Dueling Fools
The Wise Guys
May 5, 1999

The Bear Rebuttal
by Bill Barker ([email protected])

Rick tap-dances around the real issues with Merrill so fast, I feel like I'm watching Riverdance. With as tepid a "Bull" argument as Rick has put forth ("Is Merrill that bad?"), I imagine a lot of conspiracy theorists out there are thinking this Duel has been Foolishly staged, with the Wisdom Bull just rolling over for the Bear here. But no, Rick has set forth the best bull argument for Merrill that there can be -- i.e., people just haven't caught on to Merrill's prices yet, and maybe, just maybe, that will hold up for a while longer. If so, Merrill can continue to make a lot of money off of its clients' ignorance, just as it always has. I'm not going to just dismiss that as a possibility either. But, even so, what you're reading in Rick's argument is a survival story, rather than a growth or industry dominator story.

As I'm sure Rick knows, Merrill's market share in the financial services industry is dwindling. In the mutual fund industry, last year the Vanguard Group was #1 in new mutual fund inflows, and took in more new cash than the next four companies combined. Why? Why is Vanguard, which has no paid sales force, taking in so much? Because it's cheaper and it's better than the Merrill Lynches of the world. Though I imagine Merrill has the largest paid mutual fund sales force on the planet, it didn't crack the list of top companies for inflows because its mutual funds are, in a word, pathetic.

It takes people a while to catch on when the facts are being distorted by their brokers/salespeople, but catch on they do; you can bank on the fact that Merrill is going to be seeing less and less of the market for mutual fund dollars every year. Eventually, of course, there could be an actual outflow.

Rick flags the recent earnings report as a sign of good news, but it's hard to get very excited about it because every financial services company had a great quarter. Merrill had better be showing record profits in a quarter where the market is setting new highs. It's a reminder, too, that Merrill is absolutely dependent on a bull market to show increased profits at this point. Look at what happened during the last "bear" market. Last fall the market took about a two month breather, and Merrill started losing money (due, of course, to some poor trades) and started firing thousands of employees as fast as it could.

Which leads us to Rick's feigned confusion over why Schwab has a higher market cap than Merrill. C'mon, Rick, you're not fooling anybody there. Schwab showed profits up 110% year-over-year last quarter, while Merrill's were up only 18%. That Merrill could manage to have profits that were only up 18% in light of what a fantastic year and quarter the financial services industry just had is a sign of weakness -- not strength.

Rick endorses Merrill Lynch's fifty-year-ago "noble slogan" of "Bringing Wall Street to Main Street." That is a noble slogan -- it's just that Merrill Lynch doesn't have even a passing resemblance to actually caring about it anymore. Let me counter with another old Merrill slogan, "Bullish on America." If you're really bullish on America, then you have to expect that Americans are going to be good, rational allocators of their capital. And if they are, Merrill's current business model is pretty much doomed.

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