useful as an indicator. I think we talk about it because that's what they give us, but there's not really a good reason to. Consider both yesterday's report on existing home sales and today's report on new home sales. Yesterday we were told sales of existing homes in the West region fell sharply, today we were told that sales of new homes in the West region rose – to their highest level to date in 2007. Looking at the price data, the median price in the West region is by far the highest of any of the four regions, meaning that sales in the West have an outsized impact on the "national" median price. This very much helps explain why, nationally, the median price of existing homes fell while the median price of new homes rose.
In short, the median price reported for the nation as a whole is sensitive to the mix and geographic composition of monthly home sales, thus lessening its usefulness. It is more telling to look at the data from individual metro areas, which are available with a lower frequency but point to broad-based price declines across the U.S. which are likely to persist for some time.
Richard F. Moody
Chief Economist/Director of Research
5. 2007 Breeders' Cup
The 23rd Breeders' Cup World Championships will take place at Monmouth Park in New Jersey tomorrow. Below is what you need to know about it:
Each year on the first Saturday in May, no shortage of unsuspecting rubes will make their way to Louisville for the Kentucky Derby to lose the content of their wallets, and in the infield most of their clothes, to a savage mob of local bootleggers and gamblers.
But it's all in good fun, a wink and a smile, a nudge and a tout, which is why no one ever complains about the fleecing. That and the fact the fleeced innocent only discover the larceny days later safely back home in Chicago, or Detroit, or New York. "Hey, where are my shoes? Have you seen my wallet? Why do I have Stephen Foster's business card stapled to my underwear?" Good, clean fun.
But no casual, decent fan goes to the Breeders' Cup. The Kentucky Derby is usually the next to last race on an 11-race card with nobody much paying attention to what happens until the race. Imagine the World Series played in a single inning with lots of batting practice, tobacco spitting, a hot dog eating contest and beer chugging to fill the dead time and you have an image of any three of the Triple Crown races.
But not the Breeders' Cup. The Breeders' Cup is eight straight races in less than five hours featuring the fastest, most dangerous horses on the planet each running for more than $2 million dollars within their own specialized world; sprinters, two-year-old colts, milers on the turf, classic distances.
The Triple Crown is glitz and glamor and a lottery ticket to the world of six-figure stud fees.
The Breeders' Cup is strictly business.
It is a day of reckoning.
The Breeders' Cup was created in 1982, the brainchild of the late John Gaines. Gaines envisioned a day of racing that would unite the industry and create a sort of Super Bowl for horses. The location for the Breeders' Cup changes every year. This is the first time it has been held at Monmouth. Last year it was held in Kentucky at Churchill Downs.
Eight Breeders' Cup races will be televised tomorrow on ESPN beginning at Noon. Three new races will be run today and televised beginning at 4 p.m. on ESPN You can see the full fields for each race with jockey, trainer and morning line odds at Daily Racing Form. But for now, here are Five Horses You Need to Know for tomorrow.
1. Clearly Foxy - Juvenile Fillies, 30-1
This year's Juvenile Fillies race features a fairly weak field. Clearly Foxy is not so much slower than any of the well known horses, and in a race with no standouts, why settle for someone at short odds?
2. Cosmonaut - Mile, 15-1
The Breeders' Cup Mile features the world's best turf miler, Excellent Art, who is much better than any in this field. The problem is Excellent Art is drawn in the 13th post position in a race that features a short run to the first turn at a course with tight turns. That could be just enough to bring him down to earth a bit and give someone else a shot. Cosmonaut looks best of the second tier (to Excellent Art) horses.
3. Bear Now - Distaff, 15-1
Lady Joanne and Lear's Princess both look very strong in this race, but Bear Now at 15-1 isn't too far behind. If either of those don't like the sloppy, slippery track for some reason, Bear Now could pull the upset.
4. Red Rocks - Turf, 7-2
The pre-ordained winner of the turf is a horse named Dylan Thomas, listed at 7-5 in the morning line. But we hate pre-ordained winners, especially at 7-5. The rain will have the turf course very soft, and that benefits Red Rocks who won this race last year. Conventional wisdom is the horse, who is more lightly-raced this year is not as good as he was in 2006. We disagree. He's been pointed for this race all along.
5. Street Sense - Classic, 3-1
We love the fact the Kentucky Derby winner shipped to the Turfway polytrack last out and lost. Had he won he'd probably be the odds-on favorite. Now he's almost bettable at 3-1. It's been no secret that he has been pointed to this race since losing the Preakness by a nose to Curlin. This is a talented horse, and scarily enough we may not have yet seen his best race. Thinking we will tomorrow. Did we mention his nickname is Big Daddy Rabbit? He's got big ears.
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