Market Analysis

The Exorcist

Just in time for Halloween, Wall Street is once again exorcising the demons of credit crunches past.

Story Highlights:

  • Further evidence of overly pessimistic investor sentiment arrived today as Merrill Lynch CEO Stanley O'Neal's departure appears imminent.
  • CEO scapegoating doesn't have a meaningful impact on stocks—in fact, the appearance of a new regret-shunning cycle from investors is probably bullish.

Now we're talking! No real economic crisis—real or perceived—is really through until someone's head rolls, and it looks like Merrill Lynch's CEO Stanley O'Neal's noggin is on the chopping block.

Merrill CEO Ouster Watch Continues
By David Ellis,

Regret shunning and finger pointing are classic features of a post-financial crisis fallout, and an archetypal sign of a bull market with further to run. When a "wrong" is perpetrated, investors demand their pound of flesh.

It seems, no matter how low long-term interest rates go (10-year Treasuries are sitting at under 4.4%), or how orderly credit markets continue functioning, this credit crunch ain't over until we get some good old-fashioned firings.

The modern CEO is imbued with great power. When things go right, they're heroes and "visionaries;" and when things are bad, the whole thing is their fault alone. The dichotomy is that stark: CEOs are either heroes or villains. (With that kind of responsibility, is it really any wonder they get paid so much?) Thus, their standing in the public eye can often be a great proxy for general investor sentiment.

(Editor's Note: MarketMinder does NOT recommend individual securities; the below are simply examples of a broader M&A theme we wish to highlight.)

Mr. O'Neal was once a hero—brokering a number of huge deals for Merrill in his tenure and was even lauded for his aggressive investment in mortgage-related debt instruments. Today, he's a supervillain of economic woe, the lead transgressor of risky behavior in a financial community gone too far in its assumption of burdensome debt. (See our past commentary, "Rise of the Supervillains," 12/19/2006, for more.)

Yes, O'Neal looks poised to join the ranks of Carly Fiorina, Hank Greenberg, and Phil Purcell before him. But whether he's actually fired or not doesn't much matter at this point—it's clear he's playing lead scapegoat for credit crunch woes. Don't be surprised if we see a few more ritual CEO beheadings in the name of credit justice—and don't fear them.

High profile CEOs are still seen as villains and sentiment is pessimistic—all while global economic fundamentals remain strong and stocks remain dirt cheap relative to alternatives. Therefore, MarketMinder faithful know to laud yet another regret-shunning cycle because it means stocks have much further to climb.

In reality, the credit crunch is behind us. (Actually, there never really was one to begin with—just cash hoarding in anticipation of one.) It's almost as if folks forget earnings reports are by definition backward-looking events, and even Merrill's third quarter $8 billion asset write-down tied to a fallout in mortgage-backed credit products is already history.

There is a danger here, however. O'Neal is likely to be replaced by a more conservative leader, which could set the tone for a more conservative financial executive attitude throughout Wall Street. Should that be the case, recovery in debt instruments and other so-called "risky" investments could be hindered as CEOs hunker down into safer operations. But even so, the effects would likely be short lived. Conditions today are ripe for big capital markets activity—and one way or another the financial community is going to find ways to make money, and as much money as it can.

Here we are in a time of unprecedented global economic prosperity in the fifth year of a global bull market, and investors are still exorcising their demons with ritual CEO firings. It's simply another example of current sentiment's overly dour dislocation from reality—and more reason to load up on stocks today.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.