Jamie Dlugosch
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Bearly Stearn
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I want you all to stand up, open a window and yell, "I'm as mad as hell and I'm not going to take this any more". If we are truly headed back to the 70's we may as well quote the classic movie, Network. Friday's bailout of Bear Stearns (BSC) may very well begin the domino action that many have feared and the central bank is determined to avoid. We should all be concerned and frankly a bit mad. I get the concept of why BSC is too big to fail if you will, but I'm not sure the benefits of rescue outweigh the negatives. Are we not simply rewarding poor and reckless behavior? Nobody complained of course when profits at BSC were sky high during the housing boom. The lending binge generated fees of ungodly proportion and shareholders enjoyed a bull market that was propelled by the entire financial sector. And yet when the music stops here we are left holding the bag. By we I mean American citizens that once enjoyed the fruits of a transparent and inherently fair economic system. Now, our reputation has and is being damaged by trying to fix something that ought not be fixed. What is scary to me is that the central bank knows that the damage caused by its actions may take years to repair and yet they continue to act in this way. What does that say about their perception of the alternative? If BSC were allowed to fail the outcome then must be worse than what we now face as a result of intervention. I guess the loss of credibility outside our borders and runaway inflation are acceptable consequences. What in the world then are we to do as investors in this environment? Should we get out while the getting is good or at least while there is still something to get. As an optimist it is very hard to not view this turmoil as an opportunity, but this time things may be very different. Stocks are still very expensive relative to historical levels. Keep in mind there was a time when single digit P/E ratios and 7% returns were the norm. We still have a long way down if that is the case and leading the way will be the financial sector. Recently we featured a bull/bear report on Citigroup (C). What should investors do now? Well the conclusion I took from our analysis of C was to proceed cautiously. At best the stock was a buy on a dollar cost averaging basis. That would seem to still make sense in the current mess if you insist on buying at these levels.
The decision to buy C is fairly simple. If you are right there could be huge gains. If you are wrong there could be large losses. There is no real way to know for certain which way it will go. That means we are looking at a casino situation with C. Rational investors know to stay away from gambling so I would say stay away from C until this drama plays itself out. My guess is that there will be plenty of time to get in on C if indeed the company survives. I'd rather wait until I have more information and I think you all should do the same. As for BSC, I can't even comment and I won't. It truly is a mess. Jamie Dlugosch
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Comments (5)
I'm not thrilled about the Fed/JPM credit extension to BSC, but don't know enough to comment on the merits. Clearly, one concern would have to have been the potential snowball effect if Bear lost accounts, then couldn't meet margin call, then BSC paper held by other firms falls... rinse, lather, repeat.
The weekend WSJ front page article on this states that the Fed won't hold JPM liable if Bear defaults and that the only limit to the amount Bear can borrow is what they can put up as collateral. That sets up the very real possibility that the Fed effectively purchased every bit of paper Bear had that met the pledge criteria.
Wow - just went to double check something and saw that JPM is buying BSC for $2 per share.
Posted by Russell Krull | March 16, 2008 8:36 PM
Ok, I'll comment on BSC. This is bad. JPM just announced that they are buying BSC for $2 per share. Seriously. What's the point. They would have been better off letting her go down. The only thing this does is set off a global panic. Japan is only market currently open and they are down 3% so far. I'm hopeful the knee jerk reaction will be overcome by short covering and discount shopping. The worst case scenario is a 4 digit day for the Dow. Hang on to your horses boys and girls...
Jamie Dlugosch
The Rational Investor
Posted by rationalinvestor | March 16, 2008 8:42 PM
I'm just sitting here tonight watching the futures tumble. I'm not sure if I should go to bed or continue to watch. I sure wish I would have kept my puts on the Q's.
Posted by Mark Anderson | March 16, 2008 10:03 PM
I don't mean to be saying "I told you so" Jamie, but this was my exact argument about why it was not time to buy Citi. While the government changes the rules, I don't want to play. There is no way to value any of these things anymore. Like I said, this thing could be worth a fortune in a few years but it is now a complete gamble.
I think you raise a very good point about P/E and value. In this market I can't really say I believe any of them.
Right now, I'd rather have my portfolio in Vegas at the $10/$20 no limit hold'em game. At least I know I'm good enough at that to win and I know what the rules are.
Good luck,
Uncle John
Posted by Uncle John | March 17, 2008 10:17 AM
James,
The question seems to me to be NOT ' too Big to Fail ' but rather ' Too Big To BAIL '.
The FED et al are daily CONcocting new monetary vehicles that have NOT , in the Main, been thought through. PANIC is not a very good "Mother of Invention". The FED, which is the Bankers' Bank of Last Resort is now swapping [Wall]paper with non-member, non-banking institutions. Doesn't the FED have a CHARTER that constitutes the rules that they operate under ? Don't we have State & Federal Banking Regulators and Congressional "Over-Sight" ?
Where are all these NEW 'powers' coming from under the Rule of Law ? Are the In-Mates running the Asylum now ?
Remember the "Keating Five" ? The Senate Banking Committee "bent" the rules for depository institutions until "Moral Hazard"
was a forgotten concept. Who are the "new" Keating Five ? I know that one of the Old KF's is now running for President of the U.S.A.
and there has NOT been a peep in the press about Sen. John McCain's role in the LAST Major Banking Debacle that almost destroyed our Economy - for the benefit of Bankers who bought Political Clout with influence-peddling, Lobbying and flat-out bag men.
As Bob Dylan said so well, " The Masters make the Rules for the Wise Men and the Fools ".
Don L. Ferk
PS :
The BOJ took Japanse interest rates to absolute ZERO after the Asian Tiger Bust and to no avail. You can kick a dead horse or inject it with Adrenaline, but it still won't get up.
The FED "Paper" Tiger is running out of DRY POWdER - Let's start a count-down to ZERO.
It doesn't get any lower than that. Not So....
Posted by don ferk | March 17, 2008 11:49 AM