All in Thain

By, 11/15/2007

Story Highlights:

• In the wake of asset write-downs tied to the credit crunch, Merrill Lynch hired industry veteran John Thain as its CEO.
• The rise of risk-averse, hunker down executives indicates dour investor sentiment, not fundamental capital markets problems.

(Editor's Note: MarketMinder does NOT recommend individual securities; the below is simply an example of a broader theme we wish to highlight.)

Wet blankets. Sticks-in-the-mud. Squares. That's how to describe today's CEO psyche. Boards of Directors and investors continue desiring nuts-and-bolts, risk-shunning CEOs instead of visionaries willing to take risks and spring their companies ahead of the competition. This was most recently highlighted by Merrill Lynch's hiring of John Thain to the chief executive role in the wake of asset write down turmoil.

Famous for taking the helm of the NYSE after the Grasso compensation controversy, John Thain is quickly becoming an icon in an era of regret-shunning. He's the go-to, hunker-down guy to fix excesses of market greed.

Merrill Taps NYSE's Thain as CEO
By Randall Smith and Aaron Lucchetti, The Wall Street Journal

"For Wall Street at large, the message in the elevation of the low-key financial veteran is clear. After an era of go-go growth that led firms into profitable but chancy areas like mortgage securities, the industry is moving toward the kind of leader who gets down into the nitty-gritty of risk management."

In other words, a wet blanket CEO.

What's going on here? Why are today's preferred CEOs stodgy squares instead of charismatic visionaries? In the post-tech bubble, post-Enron, post-Worldcom, post-macarena era (er, maybe not the last one, but it was still bad), folks are far more risk averse than years past. They want a CEO who will protect a company, not lead it to great things.

We've seen this phenomenon a number of times, including the replacement of New Economy icon Carly Fiorina for straight-arrow Mark Hurd at HP, and super-guru Jack Welch for the mild-mannered Jeff Immelt at GE. Now it seems Financials are getting a turn to castigate executives. For every cataclysm a scapegoat is needed, and CEOs are the figureheads built to fill that role; heroes in the boom, villains in the bust.

The key feature this time around is that Financials' CEO firings appear to be predominantly sentiment-based. The credit crunch is less a crisis than a bump in the road, and the big Financials companies are on balance in very good shape. That tells us this classic regret-shunning cycle is more a revelation of today's dour sentiment than a necessary defusing of a catastrophe.

Once Mr. Thain triumphantly sedates Merrill, what next? Should we send him to anesthetize China's heated markets? Heck, we could even have him defuse the whole Britney Spears / Kevin Federline divorce fiasco! Why not?

As the world hunkers down to further sulk in regret-shunning, investors should be accumulating stocks. While we have no qualms with Mr. Thain as an executive, it's important to also recognize him as a symbol of today's dour psychology.

That's not to say there's no effect whatsoever to the wet blanket CEO phenomenon. It's entirely possible today's executives slightly hinder earnings growth in the short term with their risk averse morals. But in our view the animal spirits simply won't let it last. Even today's brand of plain vanilla executives can't keep stocks down for long—valuations are too attractive and economic fundamentals are too good.

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

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


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