Forget The Spin
Bankrupt Bear Stearns Was Given Away To Calm Markets
by Chris Ciovacco, Ciovacco Capital Management, LLC. | March 17, 2008
PrintGraph 1: Are You Concerned About Leverage Now?
I have been on Wall Street for fifteen
years, and fully appreciate how the market will read the
"purchase" of Bear Stearns for $2 per share is anybody's
guess. As a manager of risk, I see the following:
It is obvious Bear Stearns was bankrupt and could
not have continued as a viable entity.
Rather than have them declare bankruptcy, the Fed
engineered a plan to have JP Morgan "buy" Bear Sterns
for $2 per share. A price of $2 per share means the market was too
optimistic in the last 14 months when Bear's stock fell from
$169.33 in January 2007 to $30 per share as of Friday's close.
$2 per share is about 1/40th of Bear Stearn's
share price of a month ago (source: Bloomberg) JPMorgan's
acquisition of Bear Stearns represents roughly 1 percent of what
the investment bank was worth just 16 days ago. It marked a 93.3
percent discount to Bear Stearns' market capitalization as of
Friday, and roughly a 98.8 percent discount to its book value as
of Feb. 29 (source AP). A price of $2 per share tells you the
market greatly underestimated the risk associated with holding
leveraged securities backed by mortgages.
Unfortunately, Bear Stearns is not the only firm
to hold large quantities of leveraged securities backed by
mortgages.
Therefore, the market may be greatly
overestimating the value of several other firms that hold these
leveraged bets backed by questionable collateral.
Bloomberg reported the $240 million
"paid" for Bear is about 1/4 the value of Bear's
headquarters in Manhattan. Said another way, Bear's headquarters
building, which was included in the sale, is worth four times what
JP Morgan paid for the entire firm. That means Bear, as an ongoing
entity, was a liability as of Sunday. This is not surprising
considering the rush for the exits by customers in the last few
weeks and the loss-ridden portfolio of securities on Bear's books.
Add the possibility of lawsuits against Bear's actions, and JP
Morgan in effect said Bear is a liability in its present form, we
will not buy it, but we will take it for $2 per share to help
shore up confidence since the Fed has asked us nicely.
If Bear Sterns went from having a $169 stock in
January of 2007 to being virtually worthless today, it makes you
wonder what other firms may follow a similar path to insolvency. Editor's Note:
The text below was written before the announcement of the Bear Stearns
sale for $2 per share.
Technical analysis employs charts and indicators in an
attempt to understand market trends. Fundamental analysis is the
“story” of what’s happening with the economy, a stock, or market
sector. Technically, the global stock markets appear to be trying
their best to form some type of bottom near current levels. If the
January lows are not significantly breached, technicians will view
this circumstance as an intermediate positive for stocks. If these
lows do not hold, it will strengthen the secular bearish case.
Graph 2: S&P 500 as of close March 14, 2008
Some Technical Levels to Watch
Graph 3: Dow Transports as of close March 14, 2008
Confidence increases in an environment where the fundamentals (the “story”) align with the technicals (the charts). For several reasons, including the widespread unwinding of leveraged positions, the fundamental news is not expected to improve anytime soon. However, a technical intermediate rally is possible from current levels. With plenty of cash waiting to move off the sidelines, even a technical rally could be quite powerful. At the moment the fundamentals and technicals favor more pain ahead for investors. The technicals are trying hard to make at least an intermediate turn.
The purpose of technical analysis is to understand what has happened and what is happening. To be a good technician, you need to keep an open mind and have the ability to put your personal fundamental biases aside. Heading in to Monday’s open, a good technician should see negative trends in stocks, which are attempting to form a bottom.
Time will tell.
Copyright © 2008 Chris Ciovacco
Editorial Archive
Chris Ciovacco is the Chief Investment Officer for Ciovacco Capital Management, LLC.
More on the web at www.ciovaccocapital.com
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Chris Ciovacco CIO for Ciovacco Capital Management, LLC | Atlanta, GA USA | Email | Website
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