Friday, August 29, 2008

Broker Thoughts

I want to talk a little about the brokers for a moment. Many out there are arguing that they are cheap on a forward earnings basis, book value, and even better takeover basis. I try to be a very common sense thinker, if what I do can be called thinking, but I do notice that Merrill and Lehman's prize assets are their money management divisions. In particular Blackrock for Merrill and Neuberger Berman for Lehman. Regular readers know you do not sell winners you keep them but yet that is exactly what both Merrill and Lehman are considering doing with these 2 sub units.

I am thinking out loud here, so what do Merrill and Lehman bring to the table besides their sales and distribution network. Investment banking you say? Sure, but let's go back and see the value in these deals if there is any or is it deals to just do deals? Daimler, BMW and Toyota, don't outsource their car and truck manufacturing capabilities so why does Merrill Lynch or a Lehman need an investment manager? Do they manage money or not? If so why do they own a Blackrock or a Neuberger? Either they do it better or Blackrock and Neuberger does. So this begs the question as to what are we paying a Merrill or Lehman for? Investment advice? Should a Merrill trade for a multiple or a valuation similar to an Autonation (AN), Carmax(KMX), or Sonic Automotive(SAH)? A commission sales, staff with a service and repair department.

You may call this thinking crazy and maybe it is but I fail to see the difference. Now you factor in the fraud, the dishonesty, the duplicity, and where does this leave you with a Merrill. I would suggest the Merrill you see today is a far far cry from the Merrill that my grandfather under Charlie Merrill and my uncle under Donald Regan worked for. Back then Charlie Merrill went door to door taking sound securities and sold them to the retail public. Of course he wasn't sophisticated enough (not) to securitize toxic, debt paper and peddle it to our pension funds. He was a man of character. I wish no ill on the likes of Merrill but facts are facts and Merrill is reaping what is has sowed. It is a snake pit of unknown depths. I realise that your own broker is the face of Merrill and you may like him/her very much. But this retail army of brokers must follow orders or be courtmartialed. They must offer for sale what they are told to and anyone who tells you opposite has now idea how the retail brokerage firm model operates.

You disagree with this assessment? Then please explain to me how a firm of this magnitude, goes out and throws the bank ($$$) at an internet analyst, who by the way had a BA in English from Princeton, (now remember this technical qualification for an internet analyst mind you!) from Oppenheimer and who prior to being said internet analyst was a proof reader at Random House books. Further to this his only notable claim to fame, besides outright duplicity and DOCUMENTED fraudulent misrepresentation to clients, was an outlandish hail mary call on (AMZN).

For those interested, on Dec. 15, 1998, Amazon closed at $242.75 The next day, Mr. Blodgett made the prediction that Amazon would hit $400 in the next 12 months. Amazon surpassed the $400 price target in about three weeks.

Now this is the same Merrill Lynch that went out at the top of the housing market and purchased First Franklin. This is the same firm who purveyed auction rate securities on it's clients. I could go on but you get my point. Now I hear your argument already, everyone on Wall St. did this sort of thing. Yes, you are absolutely correct ! So what does that tell you about Wall St., those self proclaimed mavericks and trailblazers of financial innovation and engineering. They are fraudsters and thugs who merely copycat each other, no different than any criminal enterprise. The produce nothing, yet with enough bluster and pomp, with enough glossy graphs and fancy powerpoint presentations, they try and have convinced many that 1+1 =4. You see this is important because their bonus is calculated on this number so it is all that matters. Now don't forget that bonus's are paid to the architects of this frankensteim finance when things are great and when things fall apart as they are now, well, the shareholder has exclusive rights over the losses as bonus payments are non-refundable. Nice setup. No wonder the masses are flocking to MBA school rather than engineering, or geology, or medicine. Ya do have to give Merrill and Wall St. in general credit though, as they could convince an Eskimo to buy snow.

Housekeeping notes;

I was stopped out of my short Blackrock position yesterday at $218.25 for a flat trade on 1 unit. Frustrating you say, absolutely but we must trade this way. We must not let the boyz lunacy, no matter how bizarre, sink our ship. Believe me, the equity boyz and the product they smoke can alter their universe and in the process overwhelm our boat. We must step aside, hence adhering to our stops and not let losses run on us as this would be the absolute worst error we could make.

Why didn't I take my profits when BLK was trading $203-204, being up over 10pts you say? Well, sure I could have lowered my stop further down but this more often than not over the long haul, will cut your profits off at the knees and this is the 2nd worst error we could make.

I want to wish all my readers, a safe and enjoyable Labor Day holiday. I will be back at my post Tuesday.

Good speculating to you all and never ever forget that "an investor is a speculator who made a mistake and will not admit it".

Open Positions:
Long 2 units of Powershare Agriculture ticker DBA @ $35.35 stop $34.79
Long 2 units of XTO Energy ticker XTO @ $45.40 stop at $44.48
Long 1 unit Currencyshare SwissFranc ticker FXF @ $92.70 stop at $90.68
Long 2 units Ultra Oil & Gas ticker DIG @ $84.65 stop at XLE $71.93
Long 1 unit U.S. Oil Fund ticker USO @ $96.95 stop at $91.38
Long 2 units Ultrashort S&P500 ticker SDS @ $64.65 stop at SPY $130.58
Long 1 unit Oil Service Holdrs ticker OIH @ $186.05 stop at $177.64
Long 1 unit Ultrashort Financials ticker SKF @ $123.65 stop at XLF $22.06
Short 1 unit Int'l Bus Machines ticker IBM @ $129.05 stop at $128.56
Short 3 units FedEx ticker FDX @ $87.10 stop at $88.16
Short 2 units of Apple ticker AAPL @ $178.05 stop at $182.76
Short 1 unit ticker CRM @ $57.05 stop at $60.62

1 comment:

Mike said...

..they could convince an Eskimo to buy snow.

Heck, they could convince an Eskimo to buy "yellow" snow.