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Friday, July 18, 2008 10:06 AM

Short Squeeze In Financials Continues

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MarketWatch is reporting Merrill reports $4.65 billion quarterly net loss.

The firm also said it agreed to sell its 20% stake in Bloomberg LP back to the media company for $4.425 billion. It also plans to sell a controlling interest in its Financial Data Services unit, which has an enterprise value of more than $3.5 billion.

Moody's Investors Service downgraded Merrill to A2 from A1 after the results.
The sale of the Bloomberg stake and plans to sell Financial Data Services will cushion the impact of Merrill's second-quarter loss on their firm's capital ratios, the ratings agency said. But it also warned that Merrill has lost some financial flexibility.

"Management's options to sell assets or raise more common equity to offset unexpected losses are now reduced given the difficult industry and capital markets environment," said Peter Nerby, a senior vice president at Moody's.

Merrill may suffer another $10 billion in pre-tax write-downs, mainly from exposure to CDOs and other mortgage-related securities, Moody's predicted. If losses exceed that, the agency said further downgrades may be needed.

Merrill reported $3.5 billion of net losses from its exposure to so-called super senior CDOs. The firm took another $2.9 billion hit from the falling value of hedges it bought from bond insurers. Merrill took another $1.7 billion in net losses from the investment portfolio of its U.S. banks and $1.3 billion in write-downs on residential mortgage exposures.
Citigroup Posts $2.5 Billion Loss

Citigroup shares are up 10% in the third better-than-expected financial report this week.
It was the third better-than-expected financial report from a major bank this week, and Citi's 9.4% rise to $19.56 set up the sector for its third straight day of strong gains.

On Tuesday, Wells Fargo reported stronger earnings than expected, while on Thursday J.P. Morgan Chase reported results that pleased Wall Street.

Citi, the largest U.S. bank by assets, said on Friday that it lost money for the third consecutive quarter after writing down $7.2 billion of investments related to fixed-income weakness and consumer credit woes. The results were a bit better than expected, as some analysts had expected the firm to report write-downs of up to $9 billion.

The company (C) said it lost $2.5 billion, or 54 cents a share, compared to a profit of $6.23 billion, or $1.24 a share. On a continuing operations basis, the firm lost $2.22 billion, or 49 cents a share, compared to a profit $6.14 billion, or $1.23 a share.

"We cut our second-quarter losses in half compared to the first quarter," CEO Vikram Pandit said in a press release Friday. "While there is still much to do, we are encouraged by our progress in delivering on our commitment to the re-engineering efforts," he added. Revenues were $18.7 billion, down 29%.

The U.S. giant is planning to slash around a fifth of the assets on its balance sheet -- as much as $500 billion -- to help it recover from its massive losses in the credit crisis.
Short Squeeze Continues

The financials continue to bleed but the short squeeze continues. Fannie Mae is up another 25% today to $13.66 in the wake of Selective Enforcement of Regulation SHO and Bernanke's statement: "It's important for Fannie Mae and Freddie Mac bonds and stocks to rise so they can keep raising capital and aid the mortgage market."

This move in financials is going to fail spectacularly once the panic buying ends, but for now the bulls are having a bit of fun.

Mike "Mish" Shedlock
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