Call it an ugly mortgage market, call it poor risk management. But Merrill's writedown of $7.9 billion in subprime mortgages and collateralized debt obligations (CDOs), $3.4 billion more than they had previously announced just three weeks ago, was being greeted as a sign that plenty more bad news remains on banks' and brokers' books.
Merrill claims that the difference was due to "additional analysis...including the use of more conservative loss assumptions in valuing the underlying collateral."
Still, despite the bad news, the stock is only down 3% pre-open. Why not more? Maybe because the market has already anticipated a bigger writedown--Merrill was down about 12% last week as there were widespread rumors it would announce writedowns in excess of the $5 b they had previously announced.
And as Deutsche Bank pointed out yesterday, the current level of writedowns would leave Merrill with a book value of roughly $41. Historically, Merrill has traded at roughly 1.8x book value, giving a current fair price of $73.80 (Merrill trading this morning at $65 and change). In other words, the market has already anticipated the additional writedowns, and more, and is reflecting that in the stock price. Merrill will hold a conference call at 10 AM.
The U.S. consumer slowdown is the second theme this morning:
--Talbots joins Coach by lowering their earnings guidance, citing a "conservative consumer" (used to be the guidance was conservative, now the consumer is conservative). Down 8% pre-open.
--Separately, AutoNation and Marine Products had similar comments. AutoNation made their numbers, but noted a decline in new car sales, particularly in California and Florida, due to the housing slowdown.
--Boat maker Marine Products missed their earnings estimates, citing high fuel prices and higher insurance costs, as well as the now-ubiquitous housing slowdown. They also cited particular weakness in Florida and Southern California.
--Finally, tool maker Stanley Works bucked this negative trend, reported solid earnings and maintained its 2007 guidance.