Opinion on  Merrill Lynch & Co Inc (MER)     Sector: Financial  >  Industry: Investment Services
MER - A Closet Full of Troubles

Financial Stocks to Remain Under Pressure in 2008

Look for current rally to fizzle and for financial stocks to remain under pressure in 2008.

While the perhaps heroic, certainly desperate actions of Ben Bernanke and the Federal Reserve bank have brought some relief to the Wall Street investment banks, commercial banks, and mortgage companies look for the relief to be very short lived.

In my opinion, the problems with the world’s financial system, with the United States in the lead position, are just far greater than the solutions. In the end we will be lucky to avoid a financial meltdown.

Merrill Lynch (MER), while already taking billions in writedowns, is one of the brokerage firms that likely still has a largely toxic waste portfolio hidden away in a back closet. In addition Merrill and other Wall Street firms face potentially damaging litigation from a large army of investors who feel that they were mislead by junk financial instruments being sliced and diced and sold to them as AAA grade investments.

What do you think?

The fact is that Merrill and other Wall Street brokerage firms and investment banks got far too excited about the fees and commissions that they could and did earn from selling garbage to trusting investors. Many of these investors, like state retirement funds, do have the means to pursue litigation over the long term.

It's not a very sound business model to make a killing for a few years, then to give the money earned back, and more, over the next year or two. The brokerage and investment banking industries are very much at the beginning of the giving back phase.

Brokerages and investment banks will face a tough operating environment as a recession takes hold that will prove to be considerably deeper and longer lasting than currently forecast. The tougher operating environment plus largely worthless mark to make believe portfolios, plus a ton of adverse litigation, will prove to be devastating to MER and the big boys of the run and gun Wall Street industry.

Operating profits for the industry will likely be down by at least 30% this year. Merrill will likely do worst.

For additional information on the 2008 outlook go to  http://taipaninvestor.info/blog  Taipan Investor.      
 

Merrill Lynch and many other financial sector stocks will be reporting first quarter 2008 earnings over the next few days. Look for a horror show that will definitely spook Wall Street.

Recently it seems that the majority of Wall Street analysis and commentators have underestimated the severity of current economic conditions. Wall Street "experts" have even recommended bottom fishing in the financial sector stating that the worst of the credit crunch is over.

For those who enjoy the sport of trying to catch falling knives, go ahead, try to pick a bottom. I'll bet you will be far too early if you attempt to do that just now. 

After General Electric's earnings report issued last Friday you can expect a new wave of scared selling to hit just about all sectors, especially the financial sector and a already sick MER. When a bell weather  stock like GE reports such shocking numbers you can be sure that there is plenty more trouble to come for the stock market.

PE ratios remain far too rich in a hostile environment of sharply falling earnings.