I last wrote about First Marblehead (FMD)
in early August at the height of the liquidity crisis as funding was
drying up for nearly every lender and investors were worried about loan
assets that might be impaired or overvalued on balance sheets. Since
the fed cut the rate at the discount window and then cut the primary Federal Funds rate
by 50 basis points last week, many of these fears have been either put
to rest or shoved to the back burner. At the same time, I think Wall
Street has begun to price securities on a case by case basis instead of
the shoot first, ask questions later selling from last month. A
beneficiary of this individual asset pricing is FMD who truly has
little risk linked to a credit crisis due to the fact is is a
consulting company and does not carry loans on its books.

Wednesday was a very quiet day for FMD as the stock
hovered around the unchanged area nearly all day. Suddenly at 3:40 EST,
I was surprised to see FMD shoot up nearly three dollars almost
immediately. While the price action backed off a bit into the close,
the stock finished the day up $1.41.

Initially I couldnt find any news
on the stock, but an associate of mine was mentioning a quick drop in
SLM Corp (SLM)
which occurred at the exact same time. Sure enough, they were related as
FMD was trading off the news that several banks who were attempting to
buy SLM were having second thoughts. If the SLM deal were to go bust, it
would have a positive effect on FMD because of the business it
currently does with these banks.

FMDs primary business is to advise financial institutions on
marketing and servicing plans for education loans. While SLM operates
more on the funding side of the business, it also participates in
consulting with the banks on how to set up these loan programs. There
was some concern that a merged SLM would take business from FMD as
banks would prefer to do the programming and servicing of the loans in
house instead of outsourcing some of these functions to FMD. While many
of the banks have publicly stated that they expect to continue their
relationship with FMD, the SLM concern has been weighing heavily on FMD
as an added burden to the stock price. It appears that if this deal is
not able to be consummated, or if there are fewer banks participating
in the acquisition, FMD will likely receive more business, and the
stock price will lift as investors gain more confidence.

From a technical perspective, there still may be a good bit of
supply having over the stock. $42.00 is a key area as that is the level
from which the stock gapped down in April, and the level has been
tested 3 times now as the stock attempts to repair the damage. But
while FMD is not out of the woods yet, I believe investors are gaining
more confidence in their long-term prospects and the company as a whole
is becoming better understood.

Disclosure: Author is long FMD

Originaly from Source