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Tuesday, March 18, 2008

Bear Stearns for $2 may not hold?

In my previous post I asked the question, how is Bear Stearns trading above $2 when the deal on the table is for $2 a share. SmartMoney has an article that brings some light to the situation. Obviously this offer is just cold to the bone! There is much more behind the scenes concerning why, especially regarding the repercussions of the alternative - bankruptcy. Anyway, the shareholders who are getting the major screw are not happy and it sounds like they will fight this price. Since the process of closing the deal could drag on for 12 months, the likelihood of forcing the offer to increase may be pretty good, especially since JP Morgan is guaranteeing all of Bear's trading activity within the firm for the entire period the deal is being negotiated. What does this mean? Well, it means that Bear Stearns can still do business! That is if other investment houses trust JP Morgan's guarantee and continue to trade with Bear (note that it was the pulling out action of counterparties last week that also hurt Bear, further deterioting confidence in the firm). So, if Bear can still operate, there is a possibility it can fix its financial situation, get back to stability, and maybe even start tearing a new path on the street. In that event, Bear would be worth more. It's now trading at $6.80. Those who bought yesterday have doubled!

Monday, March 17, 2008

Talk about a swing!

Early this morning I noticed, on my Google Sidebar, that premarket trading indicated stocks were about to get hit... BIG time. I wondered, "Whoa! What could be going on to elicit such a reaction!?" So I whipped open Google Finance and behold the word was in, JPMorgan Chase is buying Bear Stearns for $2 a share. WHAT!? Yes people, JPMorgan somehow put together a deal to buy one of the top tier Investment Banks in the country for ONLY $2 a share! Needless to say, the stock price of Bear plummeted to $3 and change for an 80-90% drop in price after Friday's close. If that wasn't bad enough, note that this stock was trading in the $60 - $70 range last Monday... exactly one week ago. It dropped to the upper $20s and low $30s last Friday. And again, I tell you, it's now at $3 and change.

JPMorgan Chase pretty much scored the deal of the year, that is if it can weather the financial difficulties Bear is fighting off to make it worthwhile. Much of the plunge in the stock during last week seemed to be due to rumors that lead people to head for the hills, at least according to Bear CEO Alan D. Schwartz. Check out this BBC article for more detail. Nevertheless, the price dove and the Fed was not having it. Both the Fed and JPM stepped to the plate.

Here are some questions. If JPMorgan Chase is buying Bear Stearns for $2 a share, how is Bear's stock trading above $2? Is this a short arbitrage opportunity? And what about the larger more looming question of, how in the WORLD does a top tier company like Bear go from a 52-week high of $158.36 to $3 and change? And especially since about half of that happened in 7 days! But wait, check this... what's even scarier is that apparently the way in which the Fed stepped in to help Bear is reminiscent of the ways in which the Fed stepped in to help organizations during the Great Depression.... that is according to this article from Reuters. Resorting to measures that haven't been used since the Great Depression..... WHOA!

There are tons of articles on the web about this incident. Do a Google search; there will be no lack of its abundance. Just watch out for the people trying to spin this out of control crying doom and gloom. Yes, it's alarming. What should you do? Be careful out there. More importantly, stomp out the Greed bug. The market is tremendously volatile right now. If you are trading, get in and get out. Be happy with any profit you make. Those of you trusting your 401K retirement funds to some mutual fund manager.... you better pay attention to what's going on. There is no such thing as a free lunch and there is no genie out there. Bear is 77% institution owned according to Google Finance. That means a lot of the big boys hold this stock, including without question SEVERAL mutual funds. And nearly all 401Ks invest in mutual funds. I mean come on, who would expect a top tier Investment Bank to suddenly plunge.... Be careful out there.

Oh, and for you conspiracy theorists.... this article from the should prove mighty interesting. Somebody made a lot of money....