Some Excerpts of the Hearings Today

Federal Reserve Chair Ben Bernanke said a failure of Bear Stearns would have been severe and hard to contain.  He was only interested in getting the “deal” done and had no concern for the value of the offer or the stock price for Bear.  He said when the Fed opened the discount window more broadly, they weren’t sure if the deal would go through.

The SEC’s Cox said their agency started monitoring Bear Stearns’ capital daily,  in the summer of 2007.  He said Bear Stearns’ customers were protected.

US Treasury’s Steel said the banking/credit crisis will take a long time to work through.  He said the decision to rescue Bear Stearns was made based on protecting the markets, not just saving one firm.  He cannot say whether or not there will be more bank problem or bank failures.

Bear Stearns and Rumors

The markets are a bit weaker today, which isn’t a total surprise.  However, the selling is much stronger than mere profit taking, as some are saying.  There is a rumor that Merrill Lynch is looking at a pretty big write-down, so that’s affecting the financials.  Wait, I thought the government banned those pesky rumors!  I can’t say how many times I’ve heard it said that Bear Stearns was brought down by rumors.  Argh!  They say the rumors became a self-fulfilling prophecy.  Give me a break!  A is A!  Reality may be biting these guys in the bum, but it is what it is!  Would the outcome have been different had the rumors been that Bear Stearns declared itself a sovereign, rich country?  Nooooo.  Bear Stearns was in trouble and wishing it to be different wouldn’t have changed the end result.

JP Morgan and Bear Stearns

When I heard the news that JP Morgan was buying Bear Stearns for $2 a share, I was just sick over the total evaporation of capital that had just occured for so many people.  I was reminded, too, of a conversation I had with a woman who worked for Sears (SHLD).  She was close to retirement age, had worked for Sears for many years and had a great deal of her retirement money in Sears stock.  The conversation took place in June, when SHLD was still trading around $145, and I asked her if she was going to sell any of her stock since it was down from highs around $190.  She said no, she wouldn’t dream of it, because the stock may dip, but would always go back up.  The shares are trading now around $92.  I hope anyone holding their company stock in a retirement account takes a good look at their total portfolios to make sure they are well diversified.  Did people learn nothing from Enron?

The markets, in my opinion, continue to trade as though everything is fine.  I’m not surprised.  People seem to believe the government will bail out everybody, so the markets will continue to rise unabated. 

Update from CNBC:  BSC shareholder’s lawyers are already filing class-action lawsuits against Bear Stearns, with more to come, I’m sure. 

Bear Stearns and Emergency Rate cute - UPDATE

It is currently Sunday evening at 10:40pm (US EST). The situation with regard to the Bear Stearns ‘buy under’ for $2 Dollars per share is having wide reaching implications tonight. What had first started out as a ripple effect on the S&P Futures has turned into a Tsunami.

Sine the announcement of the Bear Stearns deal (I hate to even use that word ‘deal’ as this was more of a "scrape up the pieces") and the emergency rate cut the S&P Futures have declined by unprecedented amounts. Futures are now down 3.05% on extremely heavy volume. The magnitude of the decline over the last hour is historic.

The US dollar has also declined significantly and is setting new records against a large basket of foreign currencies tonight. Gold has now risen to $1,024 US Dollars an ounce.

What we are witnessing tonight is a genuine fear that the financial system of the United States is on the verge of collapse. The fact that Bear Stearns, just last year trading at near $160.00 US dollars per share, has now been reduced to only $2.00 per share. Do you realize the implications of this? This says that all other financial institutions who have been claiming that they "are in great shape" (just like Bear Stearns said just days ago) are being put into serious doubt tonight. The "trust" factor in the financial institutions has deteriorated substantially tonight. After JP Morgan looked over the books of Bear Stearns they concluded that the value of the company was only worth $2.00 a share. I can’t stress enough how substantial this is. This has wide spread implications for all other financial institutions, banks, and brokerages.

At this time we are poised for a very significant market sell off tomorrow. The Federal Reserve has already issued an emergency rate cut tonight, which by the way is unprecedented in itself. The fact that the Feds did this on a Sunday evening is historic. And for them to issue an emergency rate cut with their regular meeting just two days away also signals the severity of the situation at hand. Will the Federal Reserve step in and do more cuts tomorrow? Right now the US Government is trying to stop what appears to be already set in motion, and that is a complete failure of the US financial system.

On Friday night I wrote that "you have witnessed history" with regard to what happened to Bear Stearns, I think it is safe to say that history is still being made tonight and could be made again tomorrow.

What kind of efforts could the Federal Reserve do tomorrow to stop the growing fear of a financial system collapse? Hard to say, they have already thrown everything at this and it has only gotten worse. But we should not be surprised to see another emergency rate cut tomorrow morning. Will it reverse the bloodshed taking place in the markets tonight? Can’t say, but I’m sure glad I am still short the market.

Items coming off the wires tonight:

WSJ DEALJOURNAL ON BSC/JPM DEAL - THE $2 PER SHARE BASICALLY SETS DOWN AN IMPORTANT MARKET MARKER: FOR NOW, BEING A WALL STREET TRADING HOUSE IS NO LONGER A LICENSE TO PRINT MONEY
- "It’s a license to absorb plenty of risks. Risks so presumably so toxic and unknown that J.P. Morgan had to turn to the Fed in the way it did."
- "Which perception will prevail in the market? Are the dealers extra protected? Or extra vulnerable? Monday’s markets are going to be an incredible laboratory for finding out."

 

WSJ FED WATCHER GREG IP: THE FEDERAL RESERVE’S DECISION TO INVOKE A DEPRESSION-ERA LAW SO THAT IT COULD LEND TO BEAR STEARNS SHOWS HOW SERIOUSLY IT BELIEVES THE FINANCIAL SYSTEM IS AT RISK
- "The Fed has two principal tools for lending money to market participants. It lends to its 20 “primary dealers,” including Bear Stearns, every day for up to 28 days in return for top-quality collateral such as Treasurys. But this doesn’t enable it to lend any single firm much money. It can lend unlimited sums through its discount window, but only to banks. It has, since 1932, had the authority to lend to nonbanks, but has been reluctant to use it. To underline the gravity of its use, at least five of the Fed’s seven governors must ordinarily vote in its favor. It was last used to make loans during the Depression. The Fed invoked the clause in 1970 to lend to companies cut off from the commercial paper market by the failure of the Penn Central railroad, but did not end up lending any money."
- “I would be very cautious about opening that window up” to investment banks, Fed Vice Chairman Donald Kohn told Congress on March 4. Banks get access in part because they are subject to “extensive” supervision, he said.
- "J.P. Morgan Chase & Co. is the conduit for the loan because it already has access to the discount window, is supervised by the Fed, clears for Bear and knows the firm well. But if Bear fails and the collateral is insufficient to cover the loan, the Fed, not J.P. Morgan, takes the loss."

 

USD SLIDE CONTINUES: WE’RE AT A POINT NOW WHERE REALISTICALLY, IT’S GETTING VERY DIFFICULT TO CALL AN END TO THIS - SHAUN OSBORNE, CHIEF CURRENCY STRATEGIST OF TD SECURITIES
- "For the dollar to recover from here, it would need a strong indication from the Fed that they’re done with this rate-cutting cycle, and I don’t think they’re in any position to do that at the moment."

NIKKEI 225 MOVES BELOW 12,000 FOR THE FIRST TIME SINCE AUG 2005; USD/JPY BELOW 98 FOR THE FIRST TIME SINCE SEPT 1995

BEAR STEARNS FIRST QUARTER EARNINGS ANNOUNCEMENT SCHEDULED FOR MARCH 17, 2008 WILL NOT OCCUR
- In light of entering into an agreement to merge with JPMorgan Chase, The Bear Stearns Companies Inc. will not be announcing its first quarter 2008 financial results on Monday, March 17, 2008, as previously scheduled.

Market Close

The Dow closed at the low of day.  A rather lackluster, but down trend day.  Just not a lot to report, mostly rehashing of the same issues that won’t go away anytime soon.  BusinessWeek is reporting that the SEC and US Attorney’s office in Brooklyn is looking into allegations of insider trading at Bear Stearns.  This is in relation to their two hedge funds that collapsed.  Apparently, there may have been some insiders pulling out personal funds during the time they told other investors to stay put.

Goldman Sachs reports tomorrow.  I expect great numbers and a glowing guidance.  Reuter’s is reporting GS is starting a new stock hedge fund of $6B, could attract as much as $10B.  Are they going to use the “black box” method again?  Didn’t seem to work too well for their Alpha Funds.  If they can pull in $10B, maybe they should just put a down payment on Citigroup.  Then when Paulson leaves the government position, he can head Citi. 

Adobe (ADBE) reported earnings, and the numbers weren’t bad.  They beat consensus by a penny.  After hours, the stock lifted a bit, then sold back down.

The number of companies announcing share buybacks just keeps growing every day.  Circling the wagons, I think.

Gold surges on the financial meltdown

The gold prices have surged today on the news from Bear Stearns (BSC) and the continued drop in the US financial sectors.

The only sectors that are up at this time are Silver,Gold,Defense,Staples

All other sectors are down big.