Merrill Lynch (MER): To Short Or Not To Short?

From Wall Street’s vaunted CEO’s, we’ve all seen our fair share of what my favorite hockey Coach used to call “misinformation” in 2008. Most of these CEO’s have either been fired or are currently under fire, however. Save one John Thain, who is actually Merrill’s new face, but not a new one to the Street.

Goldman Sachs has produced some interesting politicians as of late. John Corzine, is suffering from bad public opinion polls as the Governor of New Jersey. Meanwhile, Hank Paulson is doing his best to admit that he has no idea what to do for the next 3-6 months before he loses his job as the Secretary of the Treasury. Then we have Mr Thain, another Goldman alum, who is one of those guys that apparently thinks he is so smart that he can fool everyone with “misinformation”, including himself.

In Merrill’s recently filed 10Q, Thain’s latest disclosure was that the $4.3 Billion stake that he announced Merrill was selling back to Bloomberg wasn’t exactly a cash deal. In fact, Michael Bloomberg didn’t really give Merrill any cash at all. Merrill gets $110M in cash, and the rest in long term notes! Yet, John Thain was waiving Merrill’s sale of their 20% stake in Bloomberg as a liquidity event? I don’t get it. I guess he is hoping no one does.

We have our eyes on Thain’s concept of transparency. This is the 2nd time he has been ‘You Tubed’ in less than a month. For one, that’s hard to do; secondly, it’s just embarrassing. Insiders bought a pile of MER stock at $22.50/share at the end of July, but that certainly doesn’t mean much to me. Insiders have been buying stock in poorly managed companies at terrible prices since November of 2007.

Merrill is one of those companies that I am looking to re-short into this latest market rally. I like to sell high, and cover low – I do not have a position currently, but I will if the stock fails at my resistance line of $28.66. At 4.1% of the float, the stock has a shockingly low short interest relative to the risks implied in their equity valuation. This company has negative cash flow from operations and will have no visibility on paying their dividend if the US economy deteriorates to the extent that it has the potential to from here.

My math says that a drop from $28.66 to $22.50 is a -21.5% decline, and I’ll happily cover the stock alongside any insiders who are brave enough to buy more on that downside test. If the stock can close above $28.66, I’ll stay on the sidelines and refresh this point of view as the facts change. For now, be weary of what this company states as facts.
KM
  • If MER fails at $28.66, I'll be shorting it.
(chart courtesy of stockcharts.com)