When Brokers Defy Logic (BSC, MS, GS, MER)

Whether or not the markets comply going into year-end is a completely different issue.  But these brokerage stocks look like they are trying to find a bottom as they throw out all that they can.  Will there be more bad headlines? You bet there will.  But these firms are not at all signaling that they will implode from all the CDO, mortgage, and debt risks.  That is what Wall Street is focusing on for the time being.

This morning Bear Stearns (NYSE:BSC) posted an incredibly wide loss and its first quarterly loss.  Its $854 million loss for the quarter after a $1.9 Billion write-down translates to -$6.90 EPS.  The truth is that it doesn’t really matter what the numbers were.  The company is sending the message that it will survive this CDO and mortgage implosion mess. It’s also not paying a bonus at the top and CEO Jimmy Cayne is one we think taht will probably ‘retire’ in 2008.  Initially the stock dropped on the news, but BSC shares are actually trading up about 1.5% at $92.00 in pre-market trading.

Yesterday, Morgan Stanley (NYSE: MS) also posted a loss and took $9.4 Billion in charges.  it also took a $5 Billion investment from China and CEO John Mack took no bonus.  Its shares rose roughly 4% yesterday and are up almost 1% pre-market today at $50.49.

On Tuesday, Goldman Sachs (NYSE:GS) came out and beat earnings expectations yet its stock fell over $7.00 Tuesday after reports of a "horrible November" were noted on its earnings conference call.  Those "horrible November" comments were being passed around Wall Street on instant messenger comments on Monday afternoon, so that was really just a confirmation.  Goldman Sachs has gone unscathed so far because of its hedging and bets against mortgage and CDO’s earlier this year.  This one is by far the Best In Show out of the brokers.  Shares are up marginally pre-market after a light recovery yesterday.

Merrill Lynch has already taken over $10 Billion in write-downs and Credit Suisse put their worst case scenario as an additional $12 to $15 Billion in write-downs.  With John Thayne as the new CEO there, you can expect him to throw out the bathwater, the baby, mommy, and all the cousins.  None of this happened on his watch there and he has a real incentive to clean house so Merrill Lynch can focus on the future.  Shares of Merrill lynch are up almost 1% pre-market.

When you see stocks trading up on bad news as most of the data is finally being filtered out, it tells you something.

Jon C. Ogg
December 20, 2007