Sunday, November 4, 2007

Rumors Create Buying Opportunity in Financials

The rumors are flying rampant and financial share are getting hit like crazy. There are so great opportunities out there.

Goldman Sachs (GS) on Friday denied a rumor that they could announce billions of dollars in write-downs. "We've said there's no truth to these rumors," said Ed Canaday, a spokesman for the brokerage. Despite that, shares finished down $10 or 4%. Shares that fetched an all time high earlier in the week at $249, now fetch $229.

Perhaps the epitome of the silliness was Deutsche Bank (DB) analyst Mike Mayo. Mayo predicted late Thursday night that the investment banks will need to take another $10 billion in writedowns in the fourth quarter, with hits of $4 billion each at Citigroup (C) and Merrill Lynch (MER) and a total of $2 billion at places like Wachovia (WB)and Bank of America (BAC).

Then, after the Wall Street Journal suggested Merrill Lynch could be under investigation over its handling of mortgage debt, Mayo issued a new note downgrading Merrill to "Hold" from "Buy" and saying it could face $10 billion in write-downs on its own. No additional facts were disclosed, nothing was said, just a Journal article and Mayo increased his estimates of write-offs by 150%. The Journal article essentially said Merrill Lynch struck deals with hedge funds to take certain positions that did not transfer risk, but merely delayed it so Merrill Lynch would not have to disclose its exposure now. That practice is under investigation by the Securities and Exchange Commission according to then paper.

Merrill Lynch said in a statement that it has "no reason to believe that any such inappropriate transactions occurred," adding they would violate the company's policy. Again a denial but no matter, the analysts are racing for the largest number.

On Thursday, the before never heard of Meredith A. Whitney of CIBC World Markets, said Wednesday night that Citigroup (C) "might" be forced to cut its dividend or sell assets to head off what she said was a $30 billion capital shortfall. The call lead to a 7% decline in Citi stock to a 4 year low.

Could they be right? Sure. Could they be wrong? Most likely. Mayo and Whitney are just guessing and giving investors guidance because of that. Investors reactions smell like fear and we all know what Warren Buffett says about fear....."buy it".

 Subscribe in a reader


blogger templates | Make Money Online