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Merrill Downgrade Creates Market Pain

Merrill Lynch's lack of assurances about future losses and an S&P downgrade of the Wall Street broker combine with weak housing numbers to create a bad brew for stocks.

Merrill Lynch'sreport of a $2.3 billion loss and an extra large writedown of $7.9 billion is taking a bite out of its stock and adding to the negative tone weighing on the market.

But also nailing the broader stock market was the midmorning move by Standard and Poor's to lower Merrill's credit ratings with a negative outlook, raising questions about the firm and Wall Street in general. Bad numbers on housing are also a negative.

The worst hit sectors are telecom, fiinancials and technology, where sellers are taking profits out of recent strong gains.

Merrill Lynch's loss, from bad bets in mortgage-related debt and other securities, is the first for the firm in six years. It is also a shocker because Merrill had already preannounced a $5 billion writedown, the largest on the street. But the fact Merrill would disclose a bigger number in this earnings report raises new concerns about the firm's health.

The writedown fits with the figures rumored by Wall Street for the last couple weeks. It also falls within a range reported by CNBC's Charlie Gasparino since earlier this month. The writedown though also included some of Merrill's higher grade securities, a surprise to analysts.

"How did they misvalue these positions as badly as they did?" said analyst Jeffrey Harte of Sandler O'Neill on "Squawk Box" today. "It's definitely going to raise concerns about the rest of the street but more specifically, it's going to raise concerns about Merrill Lynch."

Merrill CEO Stan O'Neal, as the company's earnings conference call began, admitted that "we got it wrong by being overexposed to subprime." Merrill's stock has been moving down on expectations of the writedown and it was down as much as 2% this morning.

"I am accountable for the performance of the firm overall and my job, our job, the leadership teams' job, is to address where we went wrong," he said.

Traders said Merrill management also did not declare the problems over so that was a negative for the stock and sector.

In its note, S&P said its concern about Merrill increased because of the size of the losses and "management's miscues regarding the valuation of its positions." It also said it expects management to initiate a major retrenchment in the mortgage and CDO sectors.

Buyers are finding safety in Treasuries this morning and yields continue to fall. The two year was yielding 3.80%.

The U.S. markets also got a shot of bad news from the housing market. Existing home sales fell 8% in September, to a record low 5.04 million unit pace. It was the lowest sales rate since the National Association of Realtors began tracking home and condo sales on a joint basis in 1999.

A big focus will also be CNBC's Dylan Ratigan's roundtable with President Bush's economics team on "The Call." The White House Economic Summit includes Ed Lazear, Chairman of the Council of Economic Advisors, Commerce Secretary Carlos Gutierrez, Al Hubbard, director of the National Economic Council, and Jim Nussle, director of the Office of Management and Budget.

Squawk Box Treat
For those of you who missed "Squawk Box" today, you missed a moment that business news junkies would savor--an exchange between Warren Buffett and former GE CEO Jack Welch.

Welch: "When I heard you were looking at some Bear Stearns stuff, it reminded me of our joint forays into Wall Street."

(laughter from Buffett, who was calling in from China)

Buffett: "Jack, I never figured out which one of us was getting the other one in trouble. You went into Wall Street. I went into Wall Street. You went into airlines. I went into airlines. Maybe it was vice versa. We went hand-in-hand into trouble."

Buffett is traveling in China, and CNBC's Becky Quick is there with him, reporting on the trip. Buffett also told Squawk Box that he looked at some of the debt Wall Street is trying to offload but he says he had a hard time figuring out the value of it.

"There could be possibilities down the line in some of the distressed paper. but my guess is there's going to be a lot of money lost in distressed paper," he said.

Questions? Comments? marketinsider@cnbc.com

  • Patti Domm

    Patti Domm is CNBC Executive Editor, News, responsible for news coverage of the markets and economy.

  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

  • CNBC Senior Commodities Correspondent and Personal Finance Correspondent

  • JeeYeon Park is a writer for CNBC.com. Follow her on Twitter: @JeeYeonParkCNBC

  • Rick Santelli joined CNBC Business News as an on-air editor in 1999, reporting live from the floor of the Chicago Board of Trade.

  • Senior Producer at CNBC's Breaking News Desk.