Blog Post

It's amazing what having one of the most powerful investment banks in the world vaporize can do to focus your attention. Accomplishing much more in two business days than I ever have, Bear Stearns (BSC, if you dare) has fallen from over $60+ a share to what will probably be around JP Morgan's buyout price of $2.

I have to travel tomorrow (great timing, huh?), so I won't get to devote the time to this interesting situation that I would like to. But I did want to fire off some quick thoughts that were on my mind.

Please note that I've linked to some old posts here, and I have to cite George Bernard Shaw in my defense: "I often quote myself. It adds spice to my conversation."

Besides, the largest economic forces at play frankly don't change all that quickly. And for the most part I still believe everything I've posted about over the last nine months or so (that is: financials are dangerous, small-caps are dangerous, the dollar is being massacred, emerging markets are more dangerous than advertised, etc.) I don't get (or more accurately, steal) very many good ideas, but if another one comes across the desk, I'll keep you apprised.

• We're now around 1275 on the S&P, a level I (and many others) think is very important. A break below here to the downside would be worrisome, since we could touch off a series of stops, accelerating a decline.
  

• Drawing from the often-remarked-upon similarities between this market and that of the early 1970s (as that market came to terms with inflation and financial instability), I've recently been thinking of this market in terms of the two-stage decline in the 73-74 bear. By this line of comparison, we're around March of 1974, in which a break through support at 90 started a new cascading phase of the bear market. Similarly, if we break below 1275 on the S&P, I will be forced to act off of the idea that we have moved into the second phase of a runaway bear market. I'm expecting this sort of an acceleration to the downside, but am ready to be proven wrong.
  
• Keeping with the title of this post, it looks to me like the JP Morgan buyout of Bear is effectively a mark to market of Bear's assets. The next question everyone has to ask (and, frankly, should have asked themselves a while ago) is: what are appropriate market values for other peer banks? You already know my opinion on Goldman. One thing I have always wondered is why assets that are supposed to be marketable yet have no market value have a book value of higher than zero. I suppose if I worked for a bulge-bracket firm it would make sense to me.
  
• Along similar lines . . . a friend and I were discussing recently how there really hasn't been any panic in financials, despite the brutal declines we've seen thus far. We're still in the Oprah, hand-holding "thank God everything's going to be OK" stage. Well, to butcher an old saying, every panic contains a grain of truth. It may be that our bit of bad news has just arrived. Could the more thoughtful individuals out there who are holding stock in other i-banks start getting pretty hot under the collar?
• I still think the Fed is checkmated. If they cut further (which they will, of course), gold will continue to climb. But the shock of cuts is wearing off, and I don't expect the inevitable "surprise" cuts to provide the same boosts to the upside as previous ones. The market could therefore continue to decline even with further cuts, particularly if those cuts begin to threaten the US price level. Anyway, remember that stocks fell during a substantial part of the Greenspan Fed cuts after the dot.com crash.
• If I were inclined to be bullish, here's what I'd ask . . . if it's true that pessimism is as rampant as some accounts suggest, could this all be simply the process of putting in a bottom?
• Anybody else wondering what the effects of the Bear collapse and the other turmoil could have on the world's $500 trillion+ derivatives market? As a point of comparison, the world bond market is estimated to be $45 trillion and the world stock market is estimated to be $50 trillion. No, that is not a typo. And yes, I realize that all of those positions are perfectly hedged and therefore we have nothing to worry about . . . if you believe in the perfect hedge.
• It's all enough to make you wish we hadn't canned Glass-Steagall back in '99.
  
• Finally, financials and reality, before and after: