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First, I have to say, it is really astounding, how a formerly first league player can so quickly go bust. Just one year ago, in January 2007, the stock of Bear Stearns (BSC) traded for $170, and now it has been "sold", or I should better say liquidated, for $2 in shares of JPMorgan (not even cash, meaning the price could drop even more).

Now, the first reaction might be: oh no, watch out, I must liquidate all my stocks tomorrow Monday first thing! And if you look at the Asian stock markets which dropped up to 5% you could be right. But remember that BSC already dropped 50% on Friday, when Asian markets where already closed. Some might be tempted to think that this was the end of the financial system as we know it.

Nevertheless the US markets "only" dropped 1.6% (DOW), 2.08% (SPX) and 2.26% (Nasdaq). The markets also didn't close at the worst level of the day, despite being a weekend, where traders don't like to keep positions overnight in an uncertain environment.

Why is the takeover by JPM bullish? For example, it eliminates one of the major players. Then, the Fed has agreed to provide $30bn to bolster Bear's balance sheet which had the most exposure to crappy loans ($13bn). This eliminates the risk that Bear would have to liquidate their assets at fire sale prices, which would have caused turmoil.

It is also very important that the Fed immediately acted, unlike the Fed did in 1930 (which was a cause for the Great Depression) or the Japanese central bank did after the 1990 stock market, credit and housing bust. The Banks can now borrow short term funds and lend long term. Since the spread between short and long term rates is very wide now, banks will make a decent profit and thus improve their balance sheets.

Furthermore, as the Ft.com reports:

With Bear’s headquarters alone valued at about $1bn, Mr Dimon’s main preoccupation will not be whether the deal ends up boosting earnings – JPMorgan has already said that the takeover would add $1bn a year to profits – but to decide what to sell and what to keep.

People close to the deal on Sunday night said JPMorgan was almost certain to retain Bear’s prime brokerage business, giving it critical mass in a market where it does not now have a presence.

Bear’s securities clearing unit is a reliable cash-generator and is likely to be kept. Its energy trading unit could be a nice add-on to JPMorgan’s existing franchise. However, the advisory business and some of its fixed income operations are likely to be sold or significantly downsized.

Certainly there are going to be a lot of Job cuts among the 14'000 employees of Bear. However JPM will also gain new talent. Also payrolls will probably decrease, thus increasing JPM's future earnings.

So, maybe, there is again going to be some selling tomorrow Monday, but I still believe that the lows for the general stock market have been reache. Especially if the Fed will cut rates aggressively again on Tuesday, March 18. I expect a 1% cut.
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