Thursday, July 17, 2008

Merrill Lynch Q2 08

The company shocked the investors by posting much worse than expected earnings reports. Earnings in Q2 08 was -4.6 bil and revenue was 2.1 bil. The loss is mainly from ABS CDO. ABS CDO net loss is 3.5 bil and credit adjustment is 2.8 bil due the deterioration of creditworthness of financial garantors. The gross exposure of ABS CDO declined form 26.3 bil to 19.9 bil. The company probably sold 6.4 bil of ABS CDO with a haircut of ~50%(3.5/6.4). The company has strengthened its liquidity pool from 82 to 92 bil. Also, Merrill could continue to sell its stakes in Blackrock and Financial Data Service to buffet its capital position. This might spook equity market tomorrow. Given existing gross exposure of ABS CDO and uncertainty of financial garantors. I suggest for underweight of company equity and neutral position ot debt.

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