Today's announcement that Merrill Lynch (MER) is raising capital is not news. In an attempt to bolster capital levels as a result of an $8.4 billion write down of assets in the third quarter and an anticipated $8 billion write down in the fourth quarter, MER has been seeking capital infusions and the sale of "non-strategic" assets.
MER announced a $6.2 billion capital infusion: $5 billion from Temasek, an investment company owned by the government of Singapore and $1.2 billion from Davis Selected Advisors (DSA). I do not pretend to estimate the merits of foreign government investments in U.S. stocks; however, DSA's decisions are assessable. DSA has generated good results for their clients by focusing on fundamentals, not "fads," reminding me of Warren Buffett's comment that "Fear is the foe of the faddist, but the friend of the fundamentalist."
DSA committed $1.2 billion to the purchase of MER stock at a price of $48 - roughly 15% off the present trading price. This commitment represents about 1.3% of the $92 billion of AUM. This is neither a large position for DSA as DSA does make larger, more concentrated investment positions, nor is it a negligible position. 1% is, as a friend of mine says, "real money."
Fear has driven prices down significantly. MER is almost off 50% from its 2007 highs. Intrinsic value has eroded, as $16 billion of write-downs represents a significant percentage of the $40 billion book value of MER. However, the problems are known, while the exact size is not. At a price of 15% off today's values, fair values are available. Another 20% more than that and fear will be my good buddy.
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